ChargePoint Holdings, Inc. Q2 FY2022 Earnings Call

Ladies and gentlemen, good afternoon. My name is Maya, and I’ll be your conference operator for today. At this time, I would like to welcome everyone to the ChargePoint Second Quarter Fiscal 2022 Earnings Conference Call and Webcast. All participants’ lines have been placed in listen-only mode to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session. 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.

Good afternoon, and thank you for joining us on today’s conference call to discuss ChargePoint’s second quarter of fiscal 2022. This call is being broadcast over the web 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 President, Chief Executive Officer; and Rex Jackson, our Chief Financial Officer. This afternoon, we issued our press release announcing results for the second quarter of fiscal 2022 ended July 31, 2021, which can be found on our website. We would like to remind you that during the conference call, management will be making forward-looking statements, including our fiscal third quarter and full year 2022 outlook and our expected investment and growth initiatives. 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 factors that could cause actual results to differ, please refer to our Form 10-Q filed with the SEC on June 11, 2021, and our earnings release posted today on our website and filed with the SEC on Form 8-K. Also, please note that certain financial measures we use on this call are non-GAAP. We reconcile these non-GAAP financial measures to GAAP financial measures for the current quarter in our earnings release and for our historical periods in our investor presentation posted on the Investors section of our website. And finally, we’ll be posting the transcript of our call today to our Investor Relations website under the quarterly results section. And with that, I’ll turn the call over to Pasquale.

