EVgo, Inc. (EVGO) Earnings Call Transcript & Summary

Greetings. Welcome to the EVgo Fourth Quarter and Full Year 2021 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Ted Brooks of Investor Relations. You may begin.

Hi, everyone. Welcome to EVgo's Fourth Quarter and Full Year 2021 Earnings Call. My name is Ted Brooks, and I head Investor Relations at the company. Today's call is being webcast and can be accessed from the Investors section of our website at investors.evgo.com. The call will be archived and available there and the company's results, Investor presentation and a transcript of today's proceedings will be available at the Events and Presentations section of the Investors page after the conclusion of today's call. Joining me on today's call are Cathy Zoi, EVgo's CEO; and Olga Shevorenkova, the company's Chief Financial Officer. Today, we will be discussing EVgo's latest financial results for the fourth quarter and full year 2021, followed by a Q&A session. During the call, management will be making forward-looking statements regarding the 2022 fiscal year and our outlook for expected growth and investment initiatives. These forward-looking statements involve risks and uncertainties and many of which are beyond our control and could cause actual results to differ materially from our expectations, including, among other risks and uncertainties, the severity and duration of the effects of the COVID-19 pandemic. These forward-looking statements apply as of today, and we undertake no obligation to update these statements after the call. For a more detailed description of factors that could cause actual results to differ, please refer to our Form 10-K filed soon with the SEC and posted to the Investors section of our website. Also, please note that certain financial measures we use on this call are on a non-GAAP basis. For historical periods, we provide reconciliations of these non-GAAP financial measures to GAAP financial measures, and the investor presentation can be found on the Investors section of our website. With that, I will turn the call over to Cathy Zoi, EVgo's CEO. Cathy?

