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

Okay. Great. My name is Mark Delaney, and I have the pleasure of covering ChargePoint at Goldman Sachs. I'm very pleased to have with us, Pasquale Romano, the President and CEO of the company. Thanks so much for joining.

Thanks very much for having me.

A lot to get into, but the company reported earnings results yesterday after the market closed. So I thought to kick us off, maybe you could comment a little bit on what you reported in particular, maybe some of the bigger end market trends that you're observing.

Yes. I mean I think in general, the headline is quarter in line with our top line guidance. From a guidance perspective, there was [indiscernible] development in there and then we took an impairment charge on some hangover inventory that we had from back in the supply chain crisis. We had some commitments on components for one -- first-generation product actually that we still had on the inventory line that we had to correct the current standard. So we did that in one quarter. But net of that distortion, generally very good quarter for us in line with where we expected it to come out. And we did a small restructuring yesterday. Part of it was just as we continue to evolve our organization for scale, it was planned not financially motivated. And then part of it was to put some insurance policy in place so we can guarantee that we can get to that adjusted EBITDA profitability target that we've set and continually reiterated in Q4 of next year.

Yes. A lot for us to dig into on those things. And maybe talk a little bit on your outlook between the key end markets, commercial fleet and residential.

Yes. I mean they all -- always puts and takes on a quarterly basis, but in general, all performed inside the envelope that we generally expected, a little light on the residential side. We kind of saw that coming. I mean I think overall in the industry, I think there was lightness on the residential side. We expect that to be back. There's some seasonality in the residential business as you move into fall. So we're -- we expect that to kind of return to general norm. On the commercial side, on a percentage basis, percent of billings basis has performed well for the quarter. But what we talked about yesterday on the call is, in general, we see on the discretionary charging infrastructure, which most of it is, most of this business is -- any business that has a parking lot is a ChargePoint customer, potential ChargePoint customer. When they respond to the need for charging or expand the charging infrastructure in their parking lot, has a bit of time discretion. And given the general hesitancy in the macro, it's -- every time we all listen to CNBC when we're brushing our teeth in the morning or Bloomberg or whatever you'd like, listen to in the morning. One morning, it's a soft landing; and the next morning, it's a crash, and that tells every CFO to conserve capital until there's visibility. And that just knocks right on into our business [indiscernible] the business. So what keeps it and backstops it pretty solidly are a lot of construction programs. There are building codes or it's so generally inexpensive to wire for EV charging at the time that you're doing construction, that all the construction projects that we see that are continuing, those all go with no interruption from a purchasing perspective because at that point, you might as well just put the charging infrastructure in and then there are building codes that make it mandatory depending on the jurisdiction. So there's a lot of that going on. There's utility and incentive programs that have time fuses. So that stuff sort of backstops even on the discretionary side. And then there's the less discretionary stuff on the fueling and convenience side and such where that's becoming a focus. So that's the kind of puts and takes in the commercial business. The fleet business, great progress on that. We continue to be successful there. [indiscernible] which we've broken a record on this. Please make more things that workmen and women use to go to work in the morning because that's what's really limiting that entire space.

Very good context. On the commercial part of the business, one of the strong franchises that ChargePoint has, I mean, of course, you're broad-based, but very strong in the commercial L2 charging area. And things like work from home and maybe some of the macroeconomics, the dynamics has been a little bit of an overhang there. But eventually, right utilization goes up and these corporates would have to invest again. Anything you can share along those lines around what you're seeing around utilization rates?

Yes. I mean we commented on it yesterday, utilization rates are definitely up. If you take oddly Workplace, we're in the very odd financial from a market, not from a real estate perspective, real estate utilization in general, a very odd situation. Everyone seems to have agreed that 3 days a week in office synchronized is a reasonable stepping stone into maybe being full-time back in the office. Well, the problem is now you're 3 7s versus 5 7s utilized on an asset that you're paying for. The good news for us is when you're synchronized on those days, the charging infrastructure goes with the demand on those days. So it basically looks like the same utilization pressure that if you're in the office for 5 days. And that's showing up in all our customers that have returned to work programs where they've hit the button on mandatory return to work on at least 3 days a week. So then what they've all done, many of them have done, depending on their parking configuration as they've used some of the software features to allow people to queue for chargers on our mobile app. And then once they exhaust that and they're effectively at 100% utilization over the hours of operation, they're stuck. And a lot of them are getting into that red zone where they're stuck because before the pandemic when the pause button was hit on going into the office at all, EVs were here and now EVs are here. So even if only 80% of your people are in 3 days a week, you still have a lot more EV showing up, and that's spades across the board. We're seeing that parking operations, retail parking lots, workplaces, they're all sort of overcapacity at this point, which is -- I mean, in the long term, the pressure has to relieve because eventually -- right now it's inconvenient, eventually, it becomes more than inconvenient for drivers and then it becomes a real issue.