Thanks, Pat, and thanks to all for your interest in ChargePoint and joining us for our second quarter earnings call. I’ll provide a business update to give you some perspective before turning the call over to Rex for financials and an update of our guidance reflecting our revenue event. We are pleased to share more about the execution against our plan and our strong quarter for ChargePoint. The results from this quarter can be described with one word: scale, scale across our three verticals and scale in both North America and Europe. We are a larger company than we were pre-COVID and growing more quickly. This quarter, from both a quarter-over-quarter and year-over-year perspective, exceeds revenue growth rates from the quarter that ended on July of 2019. We had strong commercial execution as businesses of all types continue to invest, and we’ll be charging for their customers, employees, and visitors. Interest in EV charging solutions from fleet operators continues to be high. In June, we announced the industry’s most comprehensive fleet charging portfolio. Earlier this month, we announced the acquisition of ViriCiti, a leading fleet vehicle management provider. And we expect the addition of team, customers, and technology from this acquisition to further strengthen our reach in eBus and commercial fleet. In residential, demand for home charging continues to be strong and our ability to serve all types of residential settings is a differentiator. From a geographical perspective, our North American execution remains strong as businesses continue to recover from the effects of COVID. Europe is growing quickly. Our activated port count is up 44% in Europe for the first half of the year versus BloombergNEF European public connector growth of 13% over the same period, and we expect our position in Europe will expand meaningfully following the close of the acquisition of has·to·be post regulatory approval with the addition of their network ports under management position added to our existing position. has·to·be has a talented team, robust technology, and an impressive base of customers, including Aral, Audi, GP Joule, Ionity, and Porsche, just to name a few. Before I jump into the business, I’ll share a few comments on the market tailwinds supporting electrification more broadly. As we have said, ChargePoint’s success is directly tied to the arrival of electric vehicles. BloombergNEF published its electric vehicle outlook in June, which was the first major increase to their outlook in five years. Sales of EVs accelerated in North America and Europe in the first half of 2021. According to BNEF, North America EV sales were up 97% year-over-year for the first half, and European EV sales were up 153%. We are witnessing more vehicles coming to market in exciting form factors for a broad array of use cases. We continue to test new vehicle models that run the gamut of passenger fleet in transit in our state-of-the-art test facility in Campbell, California. Turning to policy, much continues to evolve. On vehicle and emissions policies, President Biden issued an executive order, calling for half of all new vehicles sold to be zero emission by 2030. The Trudeau administration set a goal of 100% zero emission vehicle sales by 2035, and the EU Fit for 55 Package announced in July provides the sectoral policy tools to meet the 55% emission reduction ambition by 2030. It’s an effective mechanism to hasten the transition to the EVs. This collection of efforts has the support of many major automakers. It helps create category awareness, and we expect the pace of electrification to continue to accelerate. We are also seeing unprecedented progress in infrastructure funding. In the U.S., we were pleased to see the Senate include $7.5 billion to expand charging in the recently passed bipartisan infrastructure bill. The speaker of the House has committed to voting on this bill by September 27. The Senate has also passed a $3.5 trillion budget framework, which is backed by the President and includes instructions for lawmakers around changes in the tax code to make the President’ EV goal more attainable. The budget framework was adopted by the House last week, and we are closely tracking the drafting of this legislation and other actions in Congress with potential incentives for EV charging for communities and fleet. States play an important part in infrastructure funding, independently and in crafting mechanisms for the disbursement of federal funds. California is a leader and an influential market. The passing of the state budget that included up to $3.9 billion for zero-emission vehicles and charging incentives over the next three years will support continued infrastructure build-out. We believe we are well-positioned to enable our customers to leverage public funding in addition to ongoing private investment. Our teams have more than a decade of grants management experience, having worked with federal agencies, regional governments, and local partners to successfully build charging to support communities and connect orders. Turning to our verticals. First, let’s look at what’s happening in commercial. It enjoyed its best quarter yet with sequential billings growth of over 46% and year-over-year billings growth of over 90% from the same period last year. As a technology company with software at our core, we are pleased to report subscription revenue for the quarter grew 12% from the first quarter and 23% year-over-year. We finished the quarter with approximately 118,000 active ports on our network, an increase of about 6,000 ports sequentially. This includes over 5,400 in Europe, up from over 4,700 ports last quarter, not including an approximately 40,000 ports to be integrated on the close of the has·to·be acquisition. Exciting deployments with auto dealerships both in North America and Europe as well as fueling and convenience locations like Kum & Go led to a record quarter for shipments of DC fast ports. The total fast charge ports in our network grew to over 3,700 as of quarter-end. We continue to work with the industry to enable drivers to roam across networks in North America and Europe. This quarter, we crossed over 200,000 roaming ports accessible to drivers using ChargePoint. In fleet, we had a record quarter with growth of 187% year-over-year from a billings perspective. We believe fleet represents an enormous opportunity for ChargePoint, and we are seeing activity across the vertical, including delivery and logistics, transit, and work vehicle fleets. RFP activity is widespread. In June, we successfully unveiled what we believe is the industry’s most comprehensive charging portfolio that was designed with our fleet management software at its core to ensure cost-effective operational readiness for fleets of all types and sizes. The recently closed ViriCiti acquisition extends existing ChargePoint functionality with direct vehicle data, enabling additional functionality, including battery health monitoring, OEM-agnostic telematics, vehicle maintenance support, and vehicle operations data. Fleet managers are focused on integrated vehicle and charging visibility, access, and control. And we believe that the combined offerings of ChargePoint and ViriCiti will be a force in this space. In the residential vertical, our strategy to serve all needs is paying off. These include single-family residences, apartments, and condominiums and employers who offer electric vehicles bundled with home charging made available through leasing companies. Crossing over from the fleet vertical, employers requiring employees to take work vehicles home overnight use our home charging services that enable fuel cost reimbursement for overnight charging. Q2 residential billings were very strong, up over 79% year-over-year and 43% sequentially. We continue to offer seamless access to EV charging with integrations into leading consumer platforms. This quarter with our strategic partner, Mercedes-Benz, we announced a new benchmark for EV charging in North America with ChargePoint powering Mercedes me Charge vehicle ecosystem to be launched with the all-new EQS luxury sedan and included with all EQ future mobility products for Mercedes-Benz. With our software, drivers can seamlessly find, navigate, connect, and securely pay for charging in the vehicle and from the Mercedes me app across the ChargePoint network and roaming partners, including charging in access control environments like workplaces, shopping malls, and hotels. Our customer growth continued in the second quarter, building off a strong start to the year where we eclipsed 5,000 customers. We continue to see a steady rebuy rate of well over 60%. We are adding customers quickly while growing with existing customers rapidly. ChargePoint continues to invest heavily in our team. We finished the quarter with over 1,000 employees. As a technology company, we are especially proud of our engineering and technical staff that tops more than 500, not including the capable team of ViriCiti and the additional expected team following the close of the has·to·be acquisition. The teams managing our supply chain have navigated a dynamic environment. Rex will give you more color on margins and how ChargePoint is navigating through this global headwind, including responding to the demand for our product in the second quarter that exceeded our forecast. Before turning it to Rex, I’d like to reiterate that ChargePoint’s scaling of the new fueling network is generating notable environmental impact, having enabled over 3 billion electric miles driven and avoiding 462,000 metric tons of greenhouse gases and roughly 120 million gallons of gasoline by the end of Q2. Rex, over to you for financials.

