ChargePoint Holdings, Inc. (NYSE:CHPT) Q3 2023 Earnings Call Transcript

ChargePoint Holdings, Inc. (NYSE:CHPT) Q3 2023 Earnings Call Transcript December 1, 2022

ChargePoint Holdings, Inc. beats earnings expectations. Reported EPS is $-0.16, expectations were $-0.19.

Operator: Ladies and gentlemen, good afternoon. My name is Foe and I’ll be your conference operator for today’s call. At time this, I would like to welcome everyone to the ChargePoint Third Quarter Fiscal 2023 Earnings Conference Call and Webcast. I would now like to turn the call over to Patrick Hamer, ChargePoint’s Vice President of Capital Markets and Investor Relations. Patrick, please go ahead.

Patrick Hamer: Good afternoon and thank you for joining us on today’s conference call to discuss ChargePoint’s third quarter fiscal 2023 results. The call is being webcast and can be accessed on the Investors section of our website at investors.chargepoint.com. With me on today’s call are Pasquale Romano, our Chief Executive Officer and Rex Jackson, our Chief Financial Officer. This afternoon, we issued our press release announcing results for the quarter, which can also be found on the website. We would like to remind you that during the conference call management will be making forward-looking statements, including our fiscal fourth quarter and full fiscal year 2023 outlook. These forward-looking statements involve risks and uncertainties, many of which are beyond our control and could cause actual results to differ materially from our expectations.

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 certain factors that could cause actual results to differ, please refer to our Form 10-Q filed with the SEC on September 8, 2022 and our earnings release posted today on our website and filed with the SEC on Form 8-K. Also, please note that we use certain non-GAAP financial measures on this call, which we reconcile to GAAP in our earnings release and for historical periods and the investor presentation posted on the Investors section of our website. And finally, we will be posting the transcript of this call to our Investor Relations website under the Quarterly Results section. And with that, I’ll turn it over to Pasquale.

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Pasquale Romano: Thank you, Patrick and thank you everyone for joining our eighth earnings call as a public company. We had another record quarter with strong growth yielding $125 million in revenue, at the low end of our guidance range, up 93% year-over-year and 16% sequentially. The difference between $125 million in revenue and our guidance midpoint was largely made up of production constraints on our most mature AC product as a result of supply-driven redesign. The delay in shipping this high-margin product held our margin improvement for the quarter to 1 point and we have now shipped the shortfall and more in November. Demand again exceeded supply for the quarter, resulting in additional growth in backlog. We are on track to (ph) our revenue target for the year and Rex will provide more color on revenue and particularly on gross margin in his comments.

As we manage the revenue and gross margin challenges presented by supply chain constraints, logistics disruptions and new product introductions, I’d like to comment on operating expenses. As our OpEx this year shows, we have significantly slowed our operating expense trajectory. We are managing OpEx as a key driver of turning cash flow positive in the fourth quarter of calendar 2024 and think we have made and are making the right choices and investing to achieve our market position. As we have commented previously, we have invested ahead of the market for many years and our revenue growth has been and continues to be correlated with the availability of electric vehicles. With the continuing announcements by manufacturers of new EVs for consumers and fleets, we believe the global vehicle industry has passed the point of no return.

Spending ahead of revenue has enabled us to engage across our key verticals in North America and increasingly in Europe. Our spending has enabled us to build out a broad product portfolio and core functions within the company to support those product lines in our geographies. And though we have the typical challenges ahead to scale rapidly, we expect to grow operating expenses opportunistically and thus to continue to show improved operating leverage as we have done this year. Focusing for a moment on R&D, ChargePoint believes a broad product portfolio is essential, because you have to be everywhere drivers go to be relevant. We have achieved major recent releases of our highly modular Express Plus DC product line, which powers our global fleet and passenger car fast-charge solutions and introduced the CP6000, our newest commercial and AC fleet product line, expanding our capabilities in the geographies we serve.

With these products in production, we expect to shift a higher percentage of R&D spend to evolutions of our platforms and to continue investments in our cloud software, which comprehensively drives our entire ecosystem for drivers, commercial station owners, fleets and the large array of ecosystem partners. Given our pace of growth, we will of course continue our investments in sales and in our channel relationships, which combined give us industry leading reach. A useful growth indicator in this area is the number of bookings in a quarter that exceed $1 million. Last year, we averaged one booking over $1 million per quarter. This year, we have seen steady increases in the number of bookings exceeding $1 million within a quarter which is a reinforcing trend supporting our land-and-expand strategy.