Yes, up timing with the red zone analogy, the NFL season, I think kicks off tonight. So you -- we'll track your Red Zone offense and hopefully, you guys can convert and have some good momentum in the commercial space. I wanted to talk on Tesla opening up its network. It's been a highly topical point in the investing community and broader media. What does it mean for ChargePoint with Tesla opening up its network? And for you guys, you spoke a little bit about this last night on your earnings call, but how costly is it for ChargePoint to retrofit some of its sites?

It's actually the worst kind of revenue opportunity in my opinion. We don't own any of the charges on our network, right? So we don't do anything for free. I mean we're committed to our mission, but we're not philanthropists when it comes to -- we have no guarantee on a technology shift to our customers, the technology shifts, they have to pay for the adjustment to the chargers. Now we have very inexpensive upgrades that are going to start to roll. We said yesterday start to roll in November and then by product line, we'll roll out probably by the middle of next year, so we'll have it completed. We'll have upgrades and also availability of new product shipping. One of the things to point out is that it's not either/or with our products. If it's a commercial charger that's serving the public, it will support simultaneously NACS and CCS because we're in this difficult position, not us, but the industry is in a difficult position where if this decision was going to get made, it should have been made a long time ago. From our perspective, what I'd love to do is make a T-shirt and sell it on our website with the 2 connector picture saying, please just pick one. They do not -- by the way, there is such misinformation out there. There is no functionality difference aside from size and shape, right, between the 2 connectors. There isn't a benefit to one versus the other, assuming shape and ergonomics aside, right, there isn't a functionality difference between the 2. We have modular cables on our system and some really nifty stuff for our duals to still be able to handle either connector type dynamically. So we've got good solutions rolling out. For that, it was stuff that was in design because we had to support the Tesla so much market share, we had to support them as a de facto standard anyway a long time ago. But I think it's fairly criminal to have the auto industry take this along to settle. I don't care which one they picked. We have no dog in that fight because if it ain't on the car, we don't add it because even if we like one versus the other, it's not our decision, right? The car [indiscernible] versus the car is the dog in that perspective. We can't make OEMs and put a particular connector on their vehicle. So even if we had one that was better, that was proprietary for us, we will adopt it anyway. So it's one of those situations where we're in an unfortunate situation relative to Europe.

That's a couple of contracts. I think you guys have commented before, too, I mean, the majority of the charging sessions on your network are actually Tesla [indiscernible].

Yes. We wouldn't exist if Teslas weren't out there. We'd be much smaller, much smaller, which means we probably wouldn't exist without Teslas out there, and I have nothing against the technology, the connector or what have you, but I also don't see it as anything more than a connector at this point. The car itself speaks CCS protocol, and Tesla speaks CCS protocol when it's connected to a non-Tesla charger over [indiscernible] cable. So it actually speaks to the other standard is how that actually works on the protocol. So it's literally a CCS connector with a shape change is the way the charger thinks about it.

Very interesting. Maybe we can talk about the industry and what's needed to support broader EV adoption and something you and I have spoken on in the past, but what is needed for the grid to support widespread EV ownership in the U.S. And we all see examples where it's too hot out and air conditioning causes blackouts, you hear claims from some -- in the media and even in the investment community, will too much EV ownership cause those sorts of problems for the grid. Any thoughts you have on that topic?