Thanks, Pasquale. Good afternoon, everyone. First, my comments are non-GAAP, where we principally exclude stock-based compensation and the effect of the valuation of our stock warrants. This quarter, we also exclude legal expenses associated with our secondary offering completed in July, our ViriCiti acquisition completed in August, and our pending acquisition of has·to·be we announced in July and we expect to close later this calendar year. For a reconciliation of these non-GAAP results to GAAP, please see our earnings release. Second, after a quick review of our results, I will provide revenue estimates for fiscal Q3 and for the fiscal year. Third, consistent with our March and June calls and as you can see in our earnings release, we report revenue along three lines: networked charging systems, subscriptions, and other. Networked charging systems represent our hardware, all sold with our cloud services solutions. Subscriptions include those cloud services or assure warranties and our ChargePoint-as-a-service offerings where we bundle our solutions into a recurring subscription. Other consists of energy credits, professional services, and certain nonmaterial revenue streams. Q2 revenue was $56 million, up 61% year-over-year, well above the high end of our previously announced guidance range of $46 million to $51 million and up 39% sequentially. The top line success was across all verticals and geographies. Networked charging systems at $41 million was 73% of total revenue for the quarter and grew 91% year-on-year and 53% sequentially. Subscription revenue of $12 million was 22% of total revenue and up 23% year-on-year and 12% sequentially. Subscription growth trails networked charging systems revenue growth for three primary reasons: First, the mix as both DC networked charging systems and home have a lower ratio of subscription to hardware revenue than our overall average. Second, our quarterly sales are typically strongest in the third month of each quarter, which amplifies networked charging systems revenue taking its shipments versus ratably recognized subscriptions. And third, for most of our solutions, we begin revenues for subscriptions at a fixed time after the associated hardware shipment to accommodate installations. We are particularly pleased that our deferred revenue from our subscriptions representing recurring revenue from existing customer commitments and payments hit $100 million this quarter for the first time. Other revenue at $3 million and 6% of total revenue decreased 16% year-on-year due to lower utilization base of energy credits but increased 10% sequentially. We look at verticals from a billings perspective. Billings by vertical for Q2 were commercial 75%, fleet 12%, residential 11%, and other 3%, consistent with billings by percentage for Q1. We are very pleased to see strong growth, total billings up 87% year-on-year and 42% sequentially on a consistent mix, demonstrating strength across all our verticals. From a geographic perspective, Q2 revenue from North America was 91% and Europe was 9%, consistent with recent breakdowns by geography. Europe held its percentage in a high-growth quarter with its best quarter ever at $5 million in total revenue and up 38% year-on-year and 42% sequentially. Our customer rebuy rate, a cornerstone of our business model and reflecting our land-and-expand strategy, remained over 60% of total billings, a compelling indicator since we add hundreds of new commercial customers per quarter. And from a scale perspective, we also continued our channel success with approximately 62% of our business driven by our channel partners and continuing to add partners at a strong rate. Turning to gross margin. Non-GAAP gross margin for Q2 was 23%, flat to Q1. Continued improvements in our cost of goods sold and renewed strength in commercial offset supply chain challenges, particularly incremental logistics costs, which had an approximately 3-point negative impact on gross margin for the quarter. Non-GAAP operating expenses for Q2 were $53 million, a year-over-year increase of 70% compared to a COVID-impacted prior year quarter and a sequential increase of 13%. We continue to invest heavily in sales and marketing to support our land-and-expand model in North America and Europe, in R&D and operations to support significant new product development and a rapidly expanding customer base, and G&A expenses to support continued growth in the business and increased public company-related expenses. Looking at cash, we finished the quarter with approximately $618 million with approximately $44 million from warrant exercises, resulting from the redemption of our public warrants offsetting cash used by operations. We have funded in Q3 thus far approximately $80 million of our $90 million acquisition of ViriCiti. And on completion of regulatory review, we expect to fund the cash component of the has·to·be acquisition at approximately $135 million, potentially also in Q3. As a reminder, this acquisition is a blend of cash and stock, and I’ll cover the stock in a minute. Pasquale spoke about the strategic and operating merits of both transactions. From a financial perspective, we expect these two acquisitions combined to contribute approximately $4 million in total revenue in Q4, to be generally accretive to gross margin, to add approximately $8 million to $10 million in combined operating expenses in Q4, and to provide synergistic sales opportunities for both our hardware and software. Our new guidance, which I’ll provide shortly, reflects ViriCiti’s expected contributions since the August close and assumes has·to·be closes in late Q3. I do not expect to provide future breakouts for these acquisitions but wanted to give you a sense of initial sizing as we integrate them into our operations. Regarding share count. During the quarter, we issued 8.8 million shares of common stock in connection with the final SPAC merger earn-out, 4.4 million shares of common stock in connection with warrant exercises, and 3.9 million shares under our employee stock plan. We finished the quarter with 322 million shares outstanding. After giving it back to the acquisition of has·to·be, we expect to have roughly 328 million shares outstanding. And finally, we completed an underwritten secondary offering in July for 13.8 million outstanding shares held by existing stockholders in order to improve our float and broaden our stockholder roster. ChargePoint offered no primary shares in this transaction. Turning now to guidance. As Pat mentioned, demand for our solutions in Q2 outstripped our expectations and production ramp. And we continue to watch, as we all do, the COVID situation, including its implications for ongoing supply chain challenges and heightened logistics costs. Despite these factors, we turned in a strong first half performance and are excited about our revenue momentum going into the second half. Accordingly, for fiscal Q3, we expect total revenue of $60 million to $65 million, at midpoint an increase of 72% versus Q3 of last year and a sequential increase of over 11%. For the fiscal year, we are taking our revenue guidance of 15% from $195 million to $205 million to $225 million to $235 million at the new midpoint, representing a 57% increase year-on-year. And with that, I’ll turn the call back to Pat.

