Earnings Call Transcript - EVGO Q4 2021

Operator, Operator

Greetings. Welcome to the EVgo Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Ted Brooks of Investor Relations. You may begin.

Ted Brooks, Head of Investor Relations

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

Cathy Zoi, CEO

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

Olga Shevorenkova, CFO

Thanks, Cathy. I will start with some key operational highlights and a review of our financial performance in the fourth quarter and full year 2021. As Cathy noted, network throughput of 26.4 gigawatt hours exhibited material growth in 2021 with a 68% year-over-year increase and a 95% increase in the fourth quarter of 2021 versus the fourth quarter of 2020. Throughput for the year exceeded our guidance range of 24 to 26 gigawatt hours provided during our third quarter earnings call. Our active engineering and construction development pipeline exhibited big gains during the year, ending 2021 with over 3,100 stalls. Our active engineering and construction development pipeline was at 2,500 at the end of the third quarter, exhibiting a 26% quarter-over-quarter sequential increase. We ended 2021 with 340,000 customer accounts on our network, which represents 47% growth year-over-year. Overall, over 109,000 customer accounts were added to EVgo’s network in 2021, which represented roughly 80% of non-Tesla EV sales. We also continue to attract Tesla drivers. Our data suggests the Tesla drivers continued to comprise about 16% of our new customer accounts, and that Tesla drivers presented approximately 6% of total EVgo retail charging throughput at the end of 2021. Revenue in the fourth quarter of 2021 increased 70% versus the fourth quarter of last year, and 15% quarter-over-quarter sequentially, as the combination of EV adoption and EVgo’s business development efforts drove high activity in both retail and fleet segments. Adjusted gross margin hit new highs of 28% during the fourth quarter due to high usage and growth in high-margin data-driven ancillary services business lines. Turning now to the full year results. Revenue increased 52% year-over-year to $22.2 million, above the upper end of our guidance range of $20 million to $22 million provided during the third quarter earnings call. This was primarily driven by an 88% increase in retail charging revenue year-over-year and an 84% increase in ancillary revenue including the addition of Recargo revenue. Adjusted gross margin for the full year increased from 3% in 2020 to 23% in 2021, as we continue to scale the business driven by greater contribution from high-margin data-driven ancillary revenues like Recargo and network throughput growth that allowed us to exercise operational leverage. Finally, adjusted EBITDA was negative $51.4 million for the year, which was ahead of our guidance of negative $54 million to $58 million as revenue was stronger and G&A expenses grew at a slower rate than anticipated. Now to stall deployments for the full year. We finished 2021 with 1,676 operational stalls and 1,903 stalls, either operational or under construction. Both of these figures were in line with our guidance provided on the third quarter call. I would like to spend a few minutes talking about EVgo’s business model and key profitability drivers. The EVgo business model centers on deploying charging infrastructure that generates double-digit unlevered pretax IRRs. I would like to walk you through our deployment criteria and station economics. EVgo employs both short-term and long-term demand models to determine expected usage for every project we develop. Our short-term model, which predicts demand down to the census block or about one-tenth the size of a ZIP Code, has been highly accurate in its predictive capabilities. Our longer-term model overlays the short-term forecast against adoption trends in the marketplace for EVs and fast charging. For every project we underwrite, we develop a financial model using this utilization forecast, revenue per kilowatt hour evolution, regulatory credit pricing evolution, if applicable, non-energy costs, and energy costs for the existing tariffs. Note, we do not assume improvements in those energy costs unless new tariffs have been approved by utilities. I would like to highlight that modeled non-energy costs for every project are quite an accomplishment and include maintenance, warranties, rents, property taxes, connectivity charges, call center costs, payment fees, and the portion of asset management and customer operations team salary. CapEx estimates are provided by EVgo’s engineering team based on contracts with vendors and specific project design. Estimates only include CapEx funding support such as governmental grants or OEM offsets, if it is available to us at this specific location. Finally, we continue to model no residual value in our underwriting process, practicing a review of suitable conservativism but also likely presenting upside opportunity for us as the market develops. With respect to expectations in operation, we continue to evaluate network financial performance on a cash flow basis by market, which is calculated as charging and regulatory credits revenue minus energy and non-energy costs using