Thanks, Ted, and good morning, everyone. EVgo had another strong quarter, wrapping up a tremendous first year as a public company. We made significant progress in solidifying our position as the nation's largest public fast charging network for electric vehicles in a rapidly growing EV market. I'd like to begin this morning with some observations about the EV industry given the escalating market momentum and enthusiasm we are seeing across the U.S. In 2021 alone, the market share of electric vehicles more than doubled along with U.S. driver purchases of EVs. Approximately 475,000 electric vehicles were purchased in the U.S. last year, roughly double of sales from just the year before. This is just the beginning. Auto manufacturers are planning to introduce approximately 50 new EV models just over the next 24 months, including the arrival of EVs in segments like SUVs and pickup trucks, that will unlock new demographic frontiers and EV adoption. And by 2025, dozens more will follow, creating an abundance of EV choice for every type of driver. We expect these trends will be further accelerated by tailwinds in the macro environment as electrification of transportation has never been more widely accepted and anticipated. The improving cost and breadth of offerings comes at a time when rising commodity prices makes EV ownership more economically attractive than ever. As the pace of EV adoption accelerates, forecasters expect annual EV purchases to triple by 2025 and then triple again by 2030, it's worth remembering that we expect the demand for DC fast charging to outpace this already rapid market growth. Automakers are meeting the consumer demand for fast charging solutions with battery technologies capable of supporting significantly higher levels of charging throughput. With EVgo's growth and ability to scale profitability tied to EV adoption, we are energized by the powerful secular trends, bringing more EVs to the road. Everything we're witnessing across the industry reinforces our confidence in this market and EVgo's leading position within it. It's why we have more conviction than ever in the investments we are making and the plan we're executing against. Let me now highlight some of EVgo's remarkable accomplishments in fiscal year 2021. We delivered 26.4 gigawatt hours of charging throughput, a 68% increase over 2020. This demand for EVgo's charging services led to $22.2 million in revenue, a 52% increase over 2020. We ended the year with 340,000 customer account as more drivers chose EVgo as a key charging partner, up from 231,000 at the start of 2021. This equates to about 80% of non-Tesla EVs sold in the U.S. last year coming to EVgo. This demand for EVgo and our charging services extends past individual drivers and is illuminated by our numerous partnerships throughout the industry, further cementing our market leadership in the EV charging space. We hear it time and again when potential partners call us, and we're often that first phone call they make, they recognize EVgo's experience, track record and leadership position. Over the last year, we signed several new landmark partnerships with key OEMs, including Subaru and Toyota. EVgo is now the charging partner of automakers responsible for over 40% of U.S. light-duty vehicle sales. As each of these OEM leaders ramp their own EV production, EVgo is exceptionally well positioned to be the charging network of choice for new EV drivers. We've also grown our fleet business with numerous new and expanded partnerships that include Uber, Merchant Fleet and leaders in the autonomous vehicle space, and we're introducing our EVgo eXtend business line to the market today, an offering we're extremely excited about. Operationally, we ended the year with over 1,600 DCFC stalls in operations and increased the size of the EVgo development pipeline to approximately 3,100 new stalls, marking a 26% rise since the end of the third quarter in this crucial element of our growth story. Over the longer term, we have a funnel of approximately 4,000 additional sites, each to host at least 4 charging stalls, which represents close to 5x the number of fast charging station locations we currently operate. In terms of technology, EVgo continues to add value to our infrastructure business by developing innovative software products to attract new customers and deepen relationships with existing drivers and B2B partners. This includes the rollout of EVgo Optima, our customized software for fleet, a new mobile app and EVgo Inside our proprietary software and API suite, all designed around the same principle of anticipating how to meet our customers' charging needs in a comprehensive and intuitive way. In short, EVgo has been busy in 2021, laying the foundation for a comprehensive electrified transportation future. I'll return to these achievements and expansions of our business in some more detail in a few moments. But let me now touch on the passage of the federal government infrastructure legislation in November, an important moment that will certainly generate material effects. The National Electric Vehicle Infrastructure Program, or NEVI, will allocate $5 billion to states over the next 5 years, with an initial $615 million being made available later this year. This federal support for fast charging infrastructure may cover as much as 80% of a project's cost, and they include coverage of operating costs as well as capital expenditures. This federal support may be complemented by local or private sources of funding, marking a significant benefit to developers like EVgo and incentivizing the continued widespread build-out of a more comprehensive national fast charging network. As EVgo expected, preference of federal infrastructure funds will be toward build-outs along highway corridors first with requirements that chargers be at least 150 kilowatts in capacity with at least 4 charging stalls per location. Those locations are meant to be no more than 1 mile off a highway in most cases. State must submit their fast-charging infrastructure plans to the federal government by August 1, with approvals of those plans expected by the end of September. And while EVgo is looking forward to participating in NEVI once the program structures are finalized at the state level, our guidance for 2022 does not incorporate any financial benefits that might arise from these incentives. Over the coming quarters, we will provide investors with updates on state-level implementation, the role EVgo is playing in different geographies and the financial upshot for the company. As we look back on the rapid evolution of the EV charging industry in 2021 and look ahead to what we expect will be even more substantial growth ahead, I thought it was timely to revisit EVgo's approach to the market. We've always had a driver and customer-centric focus, building charges where we think they will help spur the adoption of EVs and where they will be used. The complement to that, of course, is providing solutions to the auto manufacturers and the site host that need EV charging infrastructure built to accommodate their own customers' needs. As a leader in the