We’d like to thank you again for your interest in ChargePoint. We are very proud of our quarter defined by broad and accelerating scale in North America and Europe across each of our three verticals. We believe our technology, capital-light business model, and market share position us well to continue to execute in this very exciting market.

The first question is from Gabe Daoud with Cowen.

Hey. Good afternoon, everyone. I was hoping we could maybe just start with the financials for a bit. Just noticed there’s a margin degradation on the subscription line quarter-over-quarter. It looked like it was only 35% in Q2, I think you’ve been closer to 50% in prior quarters. Is there anything that, Rex, you can maybe point to there as to what drove that degradation sequentially?

In the subscription line, we are indeed seeing a pull-in. The two primary costs we account for in that line of the cost of goods sold are call center expenses, which support our hosts and drivers, and any repair costs related to warranties that are favorable to us in our contracts. I would note that there’s nothing unusual in this quarter to indicate a long-term trend in this area, so I believe it’s simply an anomaly. Thank you.

Got it. Thanks, Rex. And then, I guess, as a follow-up, could you maybe just talk a little bit about the supply chain situation currently? Obviously, you guys continue to do a nice job offsetting an increase in logistical costs, but just curious what you guys are anticipating moving throughout the rest of this year.

That's a great question. In Q2, we managed the situation well. As you can see from our balance sheet, we weren’t able to build inventories, so we focused on procuring and shipping. We encountered a bit more demand than we could satisfy, which resulted in some delayed shipments due to supply chain issues. The primary concern has been increased logistics costs, with some component shortages contributing as well. Overall, I believe we handled it effectively. In Q2, this impacted us by 3 points; otherwise, we would have achieved a 26% gross margin, marking a good improvement from Q1. Looking at the second half of the year, we anticipate significant revenue growth in Q2 and Q3, placing substantial pressure on our operations team, supply chain partners, and contract manufacturers to meet those expectations. We've incorporated these factors into our guidance, and I expect this will create some mid to low single-digit pressure on our gross margin as we progress. I want to emphasize that due to our business model of land-and-expand with customers, we are focused on increasing our top line to secure territories and customer relationships. If we need to make trade-offs, we're prepared to do so.

One more point on that. Because every port that we sell is associated with a subscription to software, that’s very low churn. The way we look at the overall contribution from a port from a margin perspective is over the lifetime of that port. Because the churn rate is so low, the software revenue accumulates nicely over the years. So, it’s imperative that we ship as many ports as we humanly possibly can, so biasing our supply chain activities to making sure that we can not only acquire the customers but expand within the footprint that we have. I think we get it back in spades over the years. We just have to meet our customer demands right now.

Understood. That makes sense. Thanks, Pasquale and Rex. Just one more. Just now with ViriCiti in the fold, could you maybe just talk about conversations with fleet operators? Obviously, there’s plenty of competition within that channel. Could you maybe just highlight how impactful having the vehicle telematics is from a potential business perspective? And maybe also just talk a little bit about some of ChargePoint’s competitive advantages on the software side for fleets versus some of your competitors.

From our viewpoint, especially considering that the market is still developing and fleet operators are quite new to electrification, having a comprehensive portfolio and pre-integrated solutions is a significant advantage in establishing ourselves with these fleet customers as they transition from fossil fuels to electricity. In this context, our investments, both organic and the ViriCiti acquisition, aim to create a robust portfolio. Specific to ViriCiti, their technology adds more than basic telematics; it features advanced functions like battery health monitoring and various driver support and reporting capabilities. This is particularly relevant for large fleets, which typically work with existing telematics providers that we have pre-integrated with, while smaller fleets and eBus operators often do not have such partnerships. Therefore, offering a specialized vehicle telematics solution simplifies integration for those segments without an established partner or the internal capability to manage integrations. Essentially, our approach is similar to selecting an ERP system, where customers can opt for various plug-ins alongside core functionalities. We believe this market is evolving in a similar manner. From a differentiation standpoint, we are confident in the completeness of our offering and are continually investing in it. Most importantly, we are also focusing on integrating numerous third-party software services within the fleet ecosystem to streamline the adoption process.

Very helpful. Thanks, guys.

Gabe, one thing, this is Rex again. On your first question, you caught me a little flat-footed there. It dawned on me that you’re looking at GAAP numbers, not non-GAAP numbers. So, the driver on that from a GAAP perspective is fundamentally stock-based comp, which is a new thing for the Company, obviously, since we’ve gone public. If you look at it on a non-GAAP basis, the software margin is actually up a point sequentially. Sorry, I didn’t rock that with you when you asked the question.

No, no worries, understood. So, that $2 million at the back is all related to the subscriptions line, the $2 million?

The $2 million indicates that without stock-based compensation, subscription gross margin increased.

The next question is from Colin Rusch with Oppenheimer.

