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

Good afternoon, everyone. It's 12:15, so we'll get started again. We're pleased to have ChargePoint join us as keynote speaker for day 2 here. Headquartered in Campbell, California, ChargePoint is a market leading EV technology provider for charging stations, software solutions, and related services. The company has a $900 million market cap and a roughly equivalent enterprise value. Here with us today to discuss the ChargePoint business model is Chief Revenue Officer of the company, Michael Hughes. Michael's going to kick things off with some prepared remarks, and then afterwards we can jump into a Q&A session. And with that, Michael, floor is yours. Thanks for being here.

Thanks. I feel like we should gather around a smaller table, don't you think? You guys just want to huddle? Hopefully everybody gets a lunch break and gets a chance to get out and do some things. But for those of you here, thanks for having me. I appreciate the Gabelli team for putting this together. So I'm going to spend a few minutes. Unlike some of the businesses we've heard about today, ChargePoint has not been around forever and not in a market that's well developed and fully predictable and understood. And so what I thought I would spend a little time on, and I'm not the CFO and I'm not the VP of Engineering, I'm the Chief Revenue Officer. So I want to talk about how the business works, what charging looks like, how it develops over time. I would say it's a new business for many people, for the entire world. We're used to collecting our fuel at a gas station, and in 4 minutes picking up and driving away, and everything changes in electrification. And so people are grokking to, what's the new model, how does it work, how often do I fuel, what does that look like. We've got 15 years of data that tell us what that looks like, and it's pretty different than what we've been doing for the last however long you've been alive. So let me just talk about that real quick. So who is ChargePoint? We're about 1,500 people. We're headquartered in Silicon Valley. We are a tech company. We make software and hardware that fuels vehicles, so that's everything from a passenger car vehicle and the home charger you have to fuel that, to workplace charging when you go to the office, to charging buses in a depot, to charging FedEx, UPS, all kinds of fleet vehicles, and everything in between. So we're active in 2 continents: Europe and North America. In North America, we have pretty dominant share, somewhere around 70% of the AC charging marketplace, which is where people take the bulk of their fuel. And in Europe, where we got a little bit of a later start, we are not #1 in any country, but we're in the top 3 in every country. And so, in essence, as that market consolidates over time, there's a bunch of local heroes in each given country, it will consolidate, and it'll consolidate to where the engineering is the best, where the products are the best, where you can enjoy a journey across multiple locations, across countries, and have a seamless journey. So we feel really good about Europe. It's been growing triple-digit for the last 3, 4 years and growing there. So, rough terms, the last 5 years, we've gone from $80 million in revenue to about $0.5 billion, and this is with very, very low penetration of electric vehicles. As that increases, we see our business continuing to grow. I would say this, given that our ambition is to move all goods and people on electricity, we think of ourselves as an index fund for electrification. So whether it's passenger cars, whether those are in an Uber or a Lyft, whether it's rental cars, whether it's trucks, light duty, heavy duty, all of the above, buses, whatever form of transportation people take, we're going to be enabling that through electrification, so that's the business we're in. I thought I'd start with this. It seems a little boring or mundane, but I think it's an important place to start. How do people who drive electric vehicles charge? Anybody drive electric here? No? Okay, so we're all used to going to fuel. With an electric car, you don't go to fuel. You fuel where you sit. And where does a car sit? It sits 96% of the time. And where it sits is typically home and office, right? Just like all of us, where we are is typically the home or the office on an everyday basis. So indeed, that's where a car takes on the bulk of its fuel. Something like 80% of the fuel goes into the vehicle at the home or the office. Beyond that, and represented in this picture here, you see, you may go to the stadium at night, see a game, charge while you're at the stadium. You may go to the shopping mall, charge while you're there. On the occasion, you go on a long journey to grandma's house, to the cottage, to go skiing, whatever it might be, and along that long journey where you've exceeded the range of your battery, then you will charge in a fast-fueling location, which will look in some form, and we'll spend more time on this later, like a traditional gas station, but I think will be fully accessorized in a very different way. So let me just couch that real quick. 5% of the fuel that goes into a vehicle is fast fuel. Think of that as DC charging, where you plug in, you're getting electrons as fast as you can, and then you're on your way. So that's a very small percentage. Today, all of our fuel goes in a fast fuel model, right? All the liquid fuel goes in the vehicle when you go to the gas station and you leave. Now, 95% goes in an AC way, home, office, around town, at the library, wherever it might be. So that's really a different model, and all the economic models that say, hey, who's going to win all that, how's that going to work out. You have to recognize that. So said differently, the fuel that goes in at a gas station today is 100% of the fuel. When 90% of the fuel goes in an AC charging, home office, whatever, that leaves 10% of the gas stations required to continue to fuel our vehicles. So if there's a business I would not want to be in, it would be the business that is a neighborhood