Earnings Call Transcript
EVgo Inc. (EVGO)
Earnings Call Transcript - EVGO Q1 2024
Operator, Operator
Thank you for joining us for the EVgo First Quarter 2024 Earnings Conference Call. I will now hand the call over to Heather Davis, Vice President of Investor Relations. Please go ahead.
Heather Davis, Vice President of Investor Relations
Good morning, and welcome to EVgo's first quarter 2024 earnings call. My name is Heather Davis, and I'm the Vice President of Investor Relations at EVgo. Joining me on today's call are Badar Khan, EVgo's Chief Executive Officer; and Olga Shevorenkova, EVgo's Chief Financial Officer. Today, we will be discussing EVgo's first quarter financial results and our outlook for 2024, followed by a Q&A session. Today's call is being webcast and can be accessed on the Investors section of our website at investors.evgo.com. The call will be archived and available there along with the company's earnings release and investor presentation after the conclusion of this call. During the call, management will be making forward-looking statements that are subject to risks and uncertainties, including expectations about future performance. Factors that could cause actual results to differ materially from our expectations are detailed in our SEC filings, including in the Risk Factors section of our most recent annual report on Form 10-K. The company's SEC filings are available on the Investors section of our website. These forward-looking statements apply as of today and we undertake no obligation to update these statements after the call. Also, please note that we will be referring to certain non-GAAP financial measures on this call. Information about these non-GAAP measures, including a reconciliation to the corresponding GAAP measures, can be found in the earnings materials available on the Investors section of our website. With that, I'll turn the call over to Badar Khan, EVgo's CEO.
Badar Khan, CEO
Good morning, everyone, and thank you for joining us today. Before I begin the call, I'd like to take a moment to congratulate and thank Olga. In addition to our first quarter financial results, today, we also announce that Olga will be departing the company at the end of the month to pursue a different opportunity with a private company. Olga has been a trusted and valued partner to me since I joined EVgo and has been critical in driving the success of the company since she joined EVgo as a private company 6 years ago. On behalf of the entire EVgo family, we wish her well in her future endeavors. Many of you know Stephanie Lee, our EVP of Accounting and Finance, who will serve as Interim CFO from the time of Olga's departure until a permanent successor is on board. We are well underway with the search process and look forward to updating you when we have news to share. I will now turn to our results for the quarter. EVgo posted yet another excellent quarter, more than doubling revenue and nearly tripling throughput year-on-year. Non-Tesla electric vehicle sales grew 29% year-over-year, demonstrating continued demand for EVs. With the level of utilization we continue to see in our network, we not only have a clear path to EBITDA breakeven in 2025, but with the operating leverage in the business, we expect we could have annual adjusted EBITDA of $200 million in 3 to 5 years' time, representing a very compelling investment. I'm excited to share our results from Q1 with you today as well as talk about our key priorities over the next year or so. Let me also take a moment to address the change in our competitive landscape. Tesla's decision to halt further growth of charging stations was designed to allow them to focus on their automotive business, and particularly more affordable vehicles, and this will be positive for EV adoption. We know from experience both here in the U.S. as well as in other countries that affordability is a key driver of mass adoption. Companies like EVgo are now adding public charging stations at a pace that didn't exist when Tesla began their Supercharger business. In fact, I expect the market will be more interested in participating in this space in this new competitive context, allowing companies like EVgo to plug the gap left behind and accelerate their charging station growth. We added over 900 stations last year, most of which were state-of-the-art, ultra-fast 350-kilowatt stations, faster than Tesla's 250-kilowatt Supercharger network. We're excited to be able to add NACS connectors to our chargers later this year and welcome more drivers to our network as well as help site hosts that have been far along in the process of adding new DC fast charging stations and, of course, offer employment to as many talented employees as we can. As we've discussed in our last 2 calls, we see very strong unit economics in our business and expect to see that continue for the foreseeable future as EV demand exceeds the supply of charging stations. Now, turning back to our earnings this past quarter. We had a great first quarter of 2024 with throughput nearly tripling year-over-year. And while revenues grew just over two-fold, revenues from our owned and operated charging network grew faster. We grew our operational stores by 38% and are on track to add 800 to 900 new owned and operated stores this year. Customer accounts