the same cost categories as those we use during the underwriting process. California is the most advanced EV market in the U.S. It has attractive electricity costs, LCFS and FCI credit revenue opportunities, favorable fleet dynamics, and the highest EV penetration rate in the country. EVgo’s California charging network generates positive cash flows today. As an illustrative case study, I would like to highlight the specific performance of the San Francisco metro market within California. The San Francisco EV adoption rate is about 3%, among the highest in the United States. At the year-end 2021, EVgo operated 292 stalls in the area, resulting in an 8.4% utilization rate, generating 1.9 million kilowatt hours of throughput in the fourth quarter of 2021. The San Francisco charging network generates a 43% cash flow margin for EVgo driven by solid utilization levels and an attractive energy cost environment, LCFS add-ons, and dedicated fleet stalls take-or-pay contracts. These margins and cash flow generation ability will increase with further EV adoption. San Francisco is far from the only metro market demonstrating such results. Other metro areas in California, such as Los Angeles, show similar results, and we’ve seen comparable profitability trends in markets outside of California as well. I can call attention to Portland, Oregon, and Phoenix, Arizona as two more examples of metro markets where EVgo portfolios are generating positive cash flows. This is in markets that have lower EV penetration than California and do not have the advantage of meaningful regulatory credit risk. The rising side of EV adoption continues to improve performance in this market and many others across the country. It is a rigorous investment process and site selection bearing fruit across a number of key markets today, even when EV penetration remains very low, about 0.5% nationally, which demonstrates the strength of our business model and the attractive upside potential. EVgo’s overall path to profitability is closely tied to EV adoption. We would like to illustrate what could happen to EVgo revenue and EBITDA generation and how EVgo is positioned to profitably scale when EV adoption increases from 0.5% today to 5%, 10%, and 15% in the future, noting this estimate still represents EV markets in its infancy. At 5% EV adoption, we estimate EVgo revenue of between $1.9 billion and $2.1 billion with corresponding adjusted EBITDA of $600 million to $800 million, representing a 30% to 35% margin. As EV adoption increases to 10%, we expect revenue to reach $3.2 billion to $3.4 billion with adjusted EBITDA of $1.1 billion to $1.3 billion, representing adjusted EBITDA margins of 35% to 40%. At 15%, we estimate revenue of between $4.8 billion and $5 billion with adjusted EBITDA of $1.7 billion to $2 billion with 35% to 40% margin. EBITDA margin improvements are expected to be achieved by operational and SG&A leverage. EVgo expects to be profitable on an adjusted EBITDA basis at roughly 2.5% of the adoption rate; from there, the upsides come out. In the near-term, we’re introducing 2022 guidance based on our current expectations for the full year. There are a number of factors that will impact our results. However, the most salient of which is EV adoption. Supply chain and other global economic and political challenges may present a short-term obstacle for OEMs in getting new models on the road. At the same time, we will continue to strategically invest in the massive mid-term and long-term growth trends. As we invest, we will prioritize profitable growth with a focus on expanding margins over time. For the full year 2022, we expect to deliver network throughput of 50 to 60 gigawatt hours, revenue of $48 million to $55 million, adjusted EBITDA of negative $75 million to negative $85 million, and total DC fast charging stalls in operation or under construction at year-end 2022 more than doubling the comparable figures to 2021 results. The drivers for adjusted EBITDA reflect increased investments in technology and personnel to respond to expanding market opportunities and encapsulate our expectations for LCFS pricing and public company expenses. Finally, total stalls in operation or under construction reflect the advancements we’re making in the size of the pipeline and the success in reducing the time in development, both of which are driven in part by the technology and personnel investments I just referenced. We’re hearing a lot of progress and enthusiasm in the business with a number of strategic commercial partnerships in various stages of development. We believe that EVgo has substantial growth runway over the next decade and beyond. Assuming electric vehicles in operation grow at a 35% to 40% nine-year CAGR as many forecasts agree on, we expect an 80% to 85% CAGR for network throughput, 70% to 75% CAGR for revenue, and 40% to 45% CAGR for DC charge installs. Given the strong tailwinds and significant industry momentum we see, we believe that EVgo is well positioned to capitalize on it. Thank you for your time this morning. I would like to turn it over to the operator for questions.

Operator, Operator

And our first question comes from Gabe Daoud with Cowen. Please proceed with your question.