sector, EVgo has a finely honed methodology for determining where and when to build, own and operate fast charging infrastructure to meet our investment hurdles and unlock long-term cash flow and profitability for our investors. Hence, EVgo's historical focus on owning assets in high-traffic metropolitan areas. With interest in the EV market expanding to lower traffic rural geographies and corridors, EVgo is receiving a request to parlay our world-class experience in building stations and operating the most expansive and reliable public network in America to new geographies, geographies in which we would prefer to be the services provider rather than the asset owner. Fueling along interstate is an example of such an opportunity. We expect growth in this area to be bolstered by the passage of the infrastructure legislation whose policy objectives include national charging infrastructure ubiquity. With this in mind, EVgo is excited to announce the formalization of our white label services provided for years to partners like Kaiser Health, Green Mountain Power and Salt River Project in the form of a new offering under the banner EVgo eXtend. EVgo eXtend's partners will leverage all the end-to-end benefits of EVgo's decade-plus of planning, building, operating and maintaining the nation's most reliable charging network, while the partners themselves purchase and then retain ownership of the charging assets. Formalization of EVgo eXtend into our solution suite puts customers and drivers first, unlocks another avenue for value creation and near-term growth upside, expand EVgo's geographic reach and potential partners and complements efforts in the rest of our business that relate to fleet, software and scaling efficiencies. EVgo eXtend leverages our core competencies to expand our network footprint beyond sites that currently meet our underwriting hurdles with asset ownership creates another way to grow recurring revenues and mitigate risk associated with sites that are likely to have low utilization in the intermediate term. We're working on several exciting potential EVgo eXtend partnerships that will provide upside to our overall growth in the years to come. We're hopeful that we will be able to communicate more concretely about these efforts soon. Please stay tuned for updates. As mentioned at the outset, you may have seen recent announcements from EVgo on new partnerships with 2 major auto OEMs, Subaru and Toyota. With Subaru, EVgo was proud to become the preferred charging partner for their first electric vehicle, the Solterra EV. It is expected to become available in the U.S. this summer. EVgo's business deal with Toyota provides for 1 year of unlimited charging on EVgo's network for buyers or lessees of Toyota's first widely available electric offering, the bZ4X, which Toyota anticipates will be available later this year. This marks Toyota's first move in significant plans to become fully electric, and EVgo was delighted to have been selected as their fast charging partner. As I noted earlier, with Toyota and Subaru, along with existing partnerships with other OEMs, EVgo now has charging relationships with auto manufacturers that together represent over 40% of annual auto sales in the U.S. This provides clear evidence of the success EVgo has had in building and operating America's most robust fast charging network over the last dozen years. One of the many reasons EVgo was able to attract and retain high-quality partnerships is a commitment to technology-enabled innovation across the company. One of these innovations is EVgo Inside, which is a suite of software and APIs that helps EVgo partners manage the customer experience process from enrollment to charging to billing. We recently released an updated mobile app that showcases both the sophisticated and a friendly design that welcomes drivers to the EVgo charging experience. And our EVgo reservations and EVgo Advantage software products have broadened their reach into new locations during 2021, and EVgo's PlugShare surpassed 2 million registered users. Electrification activity in the fleet segment has rapidly expanded during the last 12 months with EVgo's current fleet clients like Uber, Lyft and 2 leading AV companies ramping their EV deployments and dozens of new fleet operators placing their first orders for EV. These newcomers to electrification are beginning to engage in charging infrastructure planning as they await arrival of their EVs. EVgo's fleet team is at work helping fleets craft infrastructure programs that will meet their needs through our EVgo Optima, EVgold and EVgo Inside solutions. We look forward to sharing updates with you in the coming quarters. Before I turn the call over to Olga, I want to underscore the EVgo investment opportunity in the context of the growing EV ecosystem as a whole. As we shared, EVgo is a pure-play EV charging company with a special focus on DC fast charging and a history of executing and operating at a superior level with uptimes in the high 90% range for our chargers historically, and with over a decade of delivering on our promises to site hosts and drivers. We are a pioneer with a first-mover advantage in this sector, including being powered by 100% renewable energy. Our relentless focus on innovation in technology, products and solutions has provided us with an edge in designing and engineering charging locations in a way that attracts partners and drivers. We have a world-class executive leadership team with deep expertise in clean energy and that has a clear vision for leading an electrified future. And the superstar employees across every function at EVgo are not only committed to excellence and delivery of EVgo charging services, but is a larger mission of a decarbonized transportation future. EVgo has ESG in our DNA. EVgo's experience and track record of execution are durable advantages in a sector with tremendous growth opportunity. We've done this all with a keen focus on financial discipline, long-term margin potential, risk mitigation and underwriting that prioritizes profitability and the prudent allocation of investor capital. As Olga will share, even in these early stages, we have realized positive results of this discipline with growth in both customers and throughput driving cash flows and providing concrete evidence of what the future will bring across the EVgo platform as EV adoption continues. We are more excited than ever about the immense opportunity in this space, and EVgo's position in the market as EV adoption is set for takeoff. We expect a lot of positive inflection points in 2022 with increasing driver demand, OEMs introducing new vehicles, and the implementation of support of policy. But we would also point to the long term and remind everyone that we are in the early innings of a major sectoral transformation. The electrification of the multitrillion dollar transportation sector is just getting started. EVgo was poised to be a key player in this transformation, and we couldn't be feeling better about the future. And with that, I will turn it over to Olga to discuss some of our financial and operational highlights. Olga?