continue to grow faster than VIO growth in the first quarter. And we were just under $1 million at the end of the quarter. We continue to see clear evidence of operating leverage that we've talked about in detail in our last 2 calls with both expanding adjusted gross margins, especially in our owned and operated business and in adjusted G&A translating into strong bottom line improvement year-over-year. EVgo's model is unique in that we own and operate DC fast charging stations where customers are going about their lives. Our growing network of over 1,000 locations is within a 10-mile drive for over 145 million Americans. And we have a network plan and strategic site hosts that allow EVgo to continue our rapid expansion, serving more EV drivers. Demand for EVs, especially among non-Tesla brands, remained strong this quarter, with new BEV sales up almost 30% year-over-year. This past quarter we saw especially strong sales growth from Ford, Rivian, Hyundai, and Kia. More affordable EV models are coming, supporting the growth of DC fast charging as these models tend to attract a higher share of customers without access to home charging. It's also worth remembering that the number of BEVs sold this quarter is roughly equal to what was sold in all of 2020. Although non-Tesla vehicles account for the vast majority of our network throughput today, we expect to start adding NACS connectors to our chargers later this year. And given our locations tend to be closer to where EV drivers live and go about their daily lives and our network is increasingly ultra-fast 350-kilowatt chargers versus Tesla's 250-kilowatt superchargers. And we offer convenient customer features like Autocharge+. We look forward to welcoming more Tesla vehicles onto our network. As we discussed in our financial webinar a few weeks ago, because of our proprietary network planning resulting in carefully selected site locations and conservative underwriting process, we have very compelling unit economics. We reached a level of scale in kilowatt hours per store that enabled us to generate positive annual cash flows on a per store basis by the end of last year. And in Q4 2023, the top 15% of our stores were generating over $30,000 per store on an annual basis. As a reminder, throughput is the product of charge rate and utilization multiplied by 24 hours. Charge rate is the speed with which EVs take energy into the car and utilization is the percentage of time an individual store has been utilized. Over the past 2 years, we have seen very strong increases in both utilization and charge rate, resulting in near quadrupling in daily throughput per store. In 3 to 5 years' time, we expect to have around 7,000 stores. And at that point, we would expect cash flow per store across the whole network to be around $37,500 per store annually, driven mostly by increased charge rates and a conservative utilization assumption and the level of throughput per store already achieved by the leading edge of our network today. This level of annual cash flow provides a very strong return when considering we're expecting around $96,000 net CapEx per store for 2024 vintage stores. And that's before any CapEx reductions we would expect to see over time, some of which I will talk about later on this call. As we've described in our prior 2 calls, EVgo has significant operating leverage, where around 40% of our cost of sales and charging network gross margin is fixed per store. And around 70% of adjusted G&A is fixed. Across our existing site host partners, we've identified approximately 10,000 stores that currently pencil to our double-digit return expectations. But we've assumed here that we will continue store growth at the 800 to 900 new stores per year that we're currently growing at. We're making good progress in securing financing that allows us to grow at least at that rate, which I'll cover later. Taking the estimates from the prior slide and assuming 7,000 stores, our owned and operated network would generate significant contribution dollars that fall straight to the bottom line once fixed G&A costs have been covered. And taking those same estimates, we expect that roughly $70 million of fixed costs to be covered by full year 2025. And therefore, at the scale of 7,000 stores in 3 to 5 years' time, the company will be generating around $200 million in adjusted EBITDA annually with very significant continued growth beyond that. Of course, this is prior to the contribution of any extended or Ancillary and Tech-Enabled services. Not only does our business benefit from such strong operating leverage, but we also benefit from a significant tailwind in the form of rising charge rates. As we have said before, the charge rate on our network is a function of the speed that batteries can be charged and the average power rating of EVgo chargers on our network. Both are rising. Vehicles sold today have significantly higher charge rates than the average charge rates of all BEVs on the roads, which will include many older vehicles with lower charge rates. In fact, over 80% of all BEVs sold today have charge rates over 50 kilowatt and over 50% are over 90 kilowatts. We conservatively assume battery electric vehicles are sold using the 2023 sales mix with no improvements to either vehicle mix or battery technology and