ChargePoint Holdings, Inc. (NYSE:CHPT) Q3 2024 Earnings Call Transcript

ChargePoint Holdings, Inc. (NYSE:CHPT) Q3 2024 Earnings Call Transcript December 6, 2023

ChargePoint Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.28 EPS, expectations were $-0.22.

Operator: Good afternoon, ladies and gentlemen. At this time, I would like to welcome everyone to the ChargePoint’s Third Quarter Fiscal 2024 Earnings Conference Call and Webcast. I would now like to turn the call over to Mr. 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 2024 earnings results. This call is being webcast and can be accessed on the Investors section of our Web site at investors.chargepoint.com. With me on today’s call are Rick Wilmer, our new President and Chief Executive Officer; and Mansi Khetani, our Interim Chief Financial Officer. This afternoon, we issued a press release announcing results for the quarter ended October 31, 2023, which can also be found on the Investors section of our Web site at investors.chargepoint.com. We’d like to remind you that during the conference call, management will be making forward-looking statements. 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 11, 2023, and our earnings release, which was posted today on our Web site and was filed today with the SEC on Form 8-K. Also, please note that we use certain non-GAAP financial measures on this call, which we reconciled to GAAP in our earnings release and for a certain historical periods in the investor presentation posted on the Investors section of our Web site. And finally, we will be posting the transcript of this call to our Investor Relations Web site within the Quarterly Results section.

With that, it is pleasure to introduce our new President and CEO, Rick Wilmer.

Rick Wilmer: Thank you, Patrick. I’d like to begin this call by introducing myself. My name is Rick Wilmer, and I have been CEO of ChargePoint since November 16. I was the company’s Chief Operating Officer for the 18 months prior to this. So, as I enter my new role, I am quite familiar with the business. I have previously served as CEO more than once, and I can assure you that the responsibility is not new to me. Since joining ChargePoint, I have introduced a number of key initiatives in the COO capacity, including the following: A more rigorous process for supplier qualification and management, this has led to millions of dollars in cost savings and improved supply assurance; a revamp of the company’s manufacturing strategy to optimize cost structure, reduce tariffs, and secure multiple sources for the manufacturing of every product we sell.

This multiple sourcing model includes new factories in Southeast Asia, which will be fully online in 2024, at which point we will begin to realize their benefits. Of particular note, I am rebuilding our entire after sales program. This is to prioritize customer care, ensure predictable deployments, and to deliver exceptional support. We are doing this in a manner that can scale for rapid growth while improving response time, shortening total time to resolution, and increasing the quality of service all without increasing our costs. I am also leading ChargePoint’s drive towards flawless network reliability. This is an important point to make as many consider it a barrier to EV adoption. It’s a challenging problem, especially when it comes to physical station damage that operators cannot easily detect with remote monitoring.

At the core of this is our recently launched network operation center. The operation center features 24×7 proactive station monitoring and predictive analytics to find anomalies before the station owners or drivers notice them. It leverages multiple sources of driver feedback, including our mobile app, calls to our driver support line, and social listening, all which enhance the completeness of actionable insights. This all drives uptime. ChargePoint defines uptime as the percentage of ports which are capable of dispensing energy at any given moment. We believe this is the most transparent reporting of this metric in the industry and exactly what a customer driving up to our station would expect it to mean. We launched the operation center in August when the ChargePoint Network was at 96% uptime and we have realized incremental improvement since then for an uptime that is currently at 97.65%.

I share this increase to communicate our success thus far, but we are not stopping there. We will soon be integrating data sources that will account for physical damage or prevent a driver from charging. We previously could not detect this. And it is critical towards delivering a comprehensive metric for reliability. More importantly, it will deliver the experience the driver is expecting when they charge their EV. This more comprehensive data set will initially lower our uptime, but from this new baseline we can continue on our quest for 99% plus reliability, and ensure everybody who needs to charge can do so seamlessly. These are just a few of the projects I have initiated to positively impact the business. And I hope they illustrate my track record of results so far at ChargePoint.