Gabe Daoud, Analyst

Good morning, everyone. Thanks, Cathy and Olga for the prepared remarks. Super helpful. Can we maybe start with slides 17 and 18. Olga, give us a little more detail on what you are thinking in the long-term, the operating leverage here, what kind of underpins some of these assumptions, if you could just talk to utilization or stalls in the ground, that would be helpful. And then also, to what extent do LCFS credits play into slide 17, like what percentage of that San Francisco cash flow comes from LCFS credits?

Olga Shevorenkova, CFO

Hi, Gabe. Thanks for your question. Just to clarify, page 17 presents an actual number, so there are no assumptions involved. LCFS is certainly an important component of our cash flow. However, even without LCFS cash flow from San Francisco, we still see a positive cash flow margin. While I can't disclose the exact figure, I can assure you that it remains positive in the San Francisco market. So, what drives the performance of this market today? Firstly, the attractive energy costs and the favorable tariffs contribute, which you can see reflected in the cash flow margin. We have a significant number of dedicated fleet take-or-pay contracts that are included in this number. The key factor is that San Francisco has one of the highest EV adoption rates in the country at 3%, leading to a respectable utilization rate of 8.5%. We consider this a decent utilization rate for now, given the current adoption level. While we believe that "decent" will evolve over time, for today's standards, it's quite good. Regarding page 18, there are other assumptions in play this year. One of the questions you had was about the stalls. Our overall target remains unchanged; we aim for 16,000 stalls by 2027, which is what we account for in this forecast. We may not disclose the exact percentage, whether it's 5%, 10%, or 16%, but when we prepare our forecasts, we ensure that our CAPEX investments and the amount of software deployed to support EBITDA and revenue generation are sensible and conservatively budgeted.

Cathy Zoi, CEO

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

Gabe Daoud, Analyst

Just a follow-up, I guess, just on this new business line, Cathy, eXtend. Could you talk a little bit about the economics there, and are any stalls that are in queue for this year under this business model? Just how do we think about balancing that long-term potential that you highlighted on slide 18 versus the eXtend business model?

Cathy Zoi, CEO

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

Operator, Operator

Our next question comes from Maheep Mandloi with Credit Suisse.

Maheep Mandloi, Analyst

Olga, maybe a question for you, if you could just kind of break down the guidance for us? We understand the revenue guidance missed a little; that was driven by the rideshare recovery slightly weak as expected. But if you could just talk about like the gross margin and operating expenses? Are you seeing any changes versus what the expectations were going into the year previously? Especially trying to understand the impact of any rising electric bills later this year due to higher energy prices? And secondly, I just wanted to touch base on EV charging hardware availability; some of your peers have been talking about delays on that. So, any color on that would be appreciated. Thanks.

Olga Shevorenkova, CFO

On energy cost, just to remind everybody that we are not chasing wholesale power, and we are not exposed to short-term volatilities in power; we’re seeing customer utility. So, on a short-term horizon, we know exactly what our energy costs will be. Now, obviously the market environment is such that power prices are rising, then utilities will probably start passing them on. But we’ll know in advance, and that doesn’t happen overnight. We don’t perceive that we as EVgo will feel the effect of rising energy costs in 2022. On the gross margin, we expect it to remain stable or improve alongside throughput growth. So, our gross margin reflects leveraging fixed operational costs. That’s why you saw it improving and in addition, growth in our high-margin, data-driven ancillary services. So, both of those trends are expected to continue to be favorable next year. We’re not guiding for gross margin, so I won’t disclose specific expectations, but that’s some perspective I can give you. And then on hardware, we’re obviously no exception to anybody else; we’re extremely focused on securing hardware supply and managing our supply chain. As of now, all of our vendors have expressed confidence that they would be able to deliver the equipment we need this year at the pre-agreed price. We have certain contractual agreements that give us quite a decent confidence that that will be the case. And I emphasized it in our conversations before and I’ll emphasize again, our main concern regarding supply chain for this year is the ability for OEMs to manufacture, access to various raw materials and components to get cars on American roads; that’s where our main concern is centered. More EVs lead to more throughput, which in turn leads to more revenue for us.

Operator, Operator

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

Craig Irwin, Analyst

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

Cathy Zoi, CEO

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

Craig Irwin, Analyst

And then just as a follow-up, siting of chargers can often be challenging for local site capacity for electricity, right? So, a lot of conversation out there about co-implementing this with batteries, potentially storage. Can you update us on where you stand on this strategy in the next couple of years, or is the format that you are using now your format of choice, which you expect to pursue?

