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

Good afternoon, everyone, and thanks again for joining us at TD Cowen's Sustainability Week. My name is Gabe Daoud. I'm TD Cowen's Charging, Battery and Energy Analyst. Next up this afternoon, we're delighted to host ChargePoint's CEO, Pasquale Romano, for a fireside chat. I'm sure, as folks on the line are aware, ChargePoint has been around since 2007 and is a leader in EV charging infrastructure in the U.S. and has a growing footprint in Europe, which I'm sure we'll hear all about and ChargePoint is also a leader amongst a number of verticals in the charging space. So with that, Pasquale, thanks for joining us.

Thanks for having me, Gabe. It's a pleasure to be here as usual.

Great. It's good to see you again. Excited for a good chat. Why don't we just -- Pasquale, I think most are probably aware or familiar with ChargePoint, but why don't you just give us a couple of minutes on why you think you have the best strategy or business model in the EV charging space?

Yes. I mean, I think what's played out from the early days of the company -- we've never pivoted, by the way, on the business model approach, we've enhanced it, but we really haven't pivoted is we made a couple of fundamental observations. First, charging is going to happen in a lot of different places because electricity is pervasively available so you can -- you don't have to go to these little things that look like gas stations to fill up your vehicle, and lo and behold, that's not how anyone that drives an EV actually charges their car. They mostly top up while they're parked. The only time you use what looks like a gas station is when you're driving beyond your battery range and that's a very infrequent use case. So once you realize that it's home, work and everywhere else, you start to -- and you look at the cost-structure of that, you start to look at it more like public Wi-Fi than you would gasoline. It's just the very simplest way to think about it. The going out of town looks a little bit more like gasoline, but most of it looks more like public Wi-Fi. So if you want to be relevant -- while the driver is not our customer, the business is, so we're selling businesses, charging infrastructure and charging them to keep it on the ChargePoint network, so it's a subscription model, what we have to keep in mind here is that the business may treat it anywhere between a revenue enhancement and an amenity and any of the ground in between because they may attribute the value of the charging to other things in their business. It may actually be a cross subsidy. So if you want to be relevant to businesses, you have to be relevant to drivers, which means you have to be in every vertical. And not every vertical is going to work in a CapEx-intensive own the charger and sell power. More importantly, in the own the charger and sell power model, it's hard to be relevant because think of how much CapEx you would have to raise even in the few use cases where things really pencil in that model. So we look at it much more as a tech company would look at things where, effectively, we're creating the largest fueling network for EVs out there by effectively crowdsourcing the CapEx by each individual business that's buying the chargers and then paying us a subscription fee. That's the thing that glues it all together for consumers. There's a whole fleet business here. I could talk about the fleet business for a very long time, but I'll pause there because I know this is just a reminder.

Great. No, that's helpful. It's a helpful reminder. Okay. So maybe let's get into the customer mix. And I know you guys have a pretty high percentage of Fortune 500 and Fortune 50 companies as customers. Why don't we talk about that customer mix and then we could get into to fleet once we kind of hit that first?

Sure. It's not -- as most things as the big guys go, the breast of the universe follows because best practices are typically set by companies that have the wherewithal to invest ahead into things that ultimately become best practices for everyone. So we're -- Gabe, as you mentioned, we're 15 years old. In the early days of the company, you weren't going to -- aside from cities and towns that got some grant funding to start to seed electric vehicle infrastructure in visible ways in downtown areas, especially in EV-forward states like California, the only companies out there leaning in, in the early days -- this was years before we were public, the only -- were the big guys, the Fortune 500-ish companies. And it's not the only -- it -- we have a very diffuse customer base. If you look at the number of transactions we do a quarter, it's thousands. And most of that, the overwhelming majority of that is our new customers. However, the existing customers are the ones that eventually programmatize their purchases to expand electric vehicle charging in their parking lot, and those are the ones that, on a recurring basis, keep coming back to expand because it's a parking model. So what they're actually driven to do is put enough chargers in to cover the percentage of cars in their parking lot with a plug, first of all, and then to cover the natural use rate that those cars would have because not every car is going to plug in every day. And so there's a natural attach rate that occurs in the parking lot, and it's usually organically found by the uniqueness of the business. and their customer or employee base. So we are continually watching what is effectively full utilization in our customer base, along with our customers, they have our tools to be able to do that. And they're expanding. So it's a land-and-expand model, and that's what's amazing is that the first purchase tends to be the smallest purchase. And that's regardless of whether it's a Fortune 500 company or a Fortune 10,000 company, it doesn't really matter. There's usually not an awareness or an understanding initially of how to do it, and that becomes more and more programmatic as the customer gets more experienced. And little companies now are fast forwarding by watching what bigger companies are doing, so those best practices are really emerging. So it's an exciting time.