Thanks, Cathy. I will start with some key operational highlights and a review of our financial performance in the fourth quarter and full year of 2021. As Cathy noted, network throughput of 26.4 gigawatt hours, exhibited material growth in 2021 with a 68% year-over-year increase and a 95% increase in the fourth quarter of 2021 versus the fourth quarter of 2020. Throughput for the year exceeded our guidance range of 24 to 26 gigawatt hours provided during our third quarter earnings call. Our active engineering and construction development pipeline exhibited big gains during the year, ending 2021 with over 3,100 stalls. Our Active Engineering & Development Pipeline was at 2,500 at the end of third quarter, exhibiting a 26% quarter-over-quarter sequential increase. We ended 2021 with 340,000 customer accounts on our network, which represents 47% growth year-over-year. Overall, over 109,000 customer accounts were added to EVgo's network in 2021, which represented roughly 80% of non-Tesla EV sales. We also continue to attract Tesla drivers. Our data suggests that Tesla drivers continue to comprise about 15% of our new customer accounts and that Tesla drivers represented approximately total EVgo retail charging throughput at the end of 2021. Revenue in the fourth quarter of 2021 increased 70% versus the fourth quarter of last year, and 15% quarter-over-quarter sequentially as the combination of EV adoption and EVgo's business development efforts drove high activity in both retail and fleet segments. Adjusted gross margin hit new highs of 28% during the fourth quarter due to high usage and growth in high-margin data-driven ancillary services business lines. Turning now to the full year results. Revenue increased 52% year-over-year to $22.2 million, above the upper end of our guidance range of $20 million to $22 million provided during the third quarter earnings call. This was primarily driven by an 88% increase in retail charging revenue year-over-year and an 84% increase in ancillary revenue, including the addition of Recargo revenue. Adjusted gross margin for the full year increased from 3% in 2020 to 23% in 2021. As we continue to scale the business, driven by greater contribution from high-margin data-driven ancillary revenues like Recargo and network throughput growth that allowed to exercise operational leverage. Finally, adjusted EBITDA was negative $51.4 million for the year, which was ahead of our guidance of negative $54 million to $58 million as revenue was stronger and G&A expenses grew at a slower rate than anticipated. And now the installed deployments for the full year. We finished 2021 with 1,676 operational stalls and 1,903 stalls either operational or under construction. Both of these figures were in line with our guidance provided on the third quarter call. I would like to spend a few minutes talking about EVgo's business model and key profitability drivers. The EVgo business model is centered at deploying charging infrastructure that generates double-digit unlevered pretax IRRs. I would like to walk you through our deployment criteria and station economics. EVgo employees brought short term, and long-term demand models to determine expected usage for every project we develop. Our short-term model, which predicts demand down to the census block, or about 1/10 the size of a ZIP code has been highly accurate in its predictive capabilities. Our longer-term model overlays short-term forecast against adoption trends in the marketplace for EVs and fast charging. For every project we underwrite, we developed a financial model using this utilization forecast; revenue per kilowatt hour evolution; regulatory credit pricing evolution, if applicable; nonenergy costs and energy costs per the existing tariff. Note, we do not assume improvements in those energy costs unless new tariffs have been approved by utilities. I would like to highlight that modeled nonenergy costs for every project are quite uncomplacent and include maintenance, warranties, rent, property taxes, connectivity charges, call center costs, payment fees and the portion of asset management and customer operations team salaries. CapEx estimates are provided by EVgo's engineering team based on contracts with vendors and specific project design. Estimates only include CapEx funding support, such as governmental grants or OEM offsets if it is available to us at this specific location. Finally, we continue to model no residual value in our underwriting process, a practice we view as suitable conservative but also likely to present upside opportunity for us as the market develops. With respect to stations in operation, we continue to evaluate network financial performance on a cash flow basis by market, which is calculated as charging and regulatory credit revenue minus energy and nonenergy costs using the same cost categories as the ones we used during the underwriting process. California is the most advanced EV market in the U.S. It has attractive electricity costs, LCFS and FCI credit revenue opportunities, favorable fleet dynamics and the highest EV penetration rate in the country. EVgo's California charging network already generates positive cash flows today. As an illustrative case study, I would like to highlight the specific performance of the San Francisco metro market within California. San Francisco EV adoption rate is about 3%, among the highest in the United States. And at the year-end 2021, EVgo operated 292 stalls in the area, resulting in 8.4% utilization rate generating 1.9 million kilowatt hours of throughput in the fourth quarter of 2021. The South Francisco charging network generates 43% cash flow margin for EVgo, driven by solid utilization levels and attractive energy cost environment, LCFS add-ons and dedicated fleet stalls take-or-pay contracts. These margins and cash flow generation ability will increase with further EV adoption. San Francisco is far from the only metro market demonstrating such results. Other metro areas in California such as Los Angeles showed similar results, and we're seeing comparable profitability trends in markets outside of California as well. I can call attention to Portland, Oregon and Phoenix, Arizona, as 2 more examples of metro markets where EVgo portfolios are generating positive cash flows. And this is in markets that have lower EV penetration than California and do not have the advantage of meaningful regulatory credit revenue. The rising tide of EV adoption continues to improve performance in these markets and many others across the country. EVgo's rigorous investment process and site selection, a bearing fruit across a number of key markets already today, even when EV penetration remains very low, about 0.5% nationally, which demonstrates the strength of our business model and the attractive upside potential. EVgo's overall path to profitability is closely tied to EV adoption. We would like to illustrate what could happen to EVgo revenue and EBITDA generation and how EVgo is positioned to profitably scale when EV adoption increases from 0.5% today to 5%, 10% and 15% in the future, noting this estimate still represent the EV market in its infancy. At 5% EV adoption, we estimate EVgo revenue of between $1.9 billion and $2.1 billion with corresponding adjusted EBITDA of $600 million to $800 million, representing a 30% to 35% margin. As EV adoption increases to 10%, we expect revenue to reach $3.2 billion to $3.4 billion with adjusted EBITDA of $1.1 billion to $1.3 billion, representing adjusted EBITDA margins of 35% to 40%. At 15%, we estimate revenue of between $4.8 billion and $5 billion, with adjusted EBITDA of $1.7 billion to $2 billion with 35% to 40% margin. EBITDA margin improvements are expected to be achieved by operational and SG&A leverage. EVgo expects to be profitable on an adjusted EBITDA basis at roughly 2.5% of the adoption rate. From there, the upside compounds. In the near term, we're introducing 2022 guidance based on our current expectations for the full year. There are a number of factors that will impact our results. However, the most salient of which is EV adoption. Supply chain and other global economic and political challenges may present a short-term obstacle for OEMs and getting new models on the road. At the same time, we will continue to strategically invest in the massive midterm and long-term growth trends. As we invest, we will prioritize profitable growth with a focus on expanding margins over time. For the full year 2022, we expect to deliver network throughput of 50 to 60 gigawatt hours, revenue $48 million to $55 million, adjusted EBITDA of negative $75 million to $85 million and total DC fast charging stalls in operation or under construction at year-end 2022 of 3,000 to 3,300 stalls. Both revenue and network throughput guidance represent a more than doubling of comparable figures to 2021 results. The drivers for adjusted EBITDA reflect increased investments in technology and personnel to respond to expanding market opportunities and encapsulate our expectations for LCFS pricing and public company expenses. Finally, total stalls and operation or under construction reflect the advancements we are making in the size of the pipeline and the success of reducing the time and development, both of which are driven in part where the technology and personnel investments I just referenced. We're seeing a lot of progress and enthusiasm in the business with a number of strategic commercial partnerships in various stages of development. We believe that EVgo has a substantial growth runway over the next decade and beyond. Assuming electric vehicles and operation grow at 35% to 40% 9-year CAGR as many forecasts agree on, we are looking at an 80% to 85% CAGR for networks throughput, 70% to 75% CAGR for revenue and 40% to 45% CAGR for DC charging stalls. Given the strong tailwinds and significant industry momentum Cathy discussed earlier, we see a massive opportunity ahead and believe that EVgo is well positioned to capitalize on it. Thank you for your time this morning. I would like to turn it over to the operator for questions.

