ChargePoint Holdings, Inc. (NYSE:CHPT) J.P. Morgan, Power & Renewables Conference June 22, 2022 1:05 PM ET
Pasquale Romano – President & Chief Executive Officer
Conference Call Participants
Bill Peterson – J.P. Morgan
Okay. It looks like we’re about ready to begin here. Welcome to the first day of our Energy Power & Renewables Conference. Really pleased to have Pat Romano, Pasquale, however you want to pronounce it.
Well, if you’re in New York, a lot of people from my heritage is Pasquale.
Pasquale, yes. So we’ll go with Pasquale Romano, CEO of ChargePoint.
Q – Bill Peterson
I want to keep this interactive, so please feel free to ask questions. Just kind of start off with those who may be a bit less familiar with the story, start with the business model. Can you spend a few minutes how did you arrive at your business model, you’ve been in business for a while longer than a lot of other people and just kind of outline how does ChargePoint generate revenue?
It’s easiest to start from first principles when we talk about our business model. For reference, the company is actually 15 years old, and I’ve been there about 11.5 years. And business model really fundamentally came together by looking at a couple of key points. First, there’s about 2 billion parking spaces in the United States alone, smaller in magnitude in Europe. So it’s hard to get an exact counter parking spaces, but it’s — there’s more parking spaces than cars, about 280 million cars and light duty trucks on U.S. roads.
And then if you look at what we thought was the likely head fake is that after 135 years, people would pattern match on a gas station. When in fact, the only reason gas stations exist is because you’ve got an environmentally controlled substance you’re trying to dispense. And so you can’t dispense it where you’re parked, but you park 96% of the time. So a car is 4% utilized, a fleet vehicle is a bit higher, but the passenger car is 4% utilized. So you got a 4% utilized asset, you got a tremendously low utilization on parking in general because you’ve got a lot of parking spaces. If you drive by most parking lots, most of the time, they’re more empty than full.
You’ve got a fuel now switching away from gasoline to electricity. You’ve got a pervasively distributed fuel with no constraints. So there’s — if you look at the map of the Earth from space at night, and you see lights everywhere, so you can dispense fuel everywhere. And in that 96% dwell time of the vehicles, you’ve got plenty of discretionary time to onboard most of the fuel. So it led us to the conclusion that this was going to be a parking model, not a pumping model unless you were driving beyond your battery range. And then, of course, it needs to look very similar to gas station. But that’s about 10% of the fuel volumetrically and a lot less of the — on a percentage basis of the sessions because you’re taking very big gulps when you’re going beyond your battery range.
So what’s that lead you to business model-wise? Well, first, it says if you want to get any market share at all, you have to effectively crowd fund the CapEx one business at a time because if you try to own all the CapEx, you’d have to raise an unprecedented amount of money to get it all in the ground. If it’s inherently attached to low utilization parking, there aren’t going to be that many scenarios where you’re going to get a return on capital. But you’ve got something that is the easiest analogy is public WiFi.
You’ve got something that’s so cheap now in electric fuel that its amenity application becomes something that’s actually much more significant. You can’t make gasoline an amenity for a whole lot of reasons, and it’s really expensive, but you can make power. So if you think about our business model, we sell to, in the commercial space, any business that has a parking lot. They pay for the CapEx. From their perspective, the CapEx isn’t that big a deal because it is covering their finite set of parking lots. He pays a subscription fee to keep that on the network and then we make it all of that collection of CapEx, that crowd funded collection of CapEx, we make look like 1 accessible, clean easy to use network from a driver’s perspective, and then we can then expand our network effect by integrating into navigation systems with auto OEMs, fleet, fuel card providers, just a myriad of things in the ecosystem that we software integrate in that are not direct revenue sources for us.