Okay. Maybe dig in a little bit. I think every quarter you guys break out billings by vertical and maybe 60%, 63% is commercial fleet, has had a pretty nice increase and residential has been pretty stable around 10% to 12% or so depending on the quarter. But maybe just talk a little bit about the commercial bucket. Yes, I think on the last call, you didn't know there was like maybe a little bit of weakness there just given macro concerns, but that was offset by strength in fleet. So maybe just talk about your expectations with commercial. Who were some of the biggest customers, I guess, within commercial, if you could characterize them? And then talk about fleet.

Well, we haven't really gone out and list -- we don't have a lot of revenue concentration, Gabe. We don't -- I can't -- I'm not going to point to the top 20 customers and say they're fueling our commercial business, no pun intended, because it's pretty diffused, which is a good thing, not a bad thing. It says we have a lot of customers and a lot of them buying stuff from us. With that said, we've had some long-standing customers in the tech space and in other areas that we're the first to lean in. And to your comment, with respect to the percentage of billings going to different verticals, the thing to remember is if something stays stable on a percentage of billings basis, it has to grow uniformly with the overall growth rate of the revenue of the company. So let's use your -- you use residential as it's pretty stable. That means it's growing at the growth rate quarter-over-quarter or year-over-year that the balance of the company is growing. For something to increase the percentage of billings, it's going to grow faster than the overall growth rate of the company. Wow, that's pretty fast. We've become kind of velocitized here because the growth rate has been stiff for a long time. And what's amazing is for a segment to even hold on at what was 59% growth Q1 to Q1, Q1 year prior, that's actually pretty amazing. Now when you see something outpace or that mix change, it's the fact that we're in literally almost every vertical that we can think of anyway, that is in EV charging. And we're also in 2 geos, we're in North America and we're in Europe. And the macroeconomic environment is going to have an effect on -- gravity affects all things, right, equally. And so the way to think about what's happening because, again, let's look at the comment I made earlier, EV charging is more like public Wi-Fi than it is about gas stations. A business that's committed to dealing with charging for its employees or customers that's under pressure will look at its discretionary expenses and say, do I spend it today or do I spend it tomorrow? CFOs everywhere are doing that. Because we're in every vertical, we get buffered from any one overweight with respect to effect in the macro within that vertical. So let's take return to office and workplace is a big segment of commercial because it's where your car's parked when it's not home most of the time. Look at the stats on New York City where you are, Gabe, look at the stats on return to office. It's not 100% back by any stretch of imagination, so it stands to reason that there's not as much utilization pressure, coupled with the fact that you had CFOs looking at, "Hey, I got to lay off 10% of my workforce or whatever because I'm heavily correlated with the macro in the wrong way." They may slow down, but it doesn't mean that the pressure isn't building because more and more EVs are penetrating into that installed base. So it rebounds quite nicely later. And because we're balanced again fleets are very well correlated for us with a bad macro because it accretes to lower cost structure for businesses that use vehicles to conduct our business. You get some offset there. Europe's not as affected by some of the macroeconomic things even though they're suffering from similar effects there. It's -- for whatever reason, not as impactful on the commercial segment there. So what you see is for one put, there's a take. And so it smooths out the short-term revenue performance of the company quite well. So that's why we like to refer ourselves -- I use a dog analogy all the time that mutts are healthy animals because they have genetic diversity and you're looking at an EV charging mutt. A very good looking and a very accomplished mutt, but a mutt nonetheless in the finest sense.

I like it. Makes sense. Okay. Maybe let's just talk a little bit more about the hardware and software. Hardware, more or less, the foot in the door to start compounding software and warranty from that installed base. So -- and maybe just talk a little bit about your views on the hardware where maybe you differentiate versus some of the competitors. And I guess similar question on the software side and just remind folks, maybe some of the functionality or some of the benefits with having a network charging system.