Yes. So we've talked about this at length in different forms. So a car is 4% utilized. It was 96% of the time, as I finally say often, it might as well be a cardboard cut out, you wouldn't know the difference. It also -- if you went to college and took a remedial finance class, as a piece of CapEx, you shouldn't technically own given how little you use it relative to how expensive it is, but we've all been accustomed to owning cars because of the convenience. So 4% utilized. That means it's sitting there parked somewhere where there's power, 96% of the time. And the -- so what it says is that it's a very easy thing to dynamically charge when there's available energy and curtail charging when there isn't. If it's plugged in, not 100% [indiscernible] but in a lot of the places [indiscernible]. Battery sizes are at a point, much like phones where you don't need to charge every day -- some people might, because they have an outlying commute. But for the most part, you don't need to charge every day. So you've got an incredible amount of discretion. If you're plugged in at home, you're plugged in at work with a little bit of utility integration and signaling, it's an unnoticeable -- you can fit it in the cracks. The first 150 million cars, you can fit in the cracks of the load curve, right? You can fit it in the [indiscernible]. And that's with utility load control integration, which we've done with a bunch of utilities as -- and it really is utility limited. It really is an investment in technology on their side, more than our side, we have the API sitting here and they just have to basically make it, create a commercial program and do the work on their side to be able to do it pervasively. We didn't even do some things for them on the home side, like, for example, we can do some if they wanted us to turn on [indiscernible] access, so we don't start all the charging sessions at the same time when someone comes home or start them when the utility rates click over to off-peak rates, the software can do all that stuff. It's just something that they have to put the programs in place. So if 70% of the fuel or so is going to come in and if you add workplace charging and around town charging, which is low-load charging, that's going to be upwards of 85% of the fuel, maybe 90% in some cases. You only have to deal with the fast charge infrastructure for long-haul driving. You don't do that often. So a utility can handle those isolated little islands where you need a bolt of lightning. It really isn't that bad a problem when you break it down that way. So again, I think the technology is there. It's a question of the will on the part of what are fairly slow-moving utilities that use in some cases, arguments to drive regulators to an outcome in the broader rate case discussions they've got going on with the regulators.

That's a helpful perspective. Can you speak to some of the government programs that are out there in the U.S., things like NEVI and the IRA and what impact that's having on your business?

Well, okay. So we've been famous for this one. I don't think we -- I think we got -- we got criticized early on in most forms that I was in, when NEVI got announcement, the infrastructure bill got announced before it was known as NEVI, on panels and with more chairs than this, and I'd be sitting there with my colleagues from other charging companies. They would say, this is great and it's going to be, I don't know, yes, you're not going to see anything until 2024. And [indiscernible] from the audience and people want to throw a bottle of water at me that I was sitting next to. And I'm like, guys, I mean, we've been through the VW Appendix D programs. . We've been through all the corridor builds in different states. We've been through like Mercedes-Benz, but most recent history, Volvo-Starbucks. We know how long these take. We announced that Volvo-Starbucks deal, I even forget how long ago it was. We're just getting the completion now, right? Because getting all the site contracts in place, getting it all -- I mean, just the mechanics of working with the car company and stuff take a while. Now imagine going through federal down to the state, RFP goes out, bids come in, right, then permitting, construction, utility interconnect. By the way, every 4 ports of charging is bigger than the U.S. grocery stores worth a load. U.S. grocery stores are 400 kilowatts, thereabouts. So every 4 ports that you see or so is more than a U.S. grocery store. So if you go see a -- at the NEVI spec level, NEVI overspec by the way, you don't need 150 kilowatts full-time per port, because you can switch it. So no one car -- you have to be able to give full power to a car so that will take it, but a full-time provisioning or 150 kilowatts is a complete overkilling waste of money, but that's how it's spec. And so when you put that much power conversion in place, if you were to fully utilize the 150 kilowatts per port of full-time power because that's what you need the utility drop to support because that's the way NEVI spec, it's more than a grocery store. So if you go to a 16-port site, it's like 5 grocery stores, right? So just to think about the perspective of how much energy that is, right? That's why it takes a while to put those sorts of programs in place. So they said, yes, it's necessary. It also -- it's going to get overbuilt. So it doesn't have to come that quickly, right? Because we're -- no one is not -- I mean, right now, you don't see huge public outcry. You'll get the occasional click-bait chasing reporter that will find the one place you can't drive to, reload as Tesla in the winter uphill both ways, right? But for the most part, no one is having a problem owning an electric vehicle and going wherever they need to go. And that's the current infrastructure levels, which are only going to get better. But this stuff is going to take a while. And assuming that these grant programs are going to move your needle in a couple -- in 3 years, if NEVI is moving our needle, we're dead. Because it shouldn't be that big a percentage of our revenue relative to what the revenue should be. It's as we have no market share. So important for coverage in rural areas, not saying it's not a good program, but not something that anyone should latch on to, even though we've got a good win rate so far, right? I'm not saying we are a bad winner, so I'm not making excuses for win rate. I'm just saying you should not latch on to that as an indicator at all because it is one tiny use case, right, for charging and in 3 years, the market needs to be so much bigger that if that's moving your needle, you've got no market share. Do you know what I mean?