And when you marry the 2 together, you get a recurring revenue model with low churn, no exposure to power. We don’t own meters, we don’t sell energy. So our customers can do whatever they want with the power. They can use it as an amenity. They can use it as a revenue kicker. They can do whatever the hell they want with it, we don’t care. And to a driver, it all looks 1 network, and that network effect makes the next business want to go with us. And that’s pretty much it.
That’s a great overview. You guys have discussed — you discussed the growth of your business, long-term correlated EV growth. Recent performance and guidance suggests actually much faster than EV market growth. That said, is that there is some concerns we might be seeing a slowdown or a recession. It could be held by — also supply constraints holding back battery. So I guess if there were to be a slowdown, what would that do? And what are you seeing in terms of demand? What will be the potential impact?
Yes. So there’s a lot to unpack there. So first of all, we’re growing faster than the arrival rate of cars only because we’re accessing a market in Europe that we were not in before. So we’ve got more TAM to sell into. And then fleet is additive because it’s a different fleet of vehicles. So when you add fleet in Europe, it can help you accelerate a bit past cars. So I think in the long term, when things reach a natural equilibrium and our market share stabilizes in all the domains, we will map to the arrival rate of vehicles in the commercial and the fleet segment is inextricable.
We have 15 years of history that says we’re mapped directly to the arrival rate of cars. Now uniquely, this is the 1 time in my 33-year career where a downturn doesn’t look so scary to me. And the reason a downturn doesn’t look so scary to me is the following. The demand relative to supply of electric vehicles largely due to production capacity constraints — it’s not battery limited yet, it might go there but it’s not battery limited yet, the production constraints will likely dominate and there’s enough EV demand so that even in a downturn, we’ll still see quite healthy growth. And quite healthy is in the outsized dimensions that we’ve been growing year-over-year. So if we see any haircutting, it’s not going to be — we don’t think it’s going to be that significant.
And we think on the supply side, it will help. I can’t peg how much it’s going to help or when it’s going to help. If someone can give me exact dates, times and arrival rates of that relief, I’d gladly pay you. But we know that cooling off — we’re pulling off the same shelf from chain perspective with a lot of things that are negatively correlated to it or positively correlated to a downturn meaning they would go negative. And so it would be helpful to us because it would loosen us up, it would probably accelerate our gross margin trajectory, a whole bunch of things. So this is the 1 time again where I don’t — and we just raised $300 million fresh cash on the balance sheet. So we’re not in a position where access to capital is going to hurt us. So solid balance sheet, growth should continue, supply chain should ease, and I don’t need capital. So I’m not sitting here saying that it’s going to be easy, but it’s going to be a lot easier, I think, than if you were making WiFi routers for consumers or something…
So hopefully a recession but it won’t be a bad day.
You make connected hardware. It’s hardware plus software. Investors always ask what can be the key differentiator. Your interest in new products. These might near-term margin hit and long-term margin potential. So what’s going on the hardware side that you can kind of defend and expand margins and expand your market position?
Well, I mean, first of all, we don’t look at our product line as a hardware product line and software product line. It’s a combined product line with all the services and support that have to go around it. I think — especially in the early days of any market that’s emerging and that’s as growing as quickly as this one, the customers don’t want to be the integrator. Even fleet customers that are way more sophisticated than a commercial business that’s doing this for their employees or their retail customers. Even the fleet guys want 1 throat to choke. They want it to be fully integrated and they want it turnkey. So I think that’s a big part of the differentiator. Another piece of the differentiation is that we design everything with an eye towards hardware with the eye towards software and software with the eye towards how that hardware is deployed in a parking to have an overall cost and reliability envelope that’s favorable and competitive, which we think we have. So we control all the pieces of the puzzle, we control the user experience we control all those things.
And I think that’s why customers, frankly, because we don’t see a tremendous — we’re not under heavy price pressure, discounting pressure any of that stuff. I’m not saying that, that in a large market won’t happen eventually. But right now, I think we’re enjoying the benefit of the completeness of the solution.