that represents roughly 70% of the assumed increase in charge rate from 43 to 80 kilowatts across our network in 3 to 5 years' time. EVgo continues to add mostly 350-kilowatt chargers to our network. And today, nearly 40% of our network is 350 kilowatts versus 22% a year ago. Therefore, the average mix of our charger network also increases over time and contributes the other 30% of the assumed growth in network charge rate. The combination of the 2 means charge rates are expected to improve significantly benefiting the company. High charge rates mean the same kilowatt hours can be dispensed over much less time, meaning we realize the same return with lower utilization. Our charge rates drive 3 sources of upside that we are not assuming. First, higher charge rates could drive up EV adoption because customers favor faster charging times. Higher EV adoption drives up utilization. Second, higher charge rates could actually drive up the share of DC fast charging, because customers are able to charge their cars for the same number of miles much faster, leading customers to become more confident in on-the-go public charging and less concerned with charging at home. Therefore, higher charge rates could lead to higher utilization and thus even higher returns per store. If we have the same utilization in 3 to 5 years' time as the top 15% of our stores today with 80 kilowatt charge rates, we would double the cash flow per store to over $75,000 annually. And third, higher charge rates translate into much improved CapEx efficiency because it allows a smaller number of chargers for the same kilowatt hours dispensed. Again, we have not assumed any of these upsides or any improvements in battery technology nor improvements to the mix of new vehicle sales in our expected economics in 3 to 5 years' time. Let's now turn to our 4 key priorities over the next year or so. First, and as you've heard a lot on prior earnings calls, we remain focused on improving the customer experience. Second, an area we will discuss further in future calls are the steps we are taking to improve efficiency in the business above and beyond the operating leverage we've talked about on the past 2 calls. Third, another area we will discuss more in future calls are the initiatives we are now putting in place to ensure we are attracting and retaining a greater number of higher-value customers on our network. And finally, we will provide a little more detail on progress on securing financing to get to free cash flow breakeven. On customer experience, we know that there are 4 things that customers value the most: First, having lots of stores at a site so they never have to wait for charge; second, having high power chargers available so they can fuel up quickly; third, having a reliable solution that works right on the first try; and fourth, a hassle-free payment process where customers just plug the connector in and the payment is processed automatically. Over the past quarter, we made progress on each of these key metrics. We continue to deploy mostly 6 stores per site. And so the percentage of sites with 6 stores or more continues to rise. And we're aiming for around 20% by the end of this year. We're mostly also only deploying 350 kilowatt chargers now. And so the percentage of stores with 350-kilowatt chargers has nearly doubled year-over-year, and we expect that to be close to 50% by the end of this year. One & Done also continues to rise. And we expect another step-up in performance in Q4 when we release a key software update. And finally, the percentage of sessions initiated with Autocharge+ has also increased significantly. And now that more than 50 models are part of this program, we expect to see continued growth in this metric during 2024. We believe the benefit of these improvements will ultimately result in customers gaining further confidence in public charging, driving up utilization and throughput on our network. As EVgo continues to scale rapidly, we have begun to turn our attention to identifying and delivering efficiencies, not just in operating costs, but also in the capital costs of the chargers. In November last year, we began prefabrication of stations, which is expected to result in an average of 15% reduction in the construction cost of a station at eligible sites and also to reduce station installation timelines by as much as 50%. We expect over 1/3 of stores operationalized in 2025 to benefit from this approach and we continue to grow this over time. Our core owned and operated business has very compelling unit economics and enormous growth potential. In January of this year, we streamlined and refocused certain teams to support near-term growth efforts in this core area. This strategy is already beginning to show in our financial results. In addition, over the course of this year, we've been implementing multiple upgrades to our ChargePoint management system, including releases that allow for predictive maintenance and automated diagnostics capabilities that will directly lead to fewer truck rolls, fewer customer calls, and faster customer issue resolution. Call center costs are a sizable portion of our sustaining G&A and are expected to decline this year as we complete the offshoring of around 90% of our core volume, which is anticipated in Q3 this year. The