Thanks, guys. Sorry if I missed this, but can you break out the increase in the guide? How much of that is coming from acquisitions, and how much of that is organic growth from the existing business?

Our estimate for Q4 is that the acquisitions will contribute around $4 million, and the remaining balance in Q4 will come from us. For Q3, we had ViriCiti for most of the quarter and expect to have has·to·be included as well. So, we believe the focus should be on the contribution expected in Q4.

Okay. That’s super helpful. And then, just in terms of the pipeline activity, can you speak to the number of potential targets you’re looking at, and how that’s grown year-over-year in terms of the land-and-expand model, getting any of those new customers in? How should we be thinking about the growth in those first-time customers that you guys can leverage?

So, you started with acquisitions and you want the customer count?

No, I think the question, Rex...

No, no, no, it’s not about acquisitions at all. It is about new customers.

Yes. We are very pleased to have announced the two acquisitions. I believe we have successfully executed our strategy of selecting key opportunities and ensuring we secure them. The question moving forward is whether we will pursue additional acquisitions or not.

No, I think the question, Rex...

No, no, no, it’s not about acquisitions at all. It is about new customers.

Yes, I am very pleased to have announced the two acquisitions we made. I believe we are executing well on our strategy as a management team, focusing on selecting the most impactful opportunities and ensuring we secure them. The key question now is whether we will be looking to pursue additional opportunities in the future.

So, from a customer growth perspective, we had a stellar quarter in Q2. We’re well past the number that we’ve had out in the market before. As you know, we are investing heavily in sales and marketing to make sure that we keep that trend going. I think we said probably six months ago that we’re around 500 new customers per quarter. We’re handily beating that now. And that’s organic, right? So obviously, the two acquisitions bring some additional customers, particularly in Europe and particularly in the eBus segment that we did not have, but our organic growth on the customer side is powerful.

The next question is from Craig Irwin with Roth Capital Partners.

So today, I had the opportunity to look very closely at your new fleet products in person, and I have to say I’m really impressed, particularly from the small component count in the different pieces, the dozen components in your DC conversion tower, the eight components in your, I guess, two-port dispenser tower. This kind of suggests like there may be an opportunity from a margin standpoint as these start to ramp in volume. Can you maybe talk us through whether or not these manufacturing efficiencies and the simplicity of these products will be accretive to margins over the next number of quarters? And there were some questions as far as the overall certification status of these new fleet products.

Yes. It’s a great set of questions, and thanks for checking out the product. I’m assuming that you were at the AC Trade Show. Is that where you saw them?

Yes.

Yes. The core of our strategy involves designing products that utilize very few subcomponents. If you examine our product line, you'll notice that the same subcomponents are present in multiple products. This approach has two main benefits. First, it enhances long-term manufacturing efficiency and scale, which helps create a favorable cost structure. Second, in mission-critical businesses—such as fleet or passenger car services—having spare capacity for maintenance ensures a simple inventory management system that facilitates rapid repairs and high uptime. This strategy allows us to achieve both a cost advantage from concentrating on a few components and improved reliability. Our goal is to continue increasing volume, and as we scale, we expect our margin recovery curve to return to historical levels, as Rex has noted in previous earnings calls.

Excellent, excellent. My next question is about products for Europe. So, my understanding also from looking at the products closely is that there’s an opportunity for a very small number of components to be changed versus the designs that are now starting to ship into North America. And can you maybe clarify for us whether or not this simplicity, this design approach that you’ve taken, maybe accelerates the margin accretion as you look to serve Europe a lot more aggressively for growth over the next number of quarters?

We have adopted a design strategy that aims to create products that can function globally, either with minimal configuration adjustments in the factory or as ready-to-use products. This approach is intended to enhance efficiency in the supply chain and establish standardized practices for repairs and reliability across both continents. For instance, the fast charge products showcased at ACT, along with certain AC products, are designed to work internationally. Specifically, the AC products, especially for fleet use and European markets, are fundamentally engineered for global operation.

And then, if I could squeeze another one in. Workplace has been a very important market of ChargePoint over the last number of years. It’s a particular point of strength for the Company, and a lot of us are looking at our teams being back in the office. And I know that many other companies have similar policies. Can you maybe comment about recent conversations with your important customers in workplace, whether or not it’s fair to expect some building of the momentum there, maybe a return to the really impressive growth that you saw over the last couple of years?

So, if you look at the remarks that we made earlier before the Q&A, we pointed out that our business volume is now above pre-COVID levels and our growth rate is above pre-COVID levels, but COVID is not over yet. And so, what that says is that our modeling assumptions in that cars drive everything. And in our revenue model, cars do drive everything. It’s completely an attach rate model as to how we model our revenue forecasting. And over the last three quarters, I think we’ve done a pretty good job even in a COVID environment, forecasting our revenue. What we have seen is a mix shift due to COVID, but the overall growth in the space has been more than compensated for by the increased arrival rate in cars relative to the pre-COVID levels that we have seen. So, with all of that said, as workplace returns, it’s all upside.