[Operator Instructions] And our first question comes from the line of Gabe Daoud with Cowen.

Thanks, Cathy, Olga for all the prepared remarks, super helpful. Can we maybe start with slides 17 and 18? Maybe Olga give us a little more meat on the bone, so to speak, I guess, I'm thinking about long term, the operating leverage here. What kind of underpins some of these assumptions you could just talk to utilization or stalls in the ground, that would be helpful. And then also, to what extent does LCFS credits play into Slide 17? Like what percentage of that San Francisco cash flow comes from LCFS credits?

Gabe, thanks for the question. So 17 -- so just to kind of clarify, first, Page 17, that's an actual number, right? So there are no assumptions which are going into that, just the numbers we're observing. LCFS is, of course, an important part of our cash flow. But even if you remove LCFS cash flow from San Francisco, you'd still see a positive cash flow margin. I wouldn't disclose the exact number. I would like not to disclose the exact number, but I will assure you that, that remains positive in the San Francisco market. So on kind of like what drives performance of San Francisco market today. First of all, it's the attractive energy cost, it's -- the tariffs we have in -- is quite attractive, and that's what you observed here in the cash flow margin. We have quite a substantial presence of dedicated fleet take-or-pay contract, which is baked into this number, that plays into this. And the third and most important is one of the highest EV adoption rates in the country as you could see, it's 3%, and that bakes into a pretty decent utilization of 8.5%. So that utilization we deem decent as of today with the current adoption levels. We, of course, expect that those -- the definition of decency will change over time. But for today's standard, that's pretty good. So when we talk about the Page 18, so the -- there are other assumptions playing into here, one of them you asked about the stalls. We're not changing our overall target, which we manifested during our thought process of 16,000 stalls by 2027, and that's roughly what we're assuming underpinning this forecast. So -- we -- again, we wouldn't probably disclose exactly what it will be a 5%, 10% and 15%. But when we run our forecast, we make sure that the CapEx investments and the amount of stalls we're deploying to support the EBITDA and revenue generation make sense and fairly prudent and conservative.

Yes. If I could just jump in and add a little bit, Gabe. The reason we included San Francisco is a market spotlight, as we all know, California is an early bellwether to what happens in many things and in particular, electrification. California has more EVs than the rest of the country, et cetera, early adopter. California has been an early adopter in autonomous vehicles. California has been an early adopter in rideshare. All of those macro trends are going to spread across the country. So when we take a good look at our business model, we look first at California. Is it working in California? And it's working in San Francisco, it's working in L.A., and what's really interesting is as Olga points out, it's also working very, very well even in the next stage of markets, which are like Portland and Phoenix. So we just feel confident that we're on to the -- we're capitalizing on investing in charging assets in a way that's going to ride the wave of electrification or transportation across America.

Awesome. That's really helpful. And then just a follow-up, I guess, just on this new business line, Cathy, eXtend, could you talk a little bit about maybe the economics there? And are any stalls that are in queue for this year under this business model? Just how do we think about balancing that long-term potential that you highlighted on Slide 18 versus the eXtend business model?

Yes. So the EVgo eXtend is an [ and ] for us. It's like we are really -- we're already a market leader in siting, building, owning, operating, what -- and we do -- essentially do the EVgo eXtend white label with a few customers now. The incoming that we're seeing, particularly as the corridor -- interest in building in corridors grows is that those corridor don't tend to meet our traditional hurdle rates to own the assets. However, there's a wonderful way for us to participate in that extension of our network through EVgo eXtend by providing the network planning, siting, construction and then an O&M that comes with having those locations be part of our network, that's accretive. We are so excited to tell you about what we've got cooking in the oven as soon as we can -- as soon as it comes out of the oven. So stay tuned. It's a really, really exciting addition to EVgo solution set.

[Operator Instructions] Our next question comes from the line of Maheep Mandloi with Credit Suisse.

Maheep Mandloi from Credit Suisse. Congratulations for the quarter. Olga, maybe a question for you. If you could just kind of break down the guidance for us and you understand the revenue guidance miss a little bit was driven by the rideshare recovery slightly weaker than expected. But could you just talk about like on the gross margin and operating expenses, are you seeing any changes versus what the expectations were going into the year previously? And especially trying to understand the impact of any rising electric builds later this year due to higher energy prices. And secondly, look, I just wanted to touch base on EV charging hardware availability. Some of your peers have been talking about delays on that. So any color on that would be appreciated.