Yes. That's interesting. On some of these broader industry topics, you serve on the national infrastructure advisory council maybe...

We are meeting in 2 weeks.

Yes. Well, maybe you can talk a little bit more on what that party does and any insights you can share.

Well, this is kind of a reconstitution of the NAC. And I got to say, we did our first report recommendation to the administration. The way it works is, by the way, it's subject to -- I'll spare you the acronyms, but it's subject to a set of rules that say everything has to be in the public domain. And the way it works is you get asked by the administration, the executive branch to study topics and provide recommendations and then that should inform the administration to drive policy in that direction. So the first one was information security on critical infrastructure. That's something we've done a lot of work on, on our own network. And then we have our CISO and our engineering team that's focused on securities working with the NAC on combined standards, and we're trying to make recommendations for cross agency standards. Because even within the federal government, I'll give you an example, the USPS deal, that we have requires FedRAMP compliance, but it doesn't require other security requirements that other federal agencies have. So what's interesting is it has a tight security set of requirements, but it's not consistent across federal agencies, let alone across water, rail, other critical infrastructure pieces. So that's what we're trying to do. And so hopefully, people listen we're hopeful, right? We're not stopping. I mean we're going to make our stuff as secure as evenly possible. You can never be hacker-proof, but at least make it hard and so anyway.

Well, fascinating stuff. And one more industry type of a question is on permitting. And do you think major permitting reform is needed in order to speed up charging site development?

Yes. I mean I think though the short answer is yes, headline, yes. I mean absolutely. I was telling Pat on the car on the way up here, I've got my own permitting woes and then I've got a leaky deck at home. And I'm trying to get it fixed before it starts raining, and I'm hung up, it's a deck. It's not like complicated. And I'm hung up because the fire department hasn't reviewed the permit yet. And this is a simple little residential project. And I'm thinking to myself, "Oh my God, this is exactly a microcosm of what every single construction project downstream from anything, including EV charging is subject to". So the answer is yes. But the reason for the analogy is all the other construction associated with that site also needs expediting. And so does utility prioritization of EV charging, they can't just put the interconnect ticket in the queue with other interconnect tickets, which is what they do now for the most part. So you can't solve just the permitting problem for EV charging because if that's in conjunction with a complete hardscape reorganization of a parking lot, they're going to be like, well, it's really great that I got the EV charging permit, but I'm not going to have the backhoe come out and tear up the parking lot until I get the 6 other permits. So you really need general permit streamlining to actually happen, and then the utility interconnect streamlining also has to happen if a utility upgrade is required on the site. So it's a lot more complicated than just get EV charging permit.

Okay. A final industry one, and you can take this if you would like, but if you could design the IRA from scratch, would you change anything?

The IRA from scratch. Yes, I was talking to actually [indiscernible] about this exact thing. And I would create a very simple, clean way to sell the tax equity without having to build a complicated tax equity structure because it effectively creates -- it turns a tax credit into a rebate program, which I think would be the simplest way because a lot of people either can't use the tax credit or find it too complicated. But if there was a simple way, if there was a simple exchange or a simple credit system that could be made to work around that, so we had a glass of wine and he seemed to agree with me, but I don't know if it went anywhere when the wine wore off.

We'll keep an eye on how industry standards progress. Some ChargePoint specific ones and following up on some of the topics the company spoke about yesterday. You have your target to be EBITDA positive in the fourth quarter of calendar '24. Can you talk about some of the key levers and what's needed to get there?