Yes. I actually -- some benefits are virtual. I brought props. When does anyone bring a prop to a fireside chat? I can bring props. Why did I bring props? It's easier to see it than it is for me to explain it. A prop is worth -- a picture of a prop is worth 1,000 words. So what I'm holding in my hand here, and it's up on the camera, it's not very big. It's not very heavy, this is the brains, the high-level brains that has the screen, payment terminal, RFID reader, will read just about any card out there, all of the Wi-Fi, cellular, Bluetooth, all the radios effectively that we need, all the processing, all the high-level memory, everything in a system. It's effectively the equivalent of a tablet computer that's highly specialized towards building into an EV charger. This sub-assembly here is what a software company does when it builds hardware. And the reason is a software company says, I got to run my code on any product that's out there, and I can't have different software releases and different architectures for different things that are out there, you'll just go crazy. And a lot of the functionality that we differentiate on is in software, and it depends on a rapid way of updating our units in the field. They're all under management, 100% connected and they're constantly being updated just like your phone is being updated in every other device you own. So we package effectively the hardware because we're driven by the software that we do because we have that under management. Now what's also great about this approach, this is in -- our AC product -- products, actually, our DC products, everything. So it wakes up and decides how it should act, which is kind of cool. Here's another prop. This right here, okay, it's a little bit bigger. I'll show you both sides. It's a little heavier too. It's got a lot more metal in it. This right here, it's a 500-kilowatt, 500 amp, actually I should say because that's not the -- there's no cheating. That's a 500 amp sub-assembly in our Express Plus product line. We could make almost anything out of this that does the following thing. What it does is it switches power over to the delivery cables, it meters -- and it has to be compliant with meter certification all over the world, so it's a DC meter. And it's got all the safety monitoring to make sure that if something were to be catastrophically wrong that you basically don't hurt anyone that's trying to charge the vehicle, okay? So it does all the safety. This one and you can bolt multiple ones of these together. So If you wanted a megawatt charger, you basically bolt 2 of these together, and that's the dispensation [indiscernible]. This over here talks to our cloud and is the brains of coordinating that thing you just saw. And there's other things in our system. But we make very few things, and we partition it in a way that matches the software. And if I want to make variance on a product because of that DNA that thought processing it's very easy for us to do that. It's also very easy for us to fix things in the field. Notice nothing is unpackaged. You don't see a technician going out with a tool belt full of stuff going out, putting little probes on actual printed circuit boards and trying to fix stuff in the field. When this breaks, our software is heavily instrumented, so is that other thing I showed you. When something goes wrong, it tells us what's wrong and this gets pre-shipped with the service tech, and it's replaced like this. It's not opened up in the field because this is the way a software company thinks about hardware, that's a big difference. This is also the way a software company thinks about manufacturing, right? So we basically don't make from the factory's perspective we don't make chargers even though we do. We make functional things that assembled into something to create a charger. In fact, you could almost assemble the charger in the field because there ain't much -- there's a few more things in this. There's the, one, power conversion box that we make, right, that we use in every charger. And if you add that and a very few other things, aside from the sheet metal case, that's what our chargers look like, and that's what all of them are built out of. And that's what's important is we do a lot of things with as few pieces as possible so we can keep them up to date. And we can keep the software functionality moving at a high rate of speed because if we have to consider too many different hardware environments, we can't move the software environment at a higher rate of speed.

Very helpful. And so given that there's very few SKUs or number of parts that are different or that are just being made, that obviously should benefit gross margin as you guys continue to scale and you've seen a nice improvement on the gross margin side. So maybe just give us an update there. What have you guys been doing over the past couple of quarters that start to translate into gross margin improvement? And how are just supply chains generally?