fueling convenience location, because, in essence, I'm leaving my house with a full tank of gas. I won't need that local business for anything in the near future. I've been driving electric for 5 years. I have to stop and make appointments to go buy gum and candy and the things that I normally get at a fuel and convenience location because I never go there anymore. So I think this is a sea change that's hard to understand and hard to recognize. Fleets in much of the same way. Fleets travel largely, get their fuel at a depot where they sit and sleep at night. They'll also charge at home, so fleet vehicles will end up in the driveway of the operator, the service technician, whatever it might be. And then beyond that, they will also charge on the road. So they follow the same routes and pathways that us individual passenger car drivers do, and will leverage those same on-route charging, depot charging, and home charging. So what this all leads to is in order to enable an electric journey for a driver of a fleet vehicle, an individual passenger car vehicle, or whatever, it's largely a software driven model to enable those drivers to access charging wherever they might be and be charged whatever makes sense for the driver. In the depot, it's free. The company's paying for that. At home, I got to pay the driver back for the fuel that he's putting in from his own meter if he's a fleet operator. In the same way my office provides me charging at no cost. My home, I'm paying for it myself. And then at the stadium, I might pay something for that there. So it's a pricing and policy engine that exists that enables a journey, and then we enable that journey through an app on your phone. Can be ours, can be other people's, that allows you to secure that journey along the way. This ecosystem of charging is really important. So today, if you buy any number of vehicles, from a Rivian to a Pulsar to a Mercedes-Benz to a Toyota, whatever it might be, in the dash, you will find ChargePoint data enabled through the dash, where are the charging stations, are they available, how much does it cost, all of those things. If you're on Google Maps or on Apple, the same thing, where are the charging stations, what's the price points, all that. We're fueling all of that data so that the electric driver journey is simple, predictable, and manageable. So all of that ecosystem is a barrier to entry for folks in the rest of this business and gives us real staying power over time. So a little bit about how people move on electrons. It's pretty different. I think the biggest challenge in this market for us and for the rest of the market is educating how this all works. Most people are very used to a liquid fuel model and understanding this model is a challenge. It takes time and you have to go through it. So what actually are we selling? We really sell hardware, software, and services. So in a commercial way, so this is at a fueling and convenience location, at an office. We'll sell a piece of hardware, a cloud set of services that attach to that, and then maintenance services as well. In a fleet model, the same things, plus all kinds of capabilities to manage their fleet. So in effect, how do you charge, when do you charge, what are the lowest utility rates, what's the state of charge of the vehicle, what's its route miles tomorrow, map all that together and build an algorithm that allows folks to charge along the way and get the full charge in order to service their routes. So that's the business we're in. It's an expanded set of software capabilities to enable that. And then residential products, home and multifamily, again, it's a charger. If you're in a multifamily building, it might be a membership service that you have, $20 a month and then I get all the charging I want. If you're at home, of course, you're paying for that charging yourself. So that's the business we're in. That's how we do it. I think the notion there is it's a hardware model. Hardware is the vessel and then software is the engine. And so today we've got probably $100 million to $150 million software business that over the course of the next 5, 10, 20 years will spin cash and is highly predictable with very low churn. Once you put it in a charging station, you need to service it, you need drivers to have access to it, you want to manage who's using it and all that kind of thing. So that continues to be the model that we'll see going forward. Hardware as a vessel to enable a software engine behind it. So that's super-light description of what we're doing. I want to call out a couple things real quick. We are a tech company, so what it says here is asset light, and I think this is a distinction that's hard to understand. We do not own the chargers. We sell them to a workplace, a fuel and convenience location, the library, wherever it might be, they put them in and then they charge whatever they want to charge for them and brand them in their own way. So Walmart's looking at putting chargers all across America. They're going to be branded Walmart, they're going to look like Walmart, they're going to be integrated with their loyalty apps, all of those things. So we are not in the business of charging anybody a tax on electrons or owning the asset. We're in the business of providing that asset to a business that then enables that asset for their own use. That is distinct from if you've heard of EVgo or Electrify America. They own the asset, they maintain the asset, and then they make a tax on the electrons that they provide into the vehicle. So I think it's really hard to get through because we're used to gas stations where you own it and then you make money on it. We're not in that business. We're a tech company, bootstrapping the businesses to allow them to build the business they want. So that's why it says asset light because we're not owning those assets. Mixing an asset business and a tech business is pretty difficult from a balance sheet perspective. That's why we don't do it. So hopefully that's enough opening comments to last long enough, but happy to take questions and jump into it.