Sure. So on energy cost, just to remind everybody that we are not trading wholesale power, and we're not exposed to short-term volatilities in power with C&I customer, utilities. So we -- on a short term, on a short horizon, we know exactly what our energy costs will be. Now obviously, the macro environment is as such that the power prices are rising, then utilities will probably start passing them on us, but we'll know in advance and that doesn't happen overnight. So we don't foresee that specifically, we at EVgo will feel the effect of rising energy costs in 2022. So on the gross margin, expect to be where it is or improving with an improvement in throughput. So our gross margin is a reflection of leveraging of fixed -- operational fixed costs. That's why you saw it improving. And in addition, the growth of our high-margin data-driven ancillary services. So both of those trends are expected to be -- to continue to be favorable next year. So you'll see margins slightly better or at the same level. We're not guiding to gross margin, so I won't disclose specific expectations, but that's the some light than I can give to you. And then on hardware, so we're obviously -- and no exception to anybody else, we're extremely focused on securing hardware supply and managing our supply chain. As of now, all of our vendors had expressed confidence that they would be able to deliver the equipment we need this year at the pre-agreed price. And we have certain contractual agreements, which give us, again, quite a decent confidence that, that will be the case. And I emphasize that in multiple conversations with investors before and I emphasize again, our main concern regarding supply chain for this year is the ability for OEMs to manufacture and get access to various raw materials and components and get cars to American roads. That I think where our main concern is centered around, that's outside of our control, but we're here for everybody in the market to deliver cars because again, as we emphasize multiple times through our script, our business is tied to the adoption, more EVs most throughput more revenue for us.

Our next question comes from the line of Craig Irwin with ROTH Capital.

So I'm quite curious about the EVgo eXtend model. It seems your more recent implementation skewed towards using equipment from 2 vendors. One of them is used by a number of other fast charging network operators. But the other happens to be the world's largest power supply producer and well known as a low-cost, high-quality producer with very little representation in North America. Do you expect to maybe have some sort of an alliance or a strategic agreement that would allow you assured supply or a different type of access for this equipment, given that it looks like you might be blazing some trails for them where they traditionally not had some -- they had not been very good at marketing globally outside of the monster EMS companies and very large tech companies?

Yes. Well, Craig, thanks for the question. On the hardware supply, as I think we've talked about before, our engineering team is -- has a pretty -- an extremely rigorous process for qualifying any hardware that we put into the field that we put on to our network. And that will be true for the EVgo eXtend customers as well as the assets that we retain ownership of. At the moment, we've got -- we've got 2 preferred vendors for our fast charging equipment. We -- that are capable supplying 350-kilowatt chargers, which is our standard ultrafast configuration now. We have a couple of other vendors that we've used in the past. But the team is continuing to qualify others that are capable. Again, the -- our exacting specifications for ultrafast frankly, the vendors had to catch up to what we want and to be able to do power sharing and power routing, the vendors had to catch up. So our team is continuing to look at suppliers that will be able to meet those exacting standards that are essentially what we expect and what drivers will expect and what OEMs expect, which is the ability to ultra-fast charge reliably. So we wouldn't rule out any special sort of alliances with vendors in the future, but there's nothing more I can tell you at this point.

Okay. And then just as a follow-up, citing of charges can often be challenging for local site capacity for electricity, right? So a lot of conversation out there about co-implementing with batteries, with energy storage. Can you update us where you stand on this? Do you see this as strategically important over the next couple of years? Or is the format that you're using the format of choice and what you expect to pursue?

Yes. We have probably a dozen stations in California that have on-site batteries, and that was -- that we put them in years ago, and that was, again, a good economic decision to avoid punitive demand charges. We are quite open to it. Frankly, wherever it will pencil economically, it makes good sense. And in some cases, the utilities will be excited about it. If the utilities modernize and go to more distributed energy sources and 2-way power flows, I think there's going to be more interest in that. The very practical question for us is, does the location have the footprint to have on-site storage? We're pretty excited about some of our larger projects under development, mega hubs, giga hubs, charging hubs, where there will be room in a parking lot or in the location for on-site storage. But again, it all has to pencil for us. Our financial discipline is unwavering. It's got a pencil to double-digit returns. So if it makes financial sense, we're open to it, and that could -- there's a lot of different ways, a lot of different people that can come to the party to help that pencil for us. But yes, we've got the team that knows how to do it, and it's a possibility for the future.

Our next question comes from the line of Ryan Greenwald with Bank of America.

Perhaps starting with '22 guidance, can we just help reconcile a bit in terms of the throughput being down 20% and significant price deflation to LCFS credits, more modest 5% decrease to revenue. Obviously, you have the full year of contribution from Recargo. But can you just talk a bit about other key offsets there?

Sure. So the first and foremost, on the network throughput, the main difference -- well, we haven't provided the formal guidance before, just to send to everybody, but from my understanding, you're referencing the [ stacked deck ] or your own forecast. But the delta here is the delay in rideshare recovery. So we continue -- with the good news that we start to observe the rebound of rideshare in general, as an industry, but what we now are seeing is that there is not enough cars for all the rideshare operators to get and electrify their fleet. And that is delayed and that's an effect of a post-COVID hangover and supply chain challenges. So that's the main driver of why the network throughput is probably below somebody's or everybody's expectation. On the revenue side, you're absolutely right. LCFS is below what we all saw even a few months ago, and that is baked in to a certain extent in our forecast, but we're observing the situation, of course, the situation is dynamic. Some of the offsets are our take-or-pay fleet contract, which we see quite a strong pipeline on and making certain assumptions on when those projects will hit operation and those are independent of throughput. Just to remind everybody, take-or-pay fleet dedicated contracts. It's a fixed amount of dollars paid to us a month independent of the throughput, and we have quite a strong view on that for this year. And we didn't -- on an eXtend side, we have, as Cathy mentioned, we have some baked in. We haven't included a full effect of that here because most of what's being baked in will manifest itself in 2023 and beyond. But there are certain modest inclusions on a second half of the year where we might see those effects, and they have been included here.