Just coming back to the sort of beginning, like customer engagement, what does the life cycle look like? How do you pursue like land and expand, maybe you could explain like what does that mean? Like what is the customer engagement and the life cycle look like?
So we talked about it a little bit on the earnings call, and we’ve gotten questions around that subject quite a bit. It’s consistently 60% to 70% of our revenue, and this is over years is from existing customers. And what we talked about in this last quarter, and we typically don’t put an exact number on our customer acquisition rates, but we acquired over 1,000 customers in 1 quarter, and that was compressed into 30% of the revenue. So you’re adding a ton of customers, but their initial buy is small because either they didn’t allocate budget for it in the first year or they want to experiment a little bit or they just want to learn or what have you. So that 70%, the future buys of those customers represent a lot more revenue than that initial buy. So we’re planting flags at a furious rate.
And then once you have a network in your parking lot, it’s like having an ERP system in your company, you can’t have more than 1 or it’s not practical to you, but wow, that’s a lot of overhead. So once they’re on ChargePoint, as long as we take good care of them and treat them well and give them good value, they’ll stay on ChargePoint and continue to expand. And we’ve been enjoying the benefit of that land and expand model for the history of the company.
Yes. Again, want to offer to see if there’s any questions before moving on. One area we’ve been looking at, I think a lot of people are starting to look at too and get excited about is the fleet opportunities. I mean passenger EVs have been around now for a while, but you’re just starting to see the commercial vehicle starting to roll out in a big way. How does this fit in your long-term business? What is it — I mean, I think you already maybe in some way seen an inflection point, but how should we think about fleet? And then long term — historically, the primary, Level 2 and now your DC fast like, how should we think about the slower charging as well as the DC fast as part of the fleet offering?
Yes. So we rewind the tape a little bit on why we’re in fleet to begin with. We’re — so we think in decades, I’ve had 4 jobs in my entire life. So you can imagine how long I stay. You start a company and this one continues forever. I am happily pulling away at ChargePoint for a very long time. So if you think in decades, right, then you have to say to yourself, okay, what’s going to disrupt me? Because it takes a while to gestationally kind of have that stuff actually manifest. And you can get really caught off guard because once your core business gets big enough, you kind of feel like you’re invincible and everything else is significant until it is.
The fleetifiction of everything, right, in the long term, who knows when autonomy is going to hit. You can ask — I mean I have my opinion, it’s irrelevant. Eventually, car ownership is going to continue to decline. And Transportation as a Service is going to continue to rise. We can all take bets on when that’s going to rear its ugly head if you’re exposed to one and not the other.
So if everything is going to fleetify, you better start playing in fleet. And by the way, that in and of itself is going to be in the short term has huge leverage from an R&D prospective with what you’re already doing for the commercial passenger car space. So you get more scale from it anyway. So it’s good news in the short term and it’s disruption proofing in the long term. So that’s why we’re in fleet.
Now when you look at fleet, how big could it get? I think it can be 1/3 of the business in the not-too-distant future. What’s the variables on that, the variables on that or the arrival rate of vehicles? OEMs, I think, made a big mistake. If I were going to electrify, I would have gone to fleet first because you’ve got a buyer with a much higher utilization vehicle where the platform life, the fuel cost, the maintenance profile, much bigger impact. When you’re 4% utilized on a passenger car, your car might as well be a cardboard cut-out in your driveway. 96% of the time it would be indistinguishable from a real vehicle but not in fleet. They should have gone the fleet first for a lot of reasons. Also, you’ve got a more concentrated path to market, so you don’t have the support issues that you would have on passenger car, but no one did that.