Yes, sounds good. Thanks, Michael. So you actually started to answer my first question towards the very end here. But something I wanted to touch on was, you mentioned that the ecosystem itself is a barrier to entry for the industry. And then your approach in terms of the asset-light business model separates you from peers in the space. What else is important to know about ChargePoint relative to the peers in the space? Anything else that you'd note in terms of differentiating factors?

Yes. So I think the thing, and I talked a little bit about it, I'll connect the dots, when we get asked the competition question, there's competition in every sector. There's competition for multifamily dwellings, there's competition for fleet depots, there's competition for workplace charging, there's competition for home. Each of those are in independent sectors. We're the only one in all of those segments. That's one thing. And the second thing is we are a software and hardware company. So we enable the usage of those devices to provide the charge that's required and allow the driver to pay whatever makes sense and all of that. Most other of our competitors are hardware competitors. So people think of ABB or think of Tritium or a variety of other folks, they make a piece of hardware and then enable the customer to go put whatever software they want on it, charge whatever they want for that. So they're in a hardware business, we're in a systems business. The hardware, the software, and the services that attach to it.

Okay. Yes, it's helpful. And then one other aspect to the business model that I think is really important for everyone to understand is your go-to-market strategy, right? And the partnership network. So maybe you can just speak to that a little bit so everyone understands that dynamic.

Yes. The ecosystem of partners on the tech side are largely software, right? So this is the OEMs that make the vehicles integrating our software into their dash. This is leasing companies, fleet management and operations companies integrating our software. So there's an ecosystem of software that allows folks to travel and leverage charging. On the hardware side and in the distribution side, if you want a charger for your home, if a depot is going to build a charging facility, they will call their electrical contractor or their build partner and say, hey look, help me figure this thing out. And so we enable all of those folks, the electrical contractors, the major players in building, construction, and electrical. And then they buy through distribution. Distribution is folks you've probably heard of, Rexel, Graybar, et al. Those folks carry and stock our products. So at any moment in time someone can say, hey great, I'm building up this facility. Where am I going to get what I need? And they'll use distribution to do that, and sometimes forward stock at distribution so that they can go build out 1 depot after another after another. So that distribution network, we probably have 100% coverage of markets geographically in North America and Europe for having distribution. We don't cover every single customer in respect -- not every electrical contractor or EPC will work with every distributor. So we've got more work to do there but broad coverage across Europe and North America for having parts where people need them.

Okay, that's helpful. And then related to that network, we've been reading headlines recently about servicing these chargers is going to take not a standard electrician but specialized techs. And as it relates to your network and the services side of things, how is ChargePoint thinking about that?

Yes, not a lot of EV drivers in the room. But if you're an EV driver, you'll find that the public charging services are crap. It's really bad. You go there, charger's broken, cable's broken, it's not connected, you can't access it, whatever. That's the challenge, right. And the asset owners that are in the business of providing that public charging have a very difficult time enabling uptime for their stations. So it's a problem, it's a real problem. We're attempting to address it in a couple of different ways. Again, we're going to sell the tech to a company that then wants to provide that as a service so they have ownership and skin in the game on making sure that is delivered. So if it says Walmart on it, says BP on it, says whoever, they're going to care about the service that's being delivered. I think that's important. Not having eyes and ears on site, sitting in parking lot of a shopping mall with nobody there who cares about it, doesn't really work in the long term. So effectively, our model is different from the traditional asset owners. The other part of it is to enable a network of folks that can fix, assess problems on charging stations is another piece of the puzzle. So we've got a spare parts capability that we're enabling all out there. And then there's proactive monitoring capabilities that allow us to see where the problem might be: coolant is low, this component is heating up, one thing or another. Assess that problem before there is an incident, and then dispatch somebody to go fix it with the appropriate parts on their truck. The other piece of that is those components have to be modular in order for them not to have to replace the entire unit. So there are, in our most complex equipment, a maximum of 20 minutes to replace any given part and not an electrical contractor required, because most times it is an operation that any technician can do, not a fully licensed electrical contractor. So the modular design enables that to occur.

Okay, that's helpful. And then just when I'm thinking about the network and the servicing that you were just mentioning, obviously the quality of that service has a direct impact on the value of your underlying brand, right? So what are some of the mechanisms, or how do you approach filtering who you allow or who you take on as a partner for that network? What's important to you guys?