Great. And what is the embedded LCFS credit pricing assumption that you guys are assuming now in '22? And how are you thinking about timing of cash flow inflection if these levels are sustained?

So we're assuming [ 150 ] for the full year.

And on cash flow inflection, how would that kind of impact how you guys are thinking about things?

I'm not sure I fully understand your question. And the cash flow inflection?

In terms of which year you would expect to inflect positive?

We wouldn't provide that guidance, but I'd like to reiterate some of the messages I was given in the script. We expect to be adjusted EBITDA positive at a moment in time when EV adoption is going to be around 2.5%. So it's 0.5% now. We -- again, our businesses very much tied to EV adoption levels. If that 2.5% will hit earlier, then we'll be EBITDA positive earlier, later, later. So that's how we think about our business, but we are not giving a specific year guidance for that.

Our next question comes from the line of Vikram Bagri with Needham.

I have a multipart question on California study. You showed that EV to EVSE ratio is pretty high and yet the utilization is under 9%, how do you see that situation evolving over time with either more EVSEs being installed? Do you see utilization coming down? Or do you see utilization going higher and EV upon EVSE ratio staying where it is. And then I think, Olga you mentioned 6% of throughput is represented by Tesla chargers. Could you compare that to what percentage of connectors are Tesla connectors? I believe that percentage is higher. And how do you plan to sort of close that gap between the throughput and the percentage of connectors allocated to Tesla? And the third question I had was, Olga you mentioned in your remarks that you pass on the higher cost of electricity because you get a heads up from the utilities months in advance. You've had 2 price increases in California and multiple across the country so far this year, what percentage of the revenue per kilowatt increase year-on-year in 2022 is just being driven by higher energy cost that you're passing on to the customers.

Yes. So for the first one, we do expect utilization to go up over time. And let me kind of go back to the basic -- to the basics of DC charge and utilization and DC charging business. So the utilization on the DC charging infrastructure is not only driven by EV to stall ratio. It also is driven by MUD density and what percentage of charging needs of this specific population is being met by DC. So it's going to be very different in San Francisco versus Santa Monica versus a place in a country where people live in single homes. And on...

Yes, just MUD density is multi unit -- it's departments.

Sorry, our internals are gone, and I kind of assume everybody knows, but it's how many people live in apartments versus how many people live in single family homes. That's a very important driver because if you have a charge at home, we have no illusions about it and the data confirms that you will use your charger at home. And another very important factor here is electrification of fleet. Right now, San Francisco is quite an advanced market regarding fleet, but it's still not at its final end-game point and with the expectation of more electrification of rideshare. And just as a reminder, we discussed it during our previous earnings call, an average commuter drives 11,000 miles a year and average rideshare driver drives 40,000 to 60,000 miles a year. And on top of it uses DC charging for 70% to 75% of the charging needs. So that's a massive -- that's a massive contribution to utilization. And so with that in mind, that kind of like just thinking about utilization as a function of EV to stalls ratio, for the years to come is not fully correct. We do think that utilization for the network in 5 to 6 years on average, will probably be around 18%. And that's our best guess as of now, and that's how we run our models. We think it's fairly conservative as well, but we expect utilization to go up over time for the network. So that's answering your first question. The second question about the Tesla, I'm not sure I follow what the question was about. Cathy, if you...

Vik, are you asking how many of our Tesla connectors are -- to what extent the Tesla connectors on our EVgo chargers are reflecting that uptick of Tesla usage on our network? I'm just trying to get -- I don't quite understand your question either.

I was trying to understand percentage of your total connectors over your network are Tesla connectors? And I believe that percentage is higher, maybe 10% or 15% of your connectors are Tesla connectors, but the throughput allocated to Tesla vehicles is only 6%. And I was wondering like is it a factor of pricing not being competitive or Tesla drivers preferring Tesla connectors only, how do you sort of like close that gap where you're installing slightly higher percentage of connectors are allocated to Tesla, but the throughput percentage allocated to Tesla, you're seeing is lower.

I think I see what you say. We -- so we're ramping up Tesla connectors and we're ramping them up throughout 2022. So that just extreme beginning of Tesla usage on our network. And it's 6% of total retail usage across the country. We have geographies where it's much, much higher, and it goes to double-digit percentage and the ratio gets reversed. That usage is very much dependent from what we're seeing from early data on availability. So geography by geography, you'll see very different ratios, very different percentage. 6% is a blended number. But that is mostly driven by lack of Tesla infrastructure in the specific geography. So for those geographies where the ratio of Tesla EVs versus Tesla superchargers is skewed, and there is not enough infrastructure, we see very high usage of Tesla on our network and for the places where it's reversed and there is abundance of infrastructure, it is not that many, but they exist. We don't see such high percentages because, of course, Tesla drivers will use a Tesla Supercharger before they come to us. But that okay. That's what we plan for and that's how our business model works. So that 6% number, which is very early inning. And as I also mentioned in my script that 15% of all new customers which sign up with EVgo are Tesla, which shows that, that 6% is positioned to grow further. We're quite happy about those results. So just to interpret, it's a good news, it's not bad news.