Understood. Well, congratulations on the strong quarter. I’ll hop back in the queue.

The next question is from Shreyas Patil with Wolfe Research.

Thank you. You mentioned earlier that you're having trouble meeting demand, which was an issue this quarter. I wanted to discuss how we should consider your ability to ramp up manufacturing if this situation continues for the next few quarters. Is there any outlook for increasing capacity for ChargePoint?

This is not a manufacturing capacity issue for us on the supply chain side. Our contract manufacturers have the labor and equipment needed to produce physical products. The problem lies in unexpected decommits for components in the supply chain. Our teams, along with our contract manufacturers, are focused on exploring every possible source of supply, with our engineering teams working on qualifying additional sources to mitigate risks. While we can't eliminate these risks completely, we can reduce the impact of unexpected decommits from suppliers who fail to meet their shipment commitments. Although the numbers are higher than we initially forecasted, we have managed to increase our component supply to meet demand generally, if not fully. Our team is diligently working to ensure that materials flow into our factories, as factory capacity is not an issue, allowing us to meet the revised guidance we have communicated for the latter half of the year. We are on it. While we have not faced any major setbacks yet, our experience keeps us vigilant, and we do not claim to be free from potential challenges.

I wanted to discuss the fleet side of the business. You mentioned 180% growth in the quarter, which is quite impressive. As you consider the opportunity with ViriCiti, I'm trying to understand how the competitive landscape is changing and how ChargePoint is positioned. We’ve seen OEMs like Ford and GM announce plans to offer fleet charging as part of their product offerings. How do you view the ability to continue providing a value-added solution as these OEMs aim to sell to their own customers?

Yes. We have previously addressed this question, and it’s consistent with what we discussed in the last earnings call. There are very few single OEM fleets available. Therefore, we are concentrating on a solution that is not dependent on any one specific OEM and is also compatible with other business system partners that fleets typically work with, allowing for as much pre-integration as possible. Our competitive strategy is to ensure that customers do not have to act as integrators, enabling a straightforward integration by being pre-integrated. While there isn't a flawless approach, we view this as a significant differentiator. We believe OEMs need a default offering, and we support that notion. However, the majority of their customers do not purchase solely from them. Given that most fleets are multi-OEM, we do not consider this a drawback.

The next question is from David Kelley with Jefferies.

I guess, two from my end, and maybe starting with the fleet charging portfolio that you unveiled a couple of months ago, clearly software-intensive. So, maybe if you could walk us through how you’re thinking about the longer term kind of subscription opportunity tied to the software for that product line, that would be great.

It would take more time than we have on this earnings call to provide a complete overview. We will certainly address this during future technology-focused days for analysts. In short, think of the software as being connected to the charging ports, similar to our traditional commercial business for passenger vehicles when we engage with workplaces or retailers and parking operators. This software is proportional to the charging ports on the ChargePoint network, but it's not focused on power sales or dependent on utilization. Additionally, there are fleet services for scheduling chargers based on next-day routes or shifts, which are billed on a per-vehicle basis, introducing a new service layer beyond charger management that also has per-vehicle billing. Later on, site-wide energy management services will come into play. Overall, we have services that correlate with chargers, vehicles, and sites. The commercial charging sector is evolving, although the vehicle component may not be as significant as the telematics aspect. I also want to highlight that our commercial and residential offerings tie into lease arrangements. Many operators provide vehicles as part of employee compensation, and our technology supports take-home fleets by enabling reimbursement for electricity costs when employees charge their vehicles at home for work purposes. This represents a significant crossover opportunity. The benefit of engaging in various verticals is that being confined to one limits visibility to use cases that intersect with others. Lastly, we are enhancing our on-route charging capabilities with fuel card integration for consolidated payments, which offers an additional opportunity for our commercial services tailored to drivers. Fleet drivers can leverage these services and have integrated billing with their employers via fuel card provider partnerships, and we plan to expand this collaboration in the commercial space. All these elements are interconnected, which isn't fully understood by many observing the industry. I'll stop there, as continuing would make for a lengthy response.

Okay. No, great. That’s super helpful, really appreciated it. And maybe just kind of to switch gears a bit, a high-level question on ESG and sustainability, and this might be a long answer as well. But clearly, we’re seeing a broader push in North America. So, maybe could you give us a window into the conversations you’re having with existing and new customers, how they see charging fit into their strategy? And could ESG boost, let’s call it, the longer-term rebuy algorithm for ChargePoint as we think out several years into the future?

Certainly, businesses of all types are increasingly adopting fees related to ESG, which benefits both their employees and customers. In the long run, electric driving is more economical than using fossil fuels. The vehicle itself has a favorable cost structure over time, and fuel costs also play a role. Additionally, companies are now evaluated based on their ESG performance, making it a consideration in their strategies. However, the amount of charging needed corresponds to the number of electric vehicles in use, making it challenging to estimate how this factors into our attach rate model at this time. We will gain clarity as the market evolves. I agree, it serves as a positive trend, but the extent remains to be seen.