Now let’s move on to talk about the third quarter. As we pre-announced on November 16, the quarter was a disappointment for us and it initiated some changes, including my appointment. While the quarter was nowhere near expectation, the big picture still looks very good. We have had challenges executing and this is what the new leadership team is here to fix. We are firmly committed to being profitable on an adjusted EBITDA basis in Q4 of calendar 2024. Our CFO, Mansi Khetani will give the results for Q3 in detail shortly which are consistent with the preliminary results given on November 16. Here are the top line figures as well as where things went wrong. Our revenue for the quarter was $110 million. Non-GAAP gross margin was negative 18% due to a $42 million non-cash impairment charge, and we managed our operating expenses as forecasted at $81 million.

As we stated earlier, this top-line revenue figure fell short of our expectations. We attribute the majority of this to 3 factors. First of all, the arrival of many commercial fleet vehicles has been delayed, or in other cases these vehicles have been slow to ramp up production. Recent data from the BloombergNEF dropped the 2023 sales forecast for electric commercial and transit vehicles by 20%. Our customers are eager to receive vehicles that they have ordered but are not proceeding with investment in the infrastructure necessary to charge them until they have line of sight on vehicle delivery. As examples, we have a single customer waiting on more than 40 transit buses, others waiting on 100 Class 6 to 8 commercial trucks, and a third waiting on 500 vans.

These begin to add up quickly. The second factor impacting Q3 top-line revenue can be summarized as a slowdown in commercial demand, combined with supply chain normalization. As we mentioned last quarter, commercial charger demand has waned in the face of high interest rates and economic uncertainty. How has this been impacted by supply chain normalization? In simple terms, our channel has moved back to a model where they are carrying lower levels of inventory and placing smaller restocking orders as needed. While it negatively impacted Q3, we are poised to quickly monetize any uptick in commercial demand with inventory ready to ship. The third factor which negatively impacted Q3 revenue was something we could not have predicted going into the quarter.

Hesitation related to the automotive labor disputes in the United States. We do considerable business with the auto OEMs and their dealerships, both of which were delayed due to the well-publicized strike. Regarding the $42 million non-cash impairment charge, I would like to outline what it was taken for and how it differs from the impairment taken in Q2. The impairment in the second quarter addressed the cost structure of a single first generation DC charger. That product continues to sell and does so at margin. The non-cash impairment taken in the third quarter addresses executional issues related to multiple product transitions and better lines inventory with current demand. This was a deliberate action that cleans the slate for the business moving forward.

We did not execute these new product transitions well and we have learned from our mistakes. Two factors that were at the center of these transitional issues, the extreme supply chain shortage brought on by the COVID pandemic, and the surge in demand we experienced from 2022 through the first-half of 2023, leaving us with surplus inventory at the end of Q3. These issues have been corrected with supply and demand better balanced. To summarize, we have balanced our future supply commitments to realign with current demand and the current product range. We believe the non-cash impairment charge we took in the third quarter places us back on solid ground to build from. As I have said at the beginning of the call, we have had some execution challenges that I began to fix as COO and will finish addressing as CEO.

We believe the non-cash impairment taken this quarter are conservative and comprehensive, and that we are now in an excellent position to monetize our current inventory. Despite these issues, there were quite a few bright spots in the third quarter. Underlying strength in the business has shown itself via market share. We boosted our balance sheet by $232 million and ended the quarter with $397 million cash on hand. We have no debt maturities until 2028. This combines with an undrawn $150 million revolving credit facility placing us in an excellent cash position. Sales of ChargePoint Home Flex, our consumer home charging station were up 45% sequentially for its best sales quarter ever. Home Flex has been the top selling charger on Amazon for 19 weeks in a row.

We take this as a sign that passenger EV sales are not slowing down despite recent media coverage to the contrary. I would also like to outline what was new from a product perspective in Q3. We saw quite a bit of activity. We began to roll out our NACS Cable Solutions, which are compatible with Tesla vehicles on time and as first to market. We released the largest update to our driver app in years, which went live as we reached 1 million quarterly active users. Our fleet software line-up has rounded out to form a unique suite of solutions and in preparation for the forthcoming transit vehicles we have announced our pantograph charging system for municipal bus fleets. Reverting to the products we already have in the field, Q3 saw increased utilization pressure.