And then I think there was another question about electricity pricing. Like our pricing and electricity pricing, do you want to talk a little bit about that?

So conceptually, we're not in the business of determining retail prices as a pure spread. And it's not necessarily that we are going to pass on consumers every single increase of tariffs because we look at it from a network perspective. And in certain places, yes, you get indexation or you get the inflation or some tariff adjustments up. In certain other places, with the great efforts of our market development team, we're getting access to much better tariffs and much better per kilowatt hour energy costs. And on top of it, with the increase in utilization and increase in throughput, demand charges, which still exists in our network get amortized which again translates into lower per kilowatt hour energy cost. So you have all these different multiple factors and vectors of events happening on the network. And we -- again, we're not passing the single cent back on the consumer, we're going back and estimating the whole network or maybe like a market by market and trying to see if that still makes sense, if economics still works...

The other thing I would add is that what you've seen in California, Vik, is that we introduced -- first we went to kilowatt hour pricing from per minute pricing. Second, we introduced time-of-use pricing at the behest of the utilities in the California Public Utility Commission. And we've been just watching about how -- what different types of consumer responses, driver responses there has been to cheaper early bird pricing, higher on-peak pricing. And so what we do -- and I think I might have said this before, we have a software backbone that will allow us to do customized pricing based on location, and we also introduced location-based pricing. So our pricing not inextricably linked to the electricity cost. There are a multitude of attributes that we use to determine what pricing will make the most sense that will deliver value to drivers and will maximize income to us.

And our next question comes from the line of Bill Peterson with JPMorgan.

This is Mahima calling in for Bill. So just really quickly, have you seen any impacts from any permitting delays? And if so, has it been prevalent in any particular geographies? And then maybe could you give us the latest timing from order to up and running essentially from site selection to installation?

Yes, yes, yes. You know I love this question. This is like my favorite topic is creating the flywheel that we can deploy more faster and more quickly. So I will start off with -- our pipeline continues to grow, site hosts continue to be really excited about having charging infrastructure on their parking lots. It still takes us 4 to 8 weeks to actually like start digging and then get the station built. What we're seeing is -- and again, last year, I talked about going from 18 months on average down to 6 months. We are still nowhere close to 6 months. That's still my dream, but we've got a long way to go. As we go into new jurisdictions, it is often the first time a local government has like had to approve a charging station. The variability around that timing. It can be as short as 1 week, and it can be as long as 12 months for the local government permit, and I kid you not. Similarly, with utilities approving designs and getting easements with the landlord. Again, it can be as quick probably as 4 to 6 weeks and as long as 12 months. And then the final energization process that the utilities have to do for inspection. Again, that can be like next day or that can be probably 6 to 8 weeks. We had a whole bunch of stalls done at the end of 2021, like dozens and dozens and dozens that were completely ready for drivers, except that utility had to come along and do the final inspection. So we got Connect the Watts that we're pushing on, like to continue to like share best practice. The more activity in the sector, the quicker we assume it will go, it's like early days of solar, but it is something that we're continuing to work on. And like as I say, making progress, but I think I can't give you a number because the variability is still -- we've got super-fast players and then we've got super slow-mo. And I don't know that the latest is probably on the distribution around that, but it's a pretty wide distribution. I hope that helps.

And our next question comes from the line of Andres Sheppard with Cantor Fitzgerald.

Congrats on the quarter, and thanks again for running a few minutes over and taking all of our questions. Maybe just to quickly follow up from the last question there. Are you able to give us any sort of breakdown in terms of how quickly you can convert those over 3,000 stalls that are in the pipeline into operational. And maybe in addition to that, any plans of expanding abroad? I know some of your peers have been increasing their footprint in Europe, for example. So I'm just wondering if that's something that's being thought of.

Yes. So on the timing, look, I think that like the -- what we're now doing is sort of counting on at least 12 months from idea to energization, right? Not wishing for 6 months or counting on 12 months, and we're working really hard on that. And again, I -- so that's -- so what we're doing right now, like those 3,000 to 3,300, those are going to get energized. There's going to be dogs that are -- take longer, and then there's going to be super quicky ones. But generally speaking, those are going to be sites that are going to go the 3,000 to 3,300, have been in planning for a while that are going to go live. But then we're building the pipeline for even bigger numbers for '23, '24, '25, right? So that's kind of what our site host development team is working on. So -- and that's just -- that's just sort of learning -- like we'll be delighted if it starts to go faster, we'll be delighted. On the overseas planning, well, look, we've got our hands full. We're really busy. We're actively doing all kinds of things in the United States. With that said, we'll be opportunistic. If there's an opportunity to naturally sort of extend our expertise, our skill and our returns and bring in -- grow the business overseas, we wouldn't be close to, but it's not something that we're actively pursuing at this point.

And ladies and gentlemen, we have reached the end of the question-and-answer session, and also this concludes today's conference as well. You may disconnect your lines at this time. Thank you for your participation.