combination of all these efforts is expected to lower our sustaining G&A per store run rate by around 15% by the end of this year. On the CapEx side, in addition to the prefab aluminum skids for station construction we began last year, we're implementing a series of incremental improvements, including a transition from copper to aluminum conductors, multi-sourcing switchgear, and various other EPC improvements that collectively aim to deliver around a 10% reduction in operationalized charger cost per store for 2025 vintage stores. We're also engaged in exploring a joint development of the next-generation charging architecture with an industry-leading partner that aims to lower CapEx per store by as much as 30% and a step change in customer experience due to a customer-focused design and improved firmware, with first deployments expected in the second half of 2026. This level of improvement in CapEx per store could improve our IRRs by at least 7 percentage points. EVgo has had success in growing our recurring customer base through B2B relationships like our OEM charging credit programs as well as our rideshare programs. And together with our subscription plans, these programs account for over half of our throughput today. In other words, over half of our throughput comes from higher usage, relatively predictable customer segments that represent stickier kilowatt hours. We reached almost 1 million customer accounts at the end of the quarter, a significant milestone for EVgo, underscoring the quality of the EVgo network. We believe our scale and position among customers is a competitive advantage that allows us to target and attract more higher-value retail customers as well as increase the value of existing customer relationships. To that end, we hired a new EVP of Growth, Scott Levitan, earlier this year, who brings a wealth of experience and a track record in exactly these activities from companies like Google, Mercari, and Philips Electronics. We started executing segment-specific marketing campaigns using low-cost methods to identify, attract, and retain customers who are most likely to be attracted by our convenient charging network close to where they live, work, and go about their lives. We've also begun piloting new automated demand-based dynamic pricing that is now live across a portion of the network with a phased expansion planned during the course of this year. And in Q2 this year, these efforts will be significantly enhanced when we expect to go live with a modernized customer data platform. All of these efforts are expected to not just ensure we continue to grow our customer base at a faster pace than VIO growth but also increase the throughput and average unit margins per customer. Our remaining key priority in the near term is to secure additional funding that allows us to reach a level of scale where we are self-financing, but also accelerates the rate of new stores operationalized per year from the 800 to 900 we are expecting to add this year. We plan to build with a track record already established with successful grant collections in prior years, a successful partnership with GM and the follow-on offering we completed in May last year. We continue to have substantial additional capacity under the ATM program we launched in November 2022, and we believe we're also making progress in pursuing non-dilutive financing options. As we've discussed, we expect around 40% of 2024 vintage CapEx to be offset from grants, OEM payments, and incentives, including executing our first 30C transaction over the next few months. That provides us with sufficient capital to continue our CapEx plans well into 2025. We continue to be pleased with the dialogue we're engaged in with the DOE loan program office for a loan under the Title-17 Clean Energy Financing Program. We believe we have a high-quality loan application that addresses the need for more public charging infrastructure built out at scale across the U.S. While we have not disclosed the quantum of loan we are seeking, I can advise that if we are successful, we believe it will be sufficient to not only expedite our journey to self-financing but also meaningfully accelerate the annual rate of store growth. Given the unit economics we've disclosed, we are now also concurrently engaged in multiple potential options for further commercial non-dilutive financing that could be contemplated alongside the DOE loan. Indeed, spurring commercial bank financing for new asset classes is an intended goal of the DOE loan program office. I'll now hand over the call to Olga, who will run through our strong financial performance for the first quarter of this year.
Olga Shevorenkova, CFO