Yes. You're good at this. Yes. You're like, tell me all my problems. Yes. So we have to go build a set of partners that are capable, and everybody wants to be in this business because they see it getting really big over time. Not everybody is capable of being in this business. And so we have a set of training programs so that before you go work on any equipment, you have gone through the [ classes ], you know what the right set of steps are and all of that. They're good. They're not enough. Because, in essence, if Hughes Incorporated has a certified electrician that has gone through the course and Guillermo goes out instead of Michael, because the certification says Hughes Incorporated, you are allowed to work on the equipment even though you haven't taken the course. So we have to do a better job of auditing and enabling the folks out there that are doing the work and then have on-demand courses, on-demand tips and tools to enable them to do it on the fly. So there's a ton of work to be done there because, you're right, at scale, we're going to need people that are ready to go in any location within 90 minutes and service equipment, and they have to be trained. So we got a ton of work we're doing to enable a ChargePoint network of certified installers that are qualified on any individual piece of equipment they might work on. So work to do.

Okay. No, that's helpful, though. And I wanted to back up a little bit to talk about the -- sorry, a question out there.

Michael, just a quick question. The overall opportunity, right? Your slides were great. Anyone who wasn't in here really missed a good presentation about where this is going. But when you think about when a saturation point comes, are we talking decades, several decades? What is the opportunity that's ahead?

Yes, I think this is a 30-year arc, and I think we talk about new sales penetration. In my zip code, 54% of the new vehicles sold are electric. In your zip code, it could be 1%, and it could be less than that. So it's somewhere around 7%, 8%, 9% today. So you got to have a lot of years of 100% electric before it's a fully-electric world, so that's probably a 30-year journey. We see regulation in London, Amsterdam, many countries in Europe, New York, wherever, that say, you will only be allowed to drive a zero-emission vehicle in the city by 2032 or 2035. That will force the OEMs to make a choice. Do I build a hybrid, do I build a fully electric, or do I build a combustion engine, or do I build all 3? And I don't know if there's any automakers in here, but in [indiscernible], we talked about peak car last night. I don't think we're at peak car, but we will get there. Can you afford to build all 3 platforms? I think it's maybe really hard for the OEMs to build all 3 platforms when some significant percentage of their customers won't be able to drive that vehicle into the city of their choice by the end of its useful life. So I think it's going to get pushed really quickly to carrying a primary platform, which is electric. The OEMs will hold on to combustion engine vehicles because they've got tons of engineering, a lot of inertia, and most of their profits, unfortunately, in the combustion engine inside. So they will slow it. But it's probably a 30-year run.

Yes. And I would imagine that the tail gets bigger towards the latter half, or is the first decade of this 30-year run going to be the 1 with the most explosive growth?

54% CAGR over the next 5 years is what we're reading. We'll see what that looks like, I suspect, of electric vehicles. So I think it's going to be rapid, but I think we'll see pretty steady, significant growth for a 10-year run. And then I don't want to say it won't slow down because you're going to continue to need a ton of it, but I think it will change, right? So right now there's a ton of focus on highway fast charging. The OEMs are all bounded together and they'll build a fast-charging network. Everyone's trying to mimic what Tesla's done. I think infrastructure will get built. There will be tons of growth, but we will discover that that's not the prime place you do it. It'll be, I want it at the library, I want it in the parking structure, I want it at the mall, I want it at my home, I want it in my workplace. So I think there will be a lot of infrastructure built over the next couple years that is high speed, because the major fuel and convenience folks, the OEMs, and government funding enables it. But I think over the next -- that'll happen over 5 years, but over the next 20 years, it'll be a lot of AC charging. Again, the car sits 96% of the time. I'm happy to, how long does it take to fuel, Michael? About 3 seconds. I get out of the car, I plug it in, I go inside and get a beer, right? So nobody wants to go to fuel. And because the OEMs are steeped in a model that is, that's what we do. That's what they're trying to mimic. And they just, in the end, will overbuild the fast-charge infrastructure and then there'll be another 20-year run of the rest of it.

Great, I'll hand it back to Guillermo, but I may pop in later.

So is it fair to say then, I know your focus has been the level 2 section of the market. That's where the focus is going to remain at this point?

No. For us, we have to go where the ducks are quacking. And so for the next, as we were saying, there's going to be a lot of DC fast-charging infrastructure built out over the next few years, so we will participate in that meaningfully. It won't be as mundane as there's a charger there, therefore I stop there. It will be an amenity-driven journey. It'll be, hey, I'm with my wife and I want to have a coffee. And I've got the dog, so I need a place to walk the dog. Show me fast-charging from my vehicle. Hey, Mercedes, show me fast charging with these amenities, and then it will show you, okay, great. Here's 4 locations you could stop. This one has a dog walk, this one has coffee, this one has the other. So it'll look like that, but it'll be a lot of DC. And then the big market is in fleet, and fleet will be a lot of DC charging, fast charging, right. So these are light, medium, and heavy duty vehicles that live in a depot, sometimes running routes in and out throughout the day, yard haulers that are moving loads around the yard, all of that stuff. So there's going to be a lot of DC over the next few years. And we spent the last 7 years building out our DC architecture to support that.