Energy dispensed from our chargers went from 250 gigawatt hours in the second quarter to 304 gigawatt hours in the third quarter, an 18% increase in only three months. Year-over-year, that figure was more than 70%. We believe this rapid increase in utilization will necessitate the customer scale that our EV infrastructure is soon. On the customer front, we signed another premium German sports car manufacturer for our in-vehicle software to find, use, and pay for charging in future vehicles. Lastly, I am extremely proud of the first location for the Mercedes-Benz charging network in North America, which recently went online at Mercedes-Benz USA headquarters in Metro Atlanta. This is the fastest passenger vehicle charging solution in North America, thanks to our powerful and flexible Express Plus DC charging line, along with ChargePoint’s full-stack software solution.

This deployment represents the rollout of a phenomenal user experience, enabled by ChargePoint. With capabilities, no other company can match, including reservations, plug-in charge, and many other features that make the charging experience impeccable. Lastly, a few general statistics of note, we count 74% of the Fortune 50 and 59% of the Fortune 500 as customers. We finished the quarter with more than 274,000 global active ports under management on the ChargePoint network, of which approximately 22,000 are DC fast chargers. We now provide drivers with access to more than 567,000 roaming ports worldwide, for a total of more than 841,000 ports. All of the port statistics I’m reciting should leave you with a second clear takeaway. Our subscription business is growing rapidly and setting us up for long-term success.

It is important for me to also give stats, which means something for the future of our planet, our updated environmental metrics. We have enabled nearly 8 billion electric miles driven, enough to drive around the world of 320,000 times. Or to look at it another way, we estimate this is enough to power more than 245,000 homes for an entire year. We estimate this means over 1.6 million metric tons of greenhouse gas emissions were averted by EVs on our network. To summarize my remarks on the business, despite our top line numbers for Q3, we believe our product and go-to-market strategy are solid. And that the key to our success moving forward is operational rigor with a laser focus on execution. Our strategy success in the near term will be validated by accomplishing our core objective of being adjusted EBITDA positive in the fourth quarter of next year.

We are managing our cash with extreme rigor, and we are well capitalized to reach adjusted EBITDA positive. We plan to treat our large inventory balance as an asset, ready to ship and deploy faster than the competition. While I have mentioned product transition challenges of the past, the good news is we have nearly completed the transition to our second generation product portfolio, which is a leading and comprehensive product line-up across both hardware and software. We will continue to fine-tune our strategy with a relentless focus on results through excellent execution. In reference to guidance, which I’m sure is top of mind for many of you, we will not be giving Q4 guidance today. As much as I would like to do so, it would not be prudent given my limited tenure in this role and the factors our team is working to counter as we speak.

This decision implies nothing about Q4, rather it serves as a signal we are 100% focused on the job at hand, which is rapid recovery and excellent execution. With that being said, we expect to provide top-line guidance next quarter, as well as outline my strategy for the road to profitability. I will conclude my remarks with a reminder of who we are, what we do, and the opportunity lying ahead of us. We are a leader in this space and continue to grow. We enable the entire EV ecosystem from software integrations and the new EVs themselves to the software which will power entire networks, utilities, municipalities, and businesses who serve EV drivers. We win by building for those EV drivers, not for a particular market or vertical. It is the singular focus on the driver that shapes our strategy.

Our platform empowers companies to connect with drivers who need to charge. It allows those companies to extend and expand their relationships with their constituents being an entirely new touch point. So, they can enhance their brand, company, loyalty, or operational effectiveness. We are not just about charging an EV to get it back out on the road, but rather to enable the transition to e-mobility. This is not only to help decarbonize our planet, but to also create a new realm of possibilities for our customers to better serve their own customers. Thank you all for listening, and I will now hand over the call to our CFO, Mansi Khetani, to review the financials.