An F-150 Lightning targeted at fleet 2 years ago would have been a brilliant idea, right? Don’t even sell it to a consumer, just sell that pickup truck, 50% of fleet vehicles, pickup trucks by the way. So it right into the fleet, but it didn’t go there. So they’re vehicle limited, except for finally maybe in transit buses, which have the most maturity of all the fleet segments. So the mix between AC and DC really is a sub-vertical based mix. Is it a light commercial fleet where it’s Sherwin-Williams converting the Chevy Volts for delivery of paint out of the stores, by the way. Yes, that’s AC charging. They don’t go very far in a day. They’re small vehicles. It’s [behind the fences] application. We have a lot of take-home fleets where take a Novartis or someone like that, that has medical device sales force, they give them a car, they’re shifting it all to electric. We do the home reimbursement. So they put the — they take the car home, they refuel it at home. They have — we also have a network at Novartis.
And it’s a take-home fleet customer because you put our home charger in and we do the automatic reimbursement to the employee of the electrons that are going to that vehicle because that’s part of the package. If you take midsized, bigger stuff, it’s largely DC dispensation at every parking space, so you don’t have to worry about whether you’ve got the dispensation — the charging capacity at a parking space for next day’s route. So you’re not so constrained to the — what’s in the ground. And then you have big iron cabinets and power conversion side. So it’s a mix of all of the above. It’s a lot of software to do the deadline scheduling for the charging to cost optimize by time of day by ship scheduling and to get all that right. So we’re headlong in the middle of it.
And all of that same product line is it’s the same product line we use commercially. It’s the same hardware product line. The core of the software is the same a lot, there’s some fleet-specific stuff because of the scheduling that’s so accustomed to fleet that exists only in fleet. But the hardware product line is literally the same hardware product line.
Moving to policy. So the Bipartisan Infrastructure Law has millions, $5 million — $5 billion out of the $7.5 billion probably in the coming years. But you’ve spoken of it, but like how does this benefit ChargePoint? And when does it benefit ChargePoint? And how long — I mean, you can maybe speak to the policy itself, but how should we think about the impacts for your business over time?
So look, we have a really large policy team that’s well entrenched in U.S. and Europe policy. We’re trying to shape it to get it right. We’re not asking for a subsidy, just to be clear. Our business model does not depend. I’m not sitting here saying, “Wow, I don’t know how I’m going to feed my dog tomorrow if we don’t get a hand out from the government.” That’s not what we’re about, okay? And I don’t think any business should ever get built with an assumption of an artificial element in the business model that if it were to change or go away suddenly makes the business model not work. And I think you can get very addicted very quickly to subsidy models.
I also think subsidy models — you have to be very careful with subsidy models because manufacturers bake them into the price if they’re targeted at the business buyer or the consumer. So if you stick in a tax credit, you stick in a grant, you’re sticking to whatever, the manufacturers in raise price to swallow all or part of that because if you had a buyer there that — where the friction didn’t need to be removed, you can take advantage of the situation and you see that. So I’m not speaking against incentives, I think they’re necessary and good, but they have to be carefully constructed and our policy team tries to carefully construct that.
Specifically with respect to the infrastructure bill, it looks very much like the VW Appendix D where it flows to states, states constructive program, put out their request for proposal, we’ll put in our proposals. We kind of — we’ll do what we’ve done with all our Appendix D bids where it’s all fast charge, it’s all for passenger car, it’s all for [corners]. That’s just the rules that the federal government put out there. We’ll put together a consortium of well-known consumer-friendly amenity brands that have locations that are optimal along corridors that states are putting out RFPs for and we’ll propose jointly with them, something that makes sense, so a consumer has something to do to.
And so one of the things you need to worry about for fast charge is that it needs to be lit, there needs to be a bathroom. There needs to be something to buy or do, right? I mean there’s all these little things like we take it for granted when we stop at a gas station. There’s a canopy. So if it’s raining, you cannot have to get wet, right? There’s all these little things that are there. There’s a camera so you feel like reasonably secure, right, all that sort of stuff. That’s not going to change, that consumer behavior and that consumer need doesn’t change for that long-haul driving segment.