The next question is from Vikram Bagri with Needham.

I have two questions. One is about near-term profitability and the other is regarding the long-term outlook and profitability. Rex, you mentioned an increase in outlook by BNEF recently, and it seems your long-term outlook was based on their forecast. With your acquisitions, which improve margins, how does that affect your outlook for achieving profitability that you initially targeted for fiscal ‘25 a few months ago? Could you discuss the factors involved in that? Regarding near-term profitability, the initial guidance at the start of the year was around 31%. You mentioned a 3% hit to gross margin for this quarter due to supply chain issues, along with a shift in mix and prolonged shutdowns related to COVID. Could you elaborate on the near-term margin outlook using 31% as a baseline, what the factors are, and if possible, quantify them? Thank you.

Vikram, you clearly have a strong understanding of the situation already. For this year, it's true that we are experiencing lighter gross margins than we had anticipated, although I believe we achieved a decent result in the first quarter. We managed to maintain that in the second quarter, despite some external challenges. Looking ahead to the second half of the year, we plan to tackle these issues as well. As I mentioned earlier, we are committed to driving revenue harder because expanding our customer base is crucial right now. This puts some pressure on us, especially since underperforming margins affect our bottom line. However, in the long run, prioritizing revenue is vital for the health of our business. Additionally, as we gain new customers, they tend to generate higher ongoing margins from their software usage compared to the initial sale. While we don’t provide specific gross margin guidance, it's clear there's a difference between our initial expectations and our current reality. Mix is a significant factor in this. If the commercial business performs as strongly in upcoming quarters as it did this quarter, we could see improved margins. Regarding acquisitions, they are expected to contribute positively to gross margins over time, although they might initially increase operational expenses more than gross margin contribution. We believe this will shift in the near future. Furthermore, there are promising benefits from initiatives that increase sales of both the software we just acquired and existing business from ChargePoint. As these synergies take effect, next year should be positive with those acquisitions. Finally, regarding profitability, we have discussed our plans for 2024. We are continuously updating our models, and I don’t believe our strategy of pursuing revenue while addressing gross margin issues will significantly alter our current trajectory. If we find that we need to adjust our timeline, we will communicate that, but we are not in that position yet.

The next question is from Itay Michaeli with Citi.

Hi, everyone. Sorry if I missed it earlier; I joined a bit late. Do you have the rebuy percentage in North America for the quarter? Also, regarding the gross margin discussion, Rex, considering the land-and-expand model, is the gross margin higher on additional ports installed at a specific customer? In other words, is it beneficial for you to invest in gross margin initially when you land, and will the incremental margin increase as you expand?

Our rebuy rate remains consistently strong, with over 60% of our business coming from rebuys. This quarter, the rebuy percentage fluctuated around 63%, 67%, and 61%, but it consistently exceeds 60%. Regarding our land-and-expand strategy and the impact on margins, the speed at which customers buy can be viewed over time. Software plays a significant role in our customer relationships, which is advantageous. However, I have not observed any necessity to lower our prices and compromise on margins to acquire customers, with the goal of recovering that later. We do have some customers with multiple ports, nearing 3,000, which allows them to enjoy pricing benefits. Nevertheless, our average selling prices are holding strong, and we haven't felt pressured in competitive scenarios to adjust our pricing strategy. We consistently approach the market in this way.

I just want to remind everyone on the call one thing as well related to that answer. Our installation does not go through our book.

That is true.

Any efficiencies from the installation perspective do not affect our revenue profile as the deployment increases at a specific customer, despite the economies of scale.

If I could sneak one more in, maybe back to the ESG discussion earlier. Do you have a rough sense of like what portion of your North America commercial customers kind of give away charging sessions for free, either all the time or at least partially?

I don’t have that information readily available. The figure fluctuates a bit, but I can certainly look it up. Generally speaking, workplaces do not view their employees as a source of revenue; rather, they consider EV charging an employee benefit. The costs associated with providing charging are similar to those of offering coffee, so it doesn’t rank high among employee benefit expenses. For instance, a cafeteria would be more costly if subsidized than providing EV charging for employees. Additionally, by supporting electric vehicle use, companies are effectively reducing their employees' personal expenses. Although this statistic isn’t ours, the industry standard suggests that you are six times more likely to purchase an electric vehicle if your employer offers charging. This is a strong indicator for your consideration on the matter. In terms of retailers, they usually set prices primarily for cost recovery. If they charge at all, it’s typically to engage customers. In the future, we expect to see more integration with loyalty programs to offer charging incentives tied to sign-ups for these programs, and other sectors are likely to follow this trend. Overall, there’s a significant amount of charging activity, and it’s often used as an incentive or employee benefit.