Mansi Khetani: Thanks, Rick. As a reminder, please see our earnings release where we reconcile our non-GAAP results to GAAP and recall that we continue to report revenue along three lines, network charging system, subscription, and other. Network charging systems refers to our connected hardware. Subscription includes our cloud services connecting that hardware, assure warranties, and our ChargePoint-as-a-service offering where we bundle hardware, software, and warranty coverage into recurring subscriptions. Other consists of professional services and certain non-material revenue items. For Q3, revenue was $110 million, down 12% year-on-year and down 27% sequentially below our guidance range of $150 million to $165 million, network charging systems at $74 million with 67% of Q3 revenue down 24% year-on-year.

Subscription revenue at $31 million was 28% of total revenue up 41% year-on-year. Other revenue at $6 million and 5% of total revenue was down 4% year-on-year. Turning to verticals, as you know, we report verticals by billings, which approximates the revenue split. Q3 billings percentages were commercial 70%, fleet 16%, residential 13% and other 1%. Commercial slowed down for the reasons Rick made out earlier. Fleet was 16% of billing, similar to last quarter. We continue to shift against large programs like the U.S. Postal Service. But as Rick also mentioned, vehicle availability pushed out many of our larger transit deals. Residential had its largest quarter ever in terms of users sold. To outline a geographic mix, North America made up 79% of Q3 revenue, and Europe was at 21%, consistent with Q2.

In the third quarter, Europe delivered $23 million in revenue, growing 30% year-on-year, but decreasing sequentially by 28%. This decrease reflects reduced demand from commercial customers due to uncertain economic conditions. This includes changing U.K. government mandates for electric vehicles, as well as lower restocking orders from our channel partners as they worked through reducing their high inventory of non-charge point products. Turning to gross margin, non-GAAP gross margin for Q3 was negative 18%. This reflects a non-cash impairment charge of $42 million. Without that impairment charge, non-GAAP gross margin would have been 20%. This was still below our expected range, mainly due to absorption of fixed costs over fewer units sold in the quarter.

We would have been within the range we had guided to had revenue matched our expectations. Non-GAAP operating expenses for Q3 were $81 million, a year-on-year increase of 2% and a sequential decrease of 9%. This reflects a partial quarter impact from the cost savings initiatives we announced on September 6. We expect to see a continual reduction in operating expenses in Q4 and beyond. Stock-based compensation in Q3 was $33 million, down from $35 million in Q2. Q3 non-GAAP adjusted EBITDA loss with pre-impairment growth profit was $55 million. This was 7% down year-on-year and higher than our expectations due to the revenue shortfall. Our non-GAAP adjusted EBITDA loss, inclusive of the non-cash impairment, was $97 million. We built inventory during the quarter.

We finished the quarter with $199 million in inventory, which is net of the Q3 non-cash impairment discussed earlier and up from $144 million at the end of Q2. Of note, about half of the impairment impacted the inventory line. The other half, which was related to commitment, is reflected as a liability on the balance sheet. We expect inventory to decline in the future as we have slowed down our build rate to adjust for the current demand environment. Our deferred revenue balance, which consists of payments to future recurring subscription revenue from existing customer commitments, was at $227 million, up from $220 million at the end of Q2. Looking at cash, we finished the quarter with $397 million of cash and cash equivalents. This balance includes $232 million raised through our at-the-market offering facility during the quarter at an average price of $4.37.

This was comprised of $175 million raised with an institutional investor in connection with the amendment to our outstanding convertible notes as announced on October 11th, and $57 million in additional funds raised in the quarter. Please refer to our prior filings available with the SEC for a more complete description of the amendments to our convertible notes. We have no further plans to access at the market facility. We believe we are fully funded through our goal of adjusted EBITDA positive in the fourth quarter of next year. In addition to our cash balance, our $150 million revolving line of credit remains undrawn. Our path to adjusted EBITDA positive in the fourth quarter of next year assumes both modest revenue growth and modest margin expansion.

In addition, we will constantly evaluate ways to increase operating efficiency and improve our cost structure. We had approximately $418 million shares outstanding as of October 31, 2023. Thank you and we will now move on to Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of James West with Evercore ISI. Please go ahead.

James West: Hey, good afternoon, Rick and Mansi.