So this will essentially, I think, accelerate the entrance of the Starbucks of the world. We recently did an announcement with them with Volvo, right, into serving the long-haul fueling market for EVs because there’s not a big enough percentage of EVs out there for them necessarily to think about that versus saving money on a different paper cup architecture for coffee. And so this will pull forward, I think, their involvement, which is a good thing. So that’s why I’m looking forward to the infrastructure bill money really rolling because I think it gets the amenity brands that naturally have to be there off the time because it’s use it or lose it with the subsidy money. So there, I think it’s a very good thing.
So more of a starting point than I mean critical versus volume, that makes sense.
I want to discuss supply constraints. This has been something that’s impacted everybody in the space in some way or the other. And it’s kind of definitely an impact on you guys, not only the cost of materials but logistics cost. What’s the impact today? And your best crystal ball on how this could roll off in the coming quarters and years?
So the way it manifests is it’s not like the cost structure uniformly rise. So I mean we — when we gave annual guidance, we guided to about a 6% impact on gross margin for supply chain given the. Growth rate of the company, right, to the midpoint of the guidance, it’s mid-90s percent growth rate. So think about it, you’re trying to double the size of your company and the world supply chain cataclysm that the world has ever seen. And assurance of supply and costs — purposes. So now what we’re seeing actually is not that the cost structure of everything is coming up by 6%. It’s that you suddenly get to de-commit somewhere in your supply chain because some obscure IC is unavailable. And suddenly, you have to pay extortion prices and the extortion prices aren’t 10% more. You might pay $50 for a $2 IC just to keep your production line up and running.
And so it’s like having a bunch of random snipers. You don’t know where they are. You don’t know when they’re going to pull the trigger, but they’re pointed at something. Okay, that’s what we feel like. We feel like we’re ducking from random snipers. And it comes in many forms, like let’s say there’s — with the zero-COVID policy in China — let’s say, you have a supplier for a cable that’s out of Germany. But they have supply chain somewhere in China, you don’t know about it. And so suddenly, your cable vendor calls you up and says, “Hey, you know the 2,000 parts I was going to ship to you last month, I can’t get them.”
And you’re like, wait a minute, you’re in Germany, and they’re like, “Yes, I know, but we injection mold the shroud and Shenzhen and we can’t get it, we can’t because they’ve shut down the warehouse, the factory, the injection molding facility period, and everyone’s hand to mouth on supply. So that’s what it feels like when you’re building a physical product.
You just don’t know because you can’t inspect that far deep into your supply chain. It’s just impractical. You can just get affected by anything, and then you get a burst of extortion pricing or cost because you’ve got to go to an alternate that’s under supply constraints or what have you. And that’s how it prints through. So it doesn’t take much to have that to start to subside. I just can’t call when that’s going to happen.
On the flip side, you do have some maybe pricing power, which is — it’s tricky because you’re trying to grow your business rapidly. But what kind of leverage do you have?
I mean we’ve done 2 price increases. And the challenge with price increases when you’re a channel-oriented business, 70% of our business — our business is flowing through channel partners is that you can’t catch them off guard. First of all, if they — not that they have any stock at this point because who’s got inventory. I wish they had inventory to sell it. We’re not a backlog-oriented business, and we’ve got a big backlog. So it’s one of these situations where you’ve got to notice them and give them appropriate notice period. They have — and they think about it, they have bids and quotes out that they haven’t fulfilled and you just can’t — you can’t change the pricing. We’ve got some — a big dealership business where dealerships are rapidly outfitting with charging infrastructure. Those are on both deals that we’ve already established pricing on.
So it takes a while for price increases that we’ve already affected to roll through. We’re seeing it rolling through now. I’m not seeing a tremendous amount of injection because I think people are practical. They’re seeing it everywhere in their supply chain. So we’re not doing anything out of line. And if we felt that it was going to business at risk. I can always use discounting to do it on a point basis.