Cathy Zoi, CEO

We have probably a dozen stations in California that have onsite batteries that we put in years ago, and that was again a good economic decision to avoid punitive demand charges. We are quite open to it, frankly, wherever it will pencil economically and makes good sense. And in some cases, the utilities will be excited about it. If utilities modernize and go to more distributed energy sources and two-way power flows, I think there’s going to be more interest in that. The very practical question for us is, does the location have the footprint to have onsite storage? We are pretty excited about some of our larger projects under development, namely mega hubs, giga hubs, charging hubs, where there will be some room in a parking lot or in a location for onsite storage. But again, it all has to pencil for us. Our financial discipline is unwavering; it needs to meet our double-digit return expectations. So, if it makes financial sense, we are open to it. We’ve got a team that knows how to do it, and it’s a possibility for the future.

Operator, Operator

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

Ryan Greenwald, Analyst

Hey. Good morning, everyone. Perhaps starting with ‘22 guidance. Can you just help reconcile a bit in terms of the throughput being down 20% and significant price inflation, the LCFS credits, with a more modest 5% decrease in revenue? Obviously, you have the full year of contribution from Recargo, but can you just talk a bit about other key offsets there?

Olga Shevorenkova, CFO

Sure. So, first and foremost, on the network throughput, we haven't provided the formal guidance before, just to clarify. But from my understanding, whether you referenced in a stock deck or your own forecast. The delta here is the way in the rideshare recovery. We can see - and the good news is that we have started to observe the rebound of rideshare in general as an industry. What we are seeing is that there aren't enough cars for all the rideshare operators to electrify their fleets, which is causing delays. That’s a fact of the post-COVID turnover and supply chain challenges. So, that’s the main driver of why the network throughput is probably below everybody's expectations. On the revenue side, you’re absolutely right; LCFS is below what we all saw even a few months ago, and that is baked into the forecast, but we are observing the situation, as it is dynamic. Some of the offsets are our take-or-pay fleet contracts, which we see a strong pipeline on and we’re making certain assumptions on when those projects will hit operations. Those are independent of throughput. Just to remind everybody, take-or-pay fleet dedicated contracts involve fixed amounts of dollars paid, independent of the throughput. We have a strong view on that for this year. We didn’t include a full effect of that here because most of what’s being baked in will manifest itself in 2023 and beyond, but there are certain modest inclusions for the second half of the year, where we might see those effects, and they have been included here.

Ryan Greenwald, Analyst

Great. Thank you. And what is the embedded LCFS credit pricing assumption that you guys are assuming now in ‘22? And how are you thinking about primary cash flow and collection, if these levels are sustained?

Olga Shevorenkova, CFO

So we are set for the full year.

Ryan Greenwald, Analyst

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

Olga Shevorenkova, CFO

I’m not sure I fully understand your question about cash flow inflection.

Ryan Greenwald, Analyst

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

Olga Shevorenkova, CFO

We wouldn't provide that guidance, but I’d like to reiterate some of the messages I was given in a script. We expect to be adjusted EBITDA positive when EV adoption reaches around 2.5%, which is currently at 0.5%. Our business is closely linked to EV adoption levels. If we reach that 2.5% earlier, then we'll be EBITDA positive sooner; if later, then it will be later. That's our perspective on the business, but we haven’t provided specific yearly guidance for that.