Yes, that's a -- it's a continuous improvement cycle. So what we've commented on in the past is that timing is often not your friend. And during the time we had the worst supply chain crisis I could ever imagine in my 34 years of doing this, we also introduced a spate of new architectures into manufacturing. Doing one or the other under normal circumstances is challenging, contending with those 2 things, contending with both at the same time gives you the gross margin profile that we had, which we said repeatedly is not the natural structural gross margin profile of the business. You can only do so much. You have to optimize for something and optimizing for product transitions and assurance of supply at a time where land and expand is critically important, right? It's going to be important forever. But right now, capturing the customers on the way in is the most important thing. It effectively cost us the gross margin divot that you saw, and now we're cleaning up from that. We're cleaning up from the impacts of that. So all of the things that we had to do just to get parts to grow, by the way, 94%. During a supply chain crisis, let's think about that, most companies that are in far more established industries than us had a hard time maintaining any sort of constancy. We actually doubled introduced a whole bunch of new platforms and did that under incredible constraints. So that's the reason for it. And what's happened since is we are now on incremental -- because we can now move stuff faster through the production system, optimizations and changes that were in the pipeline, but you just couldn't push into the factory, where we have fleshed out the number of suppliers we can buy from for assurance of supply in the future, give us an insurance that we can -- if something happens on a point supplier, we can recover from it and also take advantage of best cost structure, improve reliability, improve functionality, improve everything. And that's why it's printing through into the numbers. And like our COO likes to say, manufacturing a physical thing is a low frequency -- it's a low-frequency phenomenon, meaning if we insert a change now, you don't see the effects of those changes in the numbers immediately because to roll through a whole supply chain where you have already commitments. You have product -- you have batch product changeovers, all of those sorts of things, you have inventory, you have to work through all that stuff. So what you're seeing now in gross margin performance was the result of stuff we stock in probably the better part of 6 to 9 months ago. And so now you're starting to see -- and we're continuously moving stuff in through that process. So we should be able to kind of continue to, as Rex mentioned -- our CFO mentioned on our earnings call recently, do better by the end of this year than we're seeing now on a blended gross margin basis. So we're hopeful.

So questions came in, so I did want to get to those. Couple of them are around Tesla, so it's kind of bundle them into one, which I did want to get to anyway. But maybe just talk a little bit about Tesla opening up a supercharger network to non-Teslas, partly because they'll be now eligible for NEVI funds. And then also Ford announcing at least on, I believe, 2025 models, the cars will be equipped with the functionality or the ability to use the NACS flow. So 2 announcements or 2 developments, just maybe give us some color on that.

Yes. So the supercharger that we're opening up is not new news. That's not time correlated. That's old news. And more importantly, this is something I think that, until you say it, it's not obvious. But once you hear it, it's like, of course. Tesla's 70% market share or so in North America -- by the way, your question isn't relevant in Europe because it's all the same connector in Europe, even on Teslas, right? They all use the standard connector in Europe. So this is really a North American phenomenon, for people in the audience that don't necessarily know that. Tesla's 70% market share in the installed base or so in North America. If it weren't for them, we'd have no reason to exist. No one would buy our products and services because they're the overwhelming majority of the utilization pressure at customer sites for VARs and the reason that people are buying our product, a large reason, not the only reason because there are other good car companies out there with good stuff. But they've been driving the EV transition from the very beginning, and we're thankful for that. So as a result, everything -- any effect that could be in our numbers has been in our numbers, and I don't see any negatives. The other thing is the supercharger network, most of what it's servicing are people driving beyond their battery range. It's not primary fuel unless it's a very specialized use case. It's not where someone is not driving their EV around until the little yellow light goes on and then go to a place to reload. That's not the case. So it's done a good job getting advanced population of fast chargers out there for that use case, but that's not a very common use case, but it's driving a lot of people to buy EVs which in their everyday use drives a lot of businesses to buy our stuff. So we're -- it's a very, very positively related thing. And in the particular segment with respect to the Ford announcement, all it's going to do is perpetuate the need for adapters for longer between the 2 standards because you have what Tesla has, which is a proprietary standard and then you have the CCS standard that is on literally every other car. And the -- you don't want to have to assign a parking space to a particular connector type because the business will never get that mix right. And that mix will change over time, so that means you're going to be constantly reorganizing your parking lot to make sure you get the utilization that you want. Do we have the ability to put cables modularly on chargers? Yes. They literally bolt on the side. Do we have modular holsters? Yes. Do we basically isolate the car communications in the cable itself? Yes. So this box here that I showed you, this talks via Ethernet right there to a cable switch effectively and the cables have the electronics in them to talk to the car in whatever language the car wants to talk, and that gets packetized over a little local Ethernet network inside the charger. And this thing figures out at a high level how to talk to the car and talk to our network and talk to the rest of the charger. Simplistic way of thinking about it, but a pretty accurate picture. So we can basically adapt to just about anything out there. What we're trying to figure out is how to put our customers in the best position so they don't have to deal -- because that would be the easy way out, so they don't have to deal with one cable type matched to one particular parking space. And stay tuned for that. We haven't made any announcements there, but we're thinking through the best way to solve that problem with technology so our customers can serve any car out there because that's our goal. We're not -- we have huge respect for what Tesla has done. So not knock on anything that they're doing, but we have to basically take care of our customers, in their best interest, and they have to deal with a mixed environment now for longer in the U.S.