Speaking of partnerships, how does the Goldman Sachs partnership that you announced not too long ago. How does that impact and open up an unlock opportunities for you, clearly an opportunity for JPMorgan, come on. I had to throw that in there.
So the way we look at asset ownership in our space is that if you take our design-build services and our technology and our essentially driver presence and our ability to integrate with other brands, but we’re kind of agnostic to the use of the gear and how that integrates with the business model at the site owner. If you add to it a financing partner, that has a much lower cost of capital. You basically get the benefit of spot asset ownership don’t have to be an asset owner yourself, right? Because we don’t want to be that asset owner because I can’t raise enough capital to be significant in that space where it does make sense.
Also, they’re not sensitive to the business model. From a brand perspective, they don’t want their brand on anything. So they’re not sensitive. Let’s say, a coffee chain wants to put an EV charging and they want to finance it through GSRP at their cost of capital, great. Now I’ve incented a coffee chain to be an asset owner and we can co-brand it, they can be the primary brand on it, the driver knows it’s on the ChargePoint network, but it could be that primary brand. It all works. So there’s brand flexibility, the cost of capital is well aligned, right? It’s not a public company trying to — basically make public company returns working against that. You’ve got the amenity brand alignment, so you’ve got the $7 caramel macchiato and the $7 charging session, a uniform gross margin, all adding up to the total business, right? You’ve got it all working for you. So that’s why I think that’s so powerful.
And then also, you can combine it with some of these incentives. So let’s say, you take infrastructure bill money and on a portfolio basis, you convince a convenience store chain in the FMC world to make the jump to light speed to electricity. And you say, wait a minute here, you can — we could put in a proposal to stretch that infrastructure bill money and add financing so if you get more sites done with the same capital. Clearly, you’re on the hook for some of the costs there, but you can spread it out and you can be an early market mover. So I think it just gives us another lever, another big lever.
On last chance for a question here from the audience. Well, what would you say like least most misunderstood, what are people missing about the ChargePoint story, which is clear. What I’d not ask that you’d want to convey to this group of investors and people listening in.
Well, I think it’s getting — I think it’s getting clear. I think it’s just time. I mean, the investors are busy. It’s a new space. There’s not a lot of historicals. There’s not a lot of third-party unbiased data sources. It’s just — it’s hard for investors, right? There’s a lot of business model noise about what’s going to work and what isn’t. But I think things are coming into alignment. Most important thing, I think is completeness, just people — customer doesn’t want to be the integrator, right? So you need to be very complete with the offering.
First company to get scale has a massive, massive effect and also gross margin, long-term gross margin advantage just because of the scale. So we think you’ve got to — you can’t be a niche geography operator. You’ve got to be a broad geography operator. I think there’s so much confusion in the space because there’s what looks to be a highly fragmented set of players, but I think if you peel back the onion, it’s — there’s not that many players that are any significant. So I think it’s under — I think it’s a sexy business. But it sort of picks and shovels versus the gold miners. The gold miners get all the attention. We’re happy to sell picks and shovels in the industry. So if you look at the number of auto OEMs that people are betting on that are going EV, there’s just a ton of auto OEMs. And the differentiation of our electric vehicle platform is it’s much harder, right?
You can make a go 0 to 60 in 2 seconds with an electric motor or a battery. So performance is not a differentiator in the long term. And the cost structure — the supply chain is much simpler for EV in the long term, highly dependent on batteries, but that what it’s about. So depending on any of the auto OEMs is risky because you don’t know who’s going to win at the end, and there’s too many of them not going to consolidate. There aren’t that many people in our space. So we’re kind of like an index fund. We’re the broadest and easiest way to play the EV charging — the EV transition and we’re exposed to fleet and commercial. So it doesn’t matter which 1 of those 2 happen both of those and we’re exposed both in North America and in Europe because we’ve made the investments and have the OpEx to show for it.
That’s great. Thanks for that. That’s a great overview, and I look forward to following the progress, thanks.
Thank you so much.