Rick Wilmer: Hi, James.

Mansi Khetani: Hi.

James West: Hey. Rick, wanted to kind of dig in a little more on the slowdown in buying, particularly from what will be fleet customers. I recognize that the deliveries of the vehicles are part of the delay, but at what point do they really have to go forward with building the charging infrastructure because it’s clearly a gating item to use in those vehicles, if you will?

Rick Wilmer: I think from our perspective we see a desire to have the charging infrastructure largely coincident with vehicle delivery, maybe a bit earlier than that. That’s going to allow them to optimize their capital investment, both in vehicles and charging infrastructure such that one doesn’t show up in front of the other.

James West: Okay. And the infrastructure, I’m assuming these are customers that have already either placed purchase orders that haven’t been delivered or you’ve already done extensive work with them, so the designs are done to. It’s just a matter of delivering and installing equipment. Is that correct?

Rick Wilmer: Generally correct, yes.

James West: Okay, got it. That’s all for me. Thanks, guys.

Rick Wilmer: Thanks, James.

Operator: Our next question comes from the line of Colin Rusch with Oppenheimer & Co. Please go ahead.

Colin Rusch: Thanks so much, guys. Could you talk a little bit about the trend lines on utilization on the existing chargers that are out in the field? And then also how much cash you might be able to pull out of working capital here over the next couple of quarters as you optimize the balance sheet?

Rick Wilmer: Sure, I’ll let Mansi take the working capital question, then I’ll come back and address utilization.

Mansi Khetani: Yes. So, Colin on the working capital front, so in Q3, we did invest in the inventory build-up, you can see from our balance sheet. Over the next few quarters, we expect to bring that inventory down because we’ve already started working with our contract manufacturers on that front. So, overall in terms of general working capital usage, this should trend down. Also our deferred revenue balance, which kind of brings out the SaaS component of our business significantly helps with working capital as well.

Rick Wilmer: In terms of utilization, Colin, what we’re seeing is an increase. I think we’ve seen this from other data points in the industry as well. And we are interested to see how this translates into a pick up in the commercial business because there’s no question that pressure is building on the commercial networks regarding utilization and thus the availability of ports for people to charge their EVs when they want to charge.

Colin Rusch: Okay, I’ll take some more detailed questions offline. Thanks, guys.

Operator: Our next question comes from the line of Bill Peterson with JPMorgan. Please go ahead.

Bill Peterson: Yes, hi. Thanks for taking my questions. First of all, I’d like to understand more, I know you’re not willing to provide 4Q guidance, but in terms of the visibility you see, I’d like to try to understand what trends you’re seeing with channel partners, I guess, specifically for commercial and fleet, how much — I guess, how much inventory is at your desti partners? How much does that vary between L2 and DC fast, maybe newer and older products? I guess I’m trying to wonder, is there any more destocking or is there any destocking that needs to occur? And perhaps related, how have orders trended quarter-to-date maybe relative to prior quarters at the same period of time, first month into the quarter?

Rick Wilmer: Yes, thanks, Bill. Good question. We’re under the impression that channel inventory is largely normalized. And while I hate to continue to use the excuse of the COVID pandemic, it’s a real reason why we’ve experienced this. During the COVID pandemic, we saw certain components that went into chargers with two-year lead times. And the supply chain was driven hard due to those types of extended lead times, along with very strong demand last year into early this year. That translated through into the channel. Our products were on lead time, so the channel bought ahead and they ended up with inventory. Our lead times for our components are largely back to normal, and we are now shipping with very short lead time into the channel, which has allowed the channel inventory to normalize.

Bill Peterson: Okay, very good. And again, I’ll take mine offline as well.

Operator: Our next question comes from the line of Craig Irwin with Roth MKM. Please go ahead.

Craig Irwin: Good evening and thanks for taking my questions. So, can you maybe update us on the headcount exiting the quarter? And what should we look for to see the current status on the planned $30 million in savings that you guys have talked about? And is that something that is a firm target or is that something we can possibly see move around a little bit as you’ve expressed a really clear commitment about EBITDA profitability by the end of the ’24 calendar year?