Well, I mean we're complicated to understand because we're in a few different businesses and in 2 geographies, but we're very simple financially. It's revenue times margin, less OpEx, add back CapEx depreciation gives you adjusted EBITDA. And we gave, I think, relatively pretty good breadcrumbs yesterday. We're not a CapEx-intense business, right? So there's not much CapEx depreciation so you can even zero that line out if you really wanted to. And so what you've got to believe in what the growth trajectory is for the company to be able to model it accurately. You've got to be able to model a margin trajectory. I don't think you have to be -- I don't think [indiscernible] levels to kind of get there. And then you've got to look at our historical management of the OpEx. And what we did yesterday to just pull a step down, right, so that Q4 this year is still sitting down around 79% to 82% in that range that we guided to. . And so that's an easy one because that -- we've been pretty -- it was an 8-quarter history of us managing OpEx pretty effectively. So if you believe the growth story a reasonable margin recovery story, you don't have to be too aggressive on that to get to the number. And you just basically drop it down, you can pretty much model what we're thinking and we pretty much said that on the call. That's what we would have to do. There's no magic to getting there. It's not a complicated model at all.

Yes. And you made some comments to around cash on hand and the duration of that relative to reaching cash flow positivity?

Yes. I mean the one thing there that's I think a little more difficult for investors to unpack is just because there's not enough information in the financials, is how much inventory is going to be needed out in the fourth quarter, if you assume the revenue growth that's required to basically get to adjusted EBITDA positive. And the comments that we made that we have made publicly is that the composition of that inventory line is not 100% finished goods inventory. We haven't given a breakdown, it's not 100% finished goods inventory. So as we consume the things that are more piece-part oriented or prepaid credits into CMs or things like that, that are there that we made comments on before, the inventory can stay, can still support the inventory number that support an incrementally bigger line. And then as we work on other things, hopefully, we can keep the inventory requirements to not put too much pressure on working capital as we get out there. And then if you factor in that we have an undrawn line of credit, which is sitting there at $150 million with some pretty good banks. And we don't like our stock price, so we don't want to go willy-nilly with the ATM, but we do have it there to just do some balance sheet grooming as Rex, our CFO, has mentioned on multiple earnings calls, and you're sitting at $264 million on the balance sheet at the end of the quarter. It's a healthy position, a healthy position, especially if you look at the competitive set and where that is. I think we're in an enviable position there. More cash is always better, more cash is always better, no question. But in terms of our ability to maneuver, I think we've got some pretty solid ability to maneuver.

That's helpful context. Maybe we could talk on DC fast charging in particular, you spoke already around some of the supply chain costs and have to adjust the...

It's a legacy product.

Yes. So where do you go from here, right? And what is DC fast charging profitability? How does that trend and progress over time?

Well, I mean, it's a more complicated product line than our AC product line, and it's younger. So it's at the differential in margin is one of mostly driven by maturity disparity and a complexity disparity between the 2, but that's narrowing really fast. And that product that we took the write-down on, that was the first that we've ever built. And I can tell you that the first of anything [indiscernible] if you still have one lying around in a bin somewhere at home, go look at the first iPhone versus the one in your pocket, you thought that was awesome. Like when you got that first iPhone, however, 13 years ago or whatever 14 years ago. And you thought that was the space shuttle in your pocket. And the space shuttle is pretty [indiscernible] rocket in your pocket, right, at the time, right? And now you look at the thing and you're like, well, I can't believe I used this thing, right? And so that first product was our first iPhone effectively. And we're on -- if you want to count it generationally, we're on third, I think. And we've got a brand-new architecture that's in development that's going to revamp the entire DC product line that will be out this year. But it's in the pipeline. So when you keep accumulating all those learnings and then you accumulate the volume, which gives you a lot more leverage with your supply chain and your CMs, I think it normalizes before -- I mean we're at the front end of such a long growth cycle in this market before it penetrates very deeply at all, those margins start...

Well, I think part of the issue as well, if I'm not mistaken, was just supply chain, right, and then sort of the high cost of components. So maybe we can talk on supply chain because, I mean, last year when we were on a stage and we were talking, it was a really big issue for you and everyone else in the industry. Where do you stand today with that?