The next question is from Matt Summerville with D.A. Davidson.

Thanks. Just two quick ones. I was wondering, especially given all the new customer additions you’ve been talking about, what trends you’ve been seeing in uptake rates for ChargePoint as a service, and how you expect that to scale from here going forward?

Sure. So, we’ve been running over the last sort of four to five quarters, it’s anywhere from 4% to 7% of our billings. It’s focused entirely on our L2 workplace product. So, we’re only just now rolling it out to other products. So, when you think about our total billings, it’s going to hover in the 4% to 6%, and we were consistent with that in Q2, so. But looking forward, we’re aggressively looking at applying that to our DC products. It’s also something that we think is going to be a meaningful component of our fleet business because fleets like when integrate they can bundle charging with financing, too. So, they’re going to...

Multifamily will be another area of growth. I believe that our shift towards providing services will expand significantly over the next few years, and it has remained consistent within the range we anticipated.

Got it. And then just as a follow-up, your cash burn rate in the quarter improved a bit sequentially. How should we be thinking about that looking out over the next couple of quarters? Maybe talk about some of the bigger pluses and minuses you would want to make us aware of.

We experienced a good alignment in Q2, generating around $44 million from warrant redemptions, which roughly matched our operational cash burn. I anticipate we will be in a cash-consuming position for the foreseeable future. It's important to remember my earlier comments about profitability still apply. Looking at our current run rate, I expect it will remain stable over the next couple of years, and we should be fine from a cash perspective for at least the next two years. However, considering earlier comments about reaching cash flow positivity, and given our acquisitions, we clearly do not have enough cash to fully cover our needs, and we will need to monitor that closely.

The next question is from James West with Evercore.

First of all, I wanted to ask about something you mentioned right up from net scale. Clearly, you’re showing the benefits of scale right now. But as you outlined, there’s a lot of tailwinds in the business, whether that’s the EV sales and of course, many new models of EVs that are coming in the next 18 months, the policy tailwinds, the infrastructure tailwinds. How do you think longer term, not near term with the supply chain and the global supply chain somewhat fits array, which we all kind of know about. But how do you think longer term about how you scale this business and what the risks are, what the opportunities are? And maybe given that your software is your base, of course, and you think of you more as a software company, maybe that’s easy and circuit software, not hard to scale, but to maybe the two buckets of software versus a system.

You're asking an essential question for any company in this field, which is how we approach the markets ahead of us and the expected increase in adoption. To illustrate our internal strategy, we focus on several key areas. First, we have a robust channel strategy that has been developed over an extended period, allowing us to effectively sell through various channels. This capability is already integrated into our margin structure, which is crucial. We also ensure that our margin structure can withstand multiple tiers of distribution and that we provide the necessary training and support for our partners to emphasize our product's unique features. Additionally, we have established support systems to manage growth effectively. Collaboration with supply chain partners is vital, especially in addressing the delivery of both software and hardware products, and we strategically partner with well-known contract manufacturers to ensure we have sufficient capacity without overextending our management resources. Lastly, while I anticipate positive growth in the industry for many years, the pace at which new vehicles are introduced into specific markets significantly influences our operations, as we are ultimately limited by the production capacity of vehicle manufacturers in this sector.

And if I could maybe ask one more on M&A, you were starting to address it earlier but then switched to a customer acquisition question, but I’m thinking about company acquisitions you made. Obviously, one recently, you got one pending. Are there technology gaps, are there holds, are there areas that you’re still looking at, are you done for now, or put it on hold as you integrate? How are you guys thinking about M&A?

We have a clear focus on this. We evaluate opportunities based on technological gaps and customer base, which is likely the most important factor as it could allow us to reach a wider customer base through acquisition. We also consider whether the team and culture of the target company aligns well with ours. Successful integration is crucial, and having a shared vision for the market with the acquired company is essential. Specifically, we pay attention to how, even though our offerings are comprehensive, there are additional areas we can develop or acquire to enhance our offerings. This could help us sell more high-margin software to both existing and new customers. That's our approach. We are very careful in our evaluations and that's the perspective we have on it.

I will now pass the conference back to the management team for additional remarks.

Thank you for your thoughtful questions and for your time. I want to share something I've recently conveyed to our employees during town halls. The past six months have been remarkable for our company. We went public and this is our third earnings call since the transaction was completed. We've announced two acquisitions and closed one. We also launched an equity offering for selling shareholders and navigated the impacts of COVID on our supply chain, all while exceeding our performance forecasts. Overall, it has been an exhilarating start for us, and we take great pride in our achievements. I'm extremely proud of the team at ChargePoint, who have worked diligently to bring us to this point. We are optimistic about our future positioning and will remain focused on our growth without rushing ahead. We are very excited about what lies ahead and look forward to our next call in three months. Thank you.

That concludes the ChargePoint second quarter fiscal 2022 earnings conference call and webcast. Enjoy the rest of your day. Goodbye.