Thank you, Badar. Before I dive into EVgo's first quarter 2024 financial results, I wanted to express gratitude for having had an opportunity to serve as EVgo's Chief Financial Officer. Being part of the team, focused on growing EVgo over the past 6 years and working closely with our investors and analysts has been a pleasure and a remarkable journey. I am proud of all we have accomplished and excited about the path forward. We have a well-planned transition in place, as Badar mentioned, and the deep bench of talent in the finance organization that will ensure a smooth handoff. With that said, I will now discuss our first quarter results. EVgo started 2024 delivering another strong quarter of growth and execution. Revenue in the first quarter was $55.2 million, which represents a 118% year-over-year increase. This growth was primarily driven by increased charging revenues. Retail charging revenues of $18.3 million grew from $6.6 million in the first quarter of 2023, exhibiting a 177% year-over-year increase. Commercial charging revenues, which primarily includes revenue from our rideshare partnerships of $5.8 million increased from $1.7 million in the first quarter of 2023, exhibiting a 240% year-over-year increase. And eXtend revenue of $19.2 million grew from $10.3 million in the first quarter of 2023, increasing 86% year-over-year. We added 250 new operational stores in Q1, including eXtend. Total stores in operation were approximately 3,240 at the end of March 2024, including 130 EVgo eXtend stores, increasing 38% from the end of March 2023. During the first quarter of 2024, EVgo added 109,000 new customer accounts, which shows a 63% increase versus 67,000 customer accounts added in Q1 2023. EVgo ended the quarter with more than 981,000 customer accounts, a 60% increase over the end of Q1 2023. EVgo's network throughput continues to grow, reaching over 53 gigawatt hours and nearly tripled year-over-year and again, grew over 4 times faster than the growth in VIO. I would like to reiterate what drives this growth. First and foremost, EV adoption continues. And as Badar has just mentioned, non-Tesla EV sales, which is the market EVgo primarily addresses today, increased 29% year-over-year in the first quarter. Second, EV buyers are shifting from early to mass adopters with a higher portion of multi-unit dwellers. Third, EV vehicle miles traveled is increasing nearing parity with internal combustion engine vehicles. Fourth, rapid growth in rideshare, and finally, heavier, less efficient EV models. As a result, utilization averaged approximately 19% across the network in the first quarter of 2024. 53% of our stalls had utilization greater than 15%. Over 40% of our stalls had utilization greater than 20%, and over 20% of our stalls had utilization greater than 30%. As I touched on earlier, revenue grew 118% in the first quarter of 2024 to $55.2 million. Adjusted gross profit was $17.3 million in the first quarter of 2024, up from $6.4 million in the first quarter of 2023. Adjusted gross margin was 31.3% in the first quarter of 2024. Q1 revenue usually includes breakage related to our Nissan contract. In Q1 2024, breakage revenue was roughly $2.5 million. When removing it, adjusted gross margin was 28% in Q1, which is more in line with our expectations of mid to high 20s for the rest of 2024. When you compare this adjusted number to a similar adjusted number from Q1 2023, we still see an increase of 11 percentage points from 16.8% in the first quarter of 2023, demonstrating the leverage effect of throughput and corresponding revenue growth on the stall dependent components of cost of sales. Adjusted G&A as a percentage of revenue improved significantly from 104.6% in the first quarter of 2023 to 44.4% in Q1 of this year, demonstrating the leverage effect from our G&A. Adjusted G&A went from $26.5 million in Q1 2023 to $24.5 million in Q1 2024, clearly illustrating our focus on lean operations and path to profitability. Adjusted EBITDA was negative $7.2 million in the first quarter of 2024, a $12.9 million improvement versus negative $20.1 million in the first quarter of 2023. Cash, cash equivalents, and restricted cash was $175.5 million as of March 31, 2024. Cash used in operations was $14.1 million in the first quarter, narrowing from the first quarter of 2023. Capital expenditures were $21.1 million in the first quarter. Capital expenditures net of capital offset was $13.6 million in Q1 of 2024. Now, turning to reconfirming our 2024 guidance. EVgo continues to expect full year 2024 revenue to be in the range of $220 million to $270 million and adjusted EBITDA to be in the range of negative $48 million to negative $30 million. We continue to expect capital expenditures net of capital offsets to be in the $95 million to $110 million range with the main use of CapEx to add 800 to 900 new EVgo owned stores this year. We're as confident as ever that EVgo is on a clear path to an important inflection point in our business, hitting adjusted EBITDA breakeven. EVgo expects to be adjusted EBITDA breakeven for the full year of 2025. This is based on the expectation that electric vehicles and operations will continue to grow and that EVgo will continue to expand its network and realize operational efficiencies. We look forward to sharing our progress in 2024 with you throughout the year. Operator, we can turn the call over to questions.
Operator, Operator
Your first question comes from the line of Gab Daoud from TD Cowen.
Gabriel Daoud, Analyst
Congrats on the new opportunity. But I was hoping we could just maybe get some general thoughts on the piece of news that hit recently around Tesla and playing off the Supercharger team and that may be impacting the pace at which they grow the Supercharger network? Can you maybe just give a little bit of context or thoughts around how this could impact EVgo in both maybe the near and long-term from a market share perspective?