Oh, I mean, right now, we can build it well. I mean we can build it well. For the tough stuff, we've got capacity reservation agreements for the stuff that's still impacted, but there's not much stuff that's still impacted at all. And so that's the problem is when you optimize for assurance of supply and you don't know when the supply chain crisis is going to end, sometimes you need to make commitments on stuff and take it down and put it in a warehouse and it's higher-priced stuff. And then you just -- you've got to build it to recover the cash. And the price increases, we commented on this yesterday, the price increases that went into effect during the pandemic, which we always consider to be temporary in nature of the sort of a scarcity premium, those are gone because everyone's got stuff. So it all floated back down to kind of normal ASP levels. So you're getting a double whammy on that. And so you just got to reset it. But again, that was -- that's contained to one -- basically one product.

We got time for one or 2 more questions. I can ask them. Otherwise, I wanted to see if there's a question from the audience.

There are going to be more [indiscernible] stations, the utility upgrade, especially the electricity grid network is going to be a bottleneck in the future?

It depends. So for most AC charging, for most top-up charging around town charging, you can stretch the utility drop. Ultimately, you probably need a utility drop upgrade at a site, but you can stretch the utility drop because the cars are typically parked there for a reasonable amount of time if you're looking at workplace or around -- kind of around town charging. And they're not at particularly high charging rates. So because our software -- I'll give you an example. Let's say, one of the charging ports is provisioned at 50 amps, right? You may occupy 10, 50 amp breakers in a panel, but we can use software to limit the entire 500 amps total, but we could set a software that the combined set of chargers can't use more than 200. And so you can treat it as an intermittent load. So because we can use software to basically override the permanent load kind of peak requirement, you can stretch utility drop at a site. So I think we're a ways away from around town charging, becoming a bottleneck on the DC charging side for a long-haul charging, and that's not an everyday use case. So going back to the -- just to give people a data point, if you want to go back to a gas station model, where you put a bolt of lightning in your vehicle in 5 minutes, it's 1.5 megawatts to 2 megawatts. You multiply that by 8 pumps, you get 16 megawatts to replicate a gas station. Gas stations footprint doesn't have enough space for the utility infrastructure. So you're not -- then you got the problem you're talking about in space. So you're not going to go back to the gas station nor should you because I think the asymptote for mileage in a battery is 300 real all weather miles. It's not the BS ratings that you see now, especially WLTP ratings are completely overstated, right? The EPA range numbers are overstated, not as bad as the WLTP numbers. So when you get to 300 real miles in the winter, right, in a vehicle, and you can count on that, the number of times a year, you need to use a fast charger is not going to be that great. And it's not going to go back to being primary fuel. So at the sites that you need it, right, if you had, say, a 15- to 20-minute dwell, to get the same throughput as a gas station that has 5 minutes dwell, you're going to need 3x to 5x the amount because you probably go in and have some dead spot in your charging time because you bought a coffee or something like that. Going to need 3x to 5x the number of stalls. So if you think 8 ports, it goes to 24 to 40 ports. That's why right now, EV charging sites that are fairly high, they look so big, so early in the market. It's because you need a lot of ports to get the equivalent throughput at peak times because we're all synchronized as humans, right? That's the difference. It's the dwell time difference, and that's why the parking configuration also can't be pull-through, it says gas stations are the wrong architecture, the wrong real estate architecture. I believe this is not a gas station business. It never goes back there, and there's also not enough traffic to basically drive enough business to the number of little depots that we have right now. So that model is going to change dramatically. It's real estate wrong and it's overbuilt for what we're going to need in the long term. So I think from that vantage point, the utilities just need to respond. And that's much more of a regulation and policy thing. They've got to respond. It's not -- they've got to look the other way on fast charge. We're already driving some non-demand charge alternative rate structures in a lot of states who demand charges that have to go away. That was -- that's a distortion for a fast charger, right, that has to go away for the economics to work. And then the utilities have to basically say, be told by the regulators. You will go fast on this, and you will build out the infrastructure because for the other 90% of the fuel, it's a really beneficial thing for the grid if you load-manage it because you get more volumetric electrons moving through on a percentage basis, lower percentage of lesser amount of CapEx per electron, so you win. And until that goes click and until we get off this legacy model, you're going to have the problem that you're talking about, right? Luckily, we're at the front end of this thing. So we got a little time, right? We got 20 years -- over time, we have to fix this over 20 years. It's not a 5-year problem.

Speaking of time, we are out of time for this session. Thank you so much for joining us.

Thank you. I appreciate it.