In the third quarter alone, we had 11 bookings to end customers of over $1 million. We continue to add customers at a rapid clip. Our consistent expansion within existing customers was over 65% of our billings for the quarter, consistent with historical trends and we now account 80% of the 2021 Fortune 50 as customers and (ph) of the 2021 Fortune 500. Lastly, on investment in support of the remarkably increasing scale of the business, we will be adjusting spend proportions in favor of business systems, sales automation, customer lifecycle management, support operations tools and installer and channel partner platforms. We believe that the breadth of our product lines backed by the right systems infrastructure, are significant competitive advantages.

In Rex’s commentary, he will address billings by vertical, but I wanted to comment briefly on some of the progress in European fleet, two key enablers, we believe critical to ChargePoint’s revenue growth outpacing North American consumer EV arrival rates. In Europe, we have been acutely supply constrained. Until the introduction of the CP6000, we did not have our own AC products for most countries. Despite the limitation, we have been winning logos at an impressive rate and are encouraged by the reception of the new solution. In fleet, the demand has been strong, but the market has been vehicle limited. We are seeing impressive growth in fleet where vehicles are being delivered and in scenarios where customers are anticipating deliveries. For example, short-haul and last-mile billings are up over 475% year-over-year and transit is up 180% year-on-year.

Our installed base of network ports under management grew to over 210,000, a year-over-year increase of 30% and sequential increase of 6%. Of those, over 65,000 are in Europe and over 16,700 are DC fast, an increase of more than 1,000 DC fast ports quarter-over-quarter. I will remind you that ports under management is one way to track progress in our commercial and fleet verticals as this represents the installed base generating an annual software subscription. As a reminder, we do not include home chargers for single-family residences in our network port count, but we continue to see strong demand for residential. Complementing this, our roaming reach is now over 400,000 ports in North America and Europe. Combined, that’s over 600,000 ports available through our platform.

Rex will elaborate on guidance, but in short, the breadth and scale of our business model combined with accelerating driver demand for EVs, has allowed us to narrow our annual revenue guidance range with a higher midpoint than we gave in March and reiterated at each quarterly call. This growth is despite persistent supply chain headwinds. While these headwinds continue, we are seeing signs of freight cost decline and component shortages concentrating. Looking at some of the environmental statistics that are so critical to all of us, we estimate that our network has now fueled approximately 5 billion electric miles to-date. We estimate the drivers utilizing our network have avoided approximately 200 million cumulative gallons of gasoline and over 940,000 metric tons of greenhouse gas emissions.

In conclusion, we continue to focus on execution. We strongly believe we have the right products and the right business model. We are growing rapidly across our three verticals in two geographies, so we simply need to do everything bigger and better to maximize our opportunities and generate maximum returns for our shareholders. We believe that with each passing quarter, we add to the remarkable technology team, customer relationships, channel structure and other competitive advantages we have been building over the 15-year history of the company. Rex, take us through the financials.

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Rex Jackson: Thanks, Pasquale and good afternoon everyone. A quick reminder, as in previous calls, my comments are non-GAAP, where we principally exclude stock-based compensation, amortization of intangible assets and non-recurring costs related to restructuring and acquisitions. Please see our earnings release for our non-GAAP to GAAP reconciliations. For Q3, revenue was $125 million, up 93% year-on-year and 16% sequentially at the low end of our guidance range of $125 million to $135 million. As Pat mentioned, the difference between our results and the midpoint of our guidance was largely due to shipments of AC units delayed beyond quarter close, all of which shipped in November. As we have for multiple quarters running, we fundamentally ship what we could build and book more than we could ship.

So we worked down a meaningful percentage of our existing backlog during the quarter, a good thing since much of our backlog was at older and thus lower pricing, our ending backlog increased. Network Charging Systems revenue at $98 million was 78% of Q3 revenue, up 105% year-on-year and 16% sequentially. Subscription revenue at $22 million was 17% of total revenue, up 62% year-on-year and 7% sequentially. Other revenue of $6 million and 5% of total revenue increased 47% year-on-year and 56% sequentially. Our deferred revenue, which is future recurring subscription revenue, principally from existing customer commitments and payments for our cloud software and Assure warranty coverages, continues to grow, finishing the quarter at $175 million, up from $168 million at the end of Q2.

Turning to verticals, as you know, we report them from a billings perspective, which approximate the revenue split. Q3 billings percentages were commercial 69%, fleet 18%, residential 12% and other 1%, representing a slight shift in favor of fleet. Residential contribution was strong, but on a percentage basis was impacted by supply shortages. From a geographic perspective, North America Q3 revenue was 86% and Europe was 14%. In the third quarter, Europe delivered $17 million in revenue and grew 145% year-over-year. Europe revenue was essentially flat sequentially due to product availability, but from a bookings and backlog perspective, Europe had a record quarter. Turning to gross margin. Non-GAAP gross margin for Q3 was 20%, up 1 percentage point from Q2’s 19%.