Okay. That's clear. That's helpful. Okay. We've got another question just on safety regulations. Are there any differences that we should be thinking about, whether by vertical or geography?

There are always differences by geography. We have to meet global certifications for our products. I showed you -- it's nice to have props. I don't like virtual, but it does pay off. See this thing. This is a world certified -- or at least in the 2 big geos that we serve, North America and Europe, this is the safety -- largely to -- one of the big components in safety. It does what's called isolation monitoring. And what that effectively does is it makes sure that if energy is going into a cable that it's going into the car and not somewhere else because that somewhere else could be a person. And you want to make sure that under no uncertain terms, energy isn't going -- you want to make sure it's just going into the car. So that's what that thing's role is. And there's other safety roles in other things inside the product. And what we do is we build products, test them certify them to world standards. So you basically have to take the union of all safety specifications and build your products to solve for that problem. And you can do that. I've done that my -- most of my career, even in other companies. It takes a lot of thought. It's much faster to just basically say, here's the U.S. version, here's the French version, here's the German version because in Europe, there's a little bit more country variance. Here's the U.K. version, et cetera. We don't like doing that because imagine that mix and inventory problem set. And imagine that support and repair, especially on the SLAs that will be on for all our sophisticated customers, it's an impossibility. So yes, there's a lot of safety out there. There's a lot of safety certifications out there, and we have to make sure we meet them all.

Also, question came in. I know that you sell hardware, the attach rate with software is 100%, because you don't sell hardware without your software. But can you just talk about what the churn rate may be? And then also just on the warranty or your Assure product, what's the attach rate and churn rate for that?

We've made comments. I have to stay consistent here with comments that we've made in the past, what we have talked about and what we haven't. So the churn really hasn't changed on the software side. It's still in the single digits. And that's largely kind of the natural [ moves out and changes ] kind of noise floor in the system. You're going to always have people moving out of buildings and the associated equipment in the parking lot is now not cared and fed by a business anymore until that space is re-leased. You'll get all kinds of gyrations like that in real estate because it's really attached to real estate, if you think about it at its most basic level. So attach rates, what we've talked about on the Assure product, are very, very high. And what we've also said is user -- there is a higher propensity for a commercial customer, less so in the fleet space, but a commercial customer to self-insure because they can always pay us to come out and repair a unit. We could still detect if there's a problem. And they can always pay us. So that has a higher churn rate with respect to people not continuing. It's out in the 2.5-year range or so on average, and we've commented to that effect before. And that really hasn't changed. What I do expect is, I do expect that as the criticality of charging infrastructure and parking lots, this effectively public area Wi-Fi phenomenon starts to really gain momentum as we are now progressing into a real installed base penetration of EVs into the population. I expect us to be innovating there as we currently have in the past but continuing to innovate on offerings that really take the uptime to absolutely the next level, and we're already very good on that. But we're really focused on how do we make this something that's just as bulletproof, you could set your watch by it. And I think businesses are going to take that more and more seriously. They're going to outsource that on the commercial side. They're going to outsource that because it's not core to the business. So I expect that to be a significant component of our subscription cycle on a go-forward basis. On the fleet side, we have to be a little bit more flexible. On the fleet side, we do see customers wanting to be self-maintainers, but we have training programs, Ford stocking of spares programs so that they can self-maintain a large fleet, just commonly doing this even in the gasoline world, so it stands to reason they'll do it in the electric world. And you also may see hybrids where they have some sites where it pencils for them to be a self maintainer and some sites that they want to just outsource to us to be able to do that. So you're going to see literally every variant in the fleet space because it's -- again, it's embedded into someone's business.

Right. Okay. That makes sense. Okay. It looks like we're out of time. And it's good to have you. It's a good chat as always. And best of luck the rest of this year, and we'll chat again soon.

Yes. Great to see you and hope to do this again soon. Thank you.

Thanks, everyone.

Take care.