Operator, Operator

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

Vikram Bagri, Analyst

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

Olga Shevorenkova, CFO

For the first one, we do expect utilization to go up over time. Let me go back to the basics. The utilization of DC charging infrastructure is driven not only by EV to stall ratio but also by NUD density and what percentage of charging needs of this specific population is met by DC. So, it’s going to be very different in San Francisco versus Santa Monica, and versus areas in the country where people live in single homes. That leads to different initial conditions out of the gate. For the utilization, we expect that utilization for the network in five to six years will be around 18%. That’s our best guess as of now and how we run our models. We think it’s conservative, but we expect utilization to go up over time for the network. Regarding the second question about Tesla, we are ramping up Tesla connectors, and we are ramping them up throughout 2022. That’s the very beginning of Tesla usage on our networks. It’s 6% of total retail unites across the country. We have geographies where it’s much higher going to double-digit percentages, and the ratio gets reversed. That usage is very dependent on availability. In geographies where the ratio of Tesla EVs to Tesla’s superchargers is skewed and there is not enough infrastructure, we see very high usage of Tesla on our network. Where it’s reversed and there’s abundant infrastructure, we don’t see high percentages because Tesla drivers will naturally use a Tesla supercharger first. But that’s okay; that’s what we planned for. The 6% number is very early innings and, as I also mentioned in my script, 16% of our new customers are Tesla users, which shows the growth potential. We’re quite happy about these results; it's good news. Regarding electricity pricing, we’re not in the business of determining retail prices as a pure spread. Not every increase of tariff will automatically pass on to consumers; we look at it from a network perspective. Certain places do see indexation or inflation or tariff adjustments up. In other places, we access better tariffs and energy costs. Increased utilization and throughput lead to amortization of demand charges, which translates to lower energy costs per kilowatt. We evaluate the complete network, or market-by-market, to see if that still makes sense if economics still work.

Cathy Zoi, CEO

Yes, Vikram, part of what you see in California is that we introduced first, we went to kilowatt-hour pricing from per-minute pricing. Second, we introduced time-of-use pricing at the behest of the utilities and the California Public Utility Commission. We have been observing different consumer responses regarding cheaper early bird pricing and higher on-peak pricing. We have a software backbone that allows us to do customized pricing based on location; we also have location-based pricing. Our pricing is not inextricably linked to electricity cost. There are multiple attributes that we use to determine the pricing that delivers value to drivers and maximizes income for us.

Operator, Operator

And our next question comes from the line of Bill Peterson with JP Morgan. Please proceed with your question.

Unidentified Analyst, Analyst

Hi. This is calling in for Bill. Thank you for taking our questions. Have you experienced any effects from permitting delays? If so, have these been mostly in specific regions? Also, could you provide the latest timeline from order to operational, specifically from site selection to installation?

Cathy Zoi, CEO

Yes. You know, I love this question. This is like my favorite topic: creating the flywheel so that we can deploy more fast chargers more quickly. Our pipeline continues to grow, and site hosts continue to be really excited about having charging infrastructure on their parking lot. It still takes us 4 to 8 weeks to actually start digging and get the station built. What we are seeing is, last year I talked about going from 18 months on average, down to 6 months. We are still nowhere close to 6 months; that’s still my dream. However, as we go into new jurisdictions, it is often the first time a local government has had to approve a charging station. The variability around that timing can be as short as one week and as long as 12 months for local government permitting. Similarly, with utilities approving designs and getting easements with the landlord, it can be as quick as 4 or 6 weeks and as long as 12 months. And then, the final energization process that utilities must perform for inspection can take anywhere from the next day to about 6 to 8 weeks. We had a whole bunch of stalls done at the end of 2021 that were completely ready for drivers, but we were still waiting for utilities to complete the final inspections. We’re working on connecting the watts to push on, like to continue to share best practices. The more activity in the sector, the quicker we assume it’ll go; it's like the early days of solar. We are making progress, but I can’t give you a number because variability is still present; some jurisdictions move quickly, while others are much slower. Hope that helps.

Operator, Operator

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

Andres Sheppard, Analyst

Maybe to quickly follow up from the last question there. Are you able to give us any sort of breakdown in terms of how quickly you can convert those over 3,000 stalls that are in the pipeline into operational, and maybe in addition to that, any plans of expanding abroad? I know some of your peers have been increasing their footprint in Europe, for example. So, I’m just wondering if that’s something that’s being considered?

Cathy Zoi, CEO

On the timing, I think that what we’re now doing is counting on at least 12 months from idea to energization, right? Not wishing for six months or counting on 12 months, and we’re working really hard on that. The 3,000 to 3,300 stalls are going to get energized. Some jobs will take longer, and some will be quicker. But generally speaking, those are going to be sites that were in planning for a while; they are going to go ahead. We’re also building the pipeline for even bigger numbers for ‘23, ‘24, and ‘25, right? That’s what our site host development team is working on. We’ll be delighted if it starts to go faster. With respect to overseas planning, we have our hands full; we’re actively doing all kinds of things in the United States. With that said, we’ll be opportunistic. If there’s an opportunity to extend our expertise, skills, and returns by growing the business overseas, we wouldn’t be close to that, but it’s not something that we’re actively pursuing at this point.

Operator, Operator

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