ASPs in the quarter improved. We saw that half of the June price increase flow through in Q3 as we continue to work off backlog generated prior to the price increase. However, that impact was partially offset by $7 million or 5 points of purchase price variances and elevated logistics costs, the margin impact of a heavier DC mix due to AC supply shortages and $3 million or 2 points in product transition charges. Non-GAAP operating expenses for Q3 were $79 million, a year-on-year increase of 26% and down 1% from Q2. We are pleased to see OpEx, as a percentage of revenue, dropped from over 100% in Q1 to 74% in the second quarter and to 63% in the third quarter. This progression is a critical component of the combination of revenue growth, margin expansion and OpEx leverage improvement necessary to reach our stated goal of generating free cash flow by the fourth quarter of calendar 2024.

We do not expect OpEx to drop in dollar terms as we go forward, but expect leverage to continue to improve, especially given that we have now released a number of core products that have taken years to develop. Stock-based compensation in Q3 was $26 million, essentially flat from Q2. Recall our stock-based compensation typically stair steps each Q2 due to the timing of annual grants to our employees. Looking at cash, we finished the quarter with $398 million in cash and short-term investments. We had approximately 342 million shares outstanding as of October 31, 2022. Turning to guidance, for the fourth quarter of fiscal 2023, we expect revenue to be $160 million to $170 million, up 108% year-on-year and up 32% sequentially at the midpoint.

This translates to annual revenue guidance of $475 million to $485 million slightly above the midpoint we have had all year and doubling year-on-year. For the fourth quarter, we expect non-GAAP gross margin to again improve sequentially, but for the year to be below the 22% to 26% range we previously targeted. With our continued focus on OpEx, we are lowering our annual guidance for non-GAAP operating expenses to $325 million to $335 million down from our prior guidance of the lower end of $350 million to $370 million. With that, I will turn the call back to the operator for questions.

Operator: Thank you very much. And we will take our first question this afternoon from James West of Evercore ISI.

James West: Hey, good afternoon guys.

Pasquale Romano: Hey, James.

Rex Jackson: Hey, James.

James West: Pat, on the fleet side of the business, which obviously is a huge opportunity, I know we are still a bit vehicle constrained, but every kind of quarter we get closer to that constraint coming down. Are you starting to see urgency building within your customer base as we get closer to this kind of unleashing of vehicles in the market?

Patrick Hamer: Yes. I mean the urgency has been there. So, I don’t see a change in urgency, because the €“ I mean, I think there has been a lot of pent-up demand for vehicles, because they just pencil. What you are seeing, I’ll just draw your attention to a couple of comments that I made, large growth rates year-on-year in both the kind of midsized logistics, short-haul vehicles, because you are starting to see more supply come online. And then you are also seeing which is a disproportionately mature transit industry, so effectively buses, where because there are plenty of manufacturers that have maturing products, products that have actually seen more than one generation, you are seeing that growth rate as well. We expect this to €“ that trend to manifest the minute vehicle availability kind of percolates to all the other sub-verticals.

James West: Okay, okay. That’s helpful. And then on the production constraints or logistics and supply chain constraints that you guys are still experiencing, are those easing at this point or are they similar to maybe last quarter?

Patrick Hamer: So, I made €“ I had some specific comments in my remarks on that. The components that are continuing to be on the problem list are narrowing. So the list is narrowing. And I made a similar comment in answer to a question, I believe, last earnings Q&A. And so that’s continuing. The freight and logistics, we got headlights into that, starting to normalize. And so that’s moving in the right direction for sure. And just to kind of a little bit more color on kind of what held us up a bit this quarter on the revenue side, we made a supply-driven design update effectively of one of our AC platforms that was planned. And as a result of components coming in a bit late and a very complicated transition in what is a kind of mature product in the factory, just didn’t get it all built in time.

So as Rex pointed out in his comments, I think I made it in mine as well we cleared all that and shipped it. We just shipped it on the wrong side of the quarter boundary. So that’s all the stuff is all out and we are continuing to build down the factory on that front.

James West: Perfect. Thanks, Pat.

Operator: Thank you. We will go next now to Matt Summerville of D.A. Davidson.

Matt Summerville: Thanks. Couple of questions. I want to put just a finer point on the supply chain side of things. In an unconstrained supply chain environment, what would revenue have looked like in Q3 and what could it look like in Q4?