Badar Khan, CEO
Yes. Thanks, Gab. Look, this is a fairly significant change in the competitive dynamic in the charging space. And I think it's positive for the sector and for EVgo. It's positive in my mind because it allows Tesla to focus on cars, and more affordable cars, as they've been talking about recently with the Model 2. I think that's great for EV adoption. I think we all see that affordability is a key driver of shifting from early adopters to mass adoption. We see that from almost all the other OEMs on their earnings calls in terms of building out more affordable vehicles. So I think that's a positive. I think it's very positive for EVgo. I think that we have talked about very strong economics here on this call and I expect to see that to continue, or frankly, improve in the foreseeable future. I expect to see that demand exceeds supply of charging stations for some time. Companies like EVgo just really didn't exist 12 years ago when Tesla began its Supercharger business, but they exist today. We added over 900 stores, as we said last year, which are state-of-the-art ultra-fast 350-kilowatt chargers. I expect that the market will be more interested in participating in this space, in this new competitive dynamic, allowing companies like ourselves and others to pick up some of the slack in terms of charging station growth that Tesla may be leaving behind.
Gabriel Daoud, Analyst
That's helpful. That's great color. And then I guess just as a follow-up, maybe switching gears to financing. You noted in your prepared remarks 30C maybe start to kick off over the next couple of months. Is there any additional color you can provide on just expectations and maybe remind us of the 800 to 900 new stalls this year fully qualified for that 30% reimbursement? And then the second part of that question is just the DOE loan process, if you can maybe just dial in a bit more detail on that? And maybe specifically just timing around when you think we can get an answer?
Badar Khan, CEO
Sure. I'll ask Olga to comment on the 30C transaction this year. Starting with the DOE loan, we believe we have a high-quality application in front of the DOE loan program office, and we've been in communication with them for quite some time. We're pleased with our progress, knowing this is a crucial part of President Biden's agenda. The unit economics we've shared suggest this is a sound investment. Regarding timing, this isn't something we expect to happen in 2025; we anticipate it will be over the course of this year if we are successful. While we haven't disclosed a specific amount, we expect it to accelerate our growth from the 800 to 900 stores this year compared to the over 900 we did last year, and it should also help us reach free cash flow breakeven at a faster rate of store growth. This isn't our only source of non-dilutive financing; the economics are very appealing, which should attract capital to our business. We believe this will improve with the competitive landscape we've discussed recently. We're also in discussions with counterparties regarding similar types of non-recourse project financing that can complement the DOE loan. Olga, would you like to provide some insight on the 30C?
Olga Shevorenkova, CFO
Yes, and maybe like a little add-on about the DOE loans we're applying and the Title 17, that LPO program, and feel free to just do research and see what kind of other companies did that and what quantum they obtained. I think it will give you a good feel for what we're looking for as well. And on 30C, roughly 35% to 40% of our portfolio last year and this year qualifies. We're working on effectuating the first transaction and selling our 2023 portfolio. It will be one of the first transactions done of this nature in the industry and certainly will be the first one for EVgo. So it takes a little bit of time to put the transaction documents in place. But we see very strong interest for these types of portfolios. And it is clear to us that a very robust market is emerging to be able to trade this credit in the future on a regular basis.
Operator, Operator
Your next question comes from the line of Chris Dendrinos from RBC Capital Markets.
Christopher Dendrinos, Analyst
I guess I wanted to kind of dial in a little bit into the operations side of things and maybe to start here. On the throughput, it looks like maybe December I want to say it was around 201. And so the implied on the quarter was a bit lower on the kilowatt hours per day. Can you just kind of talk about the dynamics there? Is there any sort of seasonality going on? Or how should we kind of think about, I guess, throughput growth going forward?
Badar Khan, CEO
Yes, Chris, that's exactly it. It's seasonality where we've been growing so fast over the last couple of years. We haven't even seen it in our numbers, but we're finally seeing it. That's really it. April's throughput per store per day is well over 210 kilowatt hours per store per day. So that's in line with what we were expecting.
Christopher Dendrinos, Analyst
And then I guess, I think you mentioned some software updates that might have been going out later this year. Can you kind of just update us on sort of what's going on there and the expectations for that?
Badar Khan, CEO
We have been focused on building a growth engine that allows us to carefully select stores which we believe will generate strong returns. Our proprietary network plan and site selection process have been refined to operate smoothly. As mentioned in our Q4 call, we are exceeding our throughput expectations compared to our previous modeling. While we initially emphasized building our growth engine, we are now concentrating on improving its efficiency due to the scale of our business. This is evident in various areas, particularly in reducing operational inefficiencies. We are implementing several software and process improvements that have been successful in other industries. These enhancements will help in predictive maintenance and diagnostics for our equipment, allowing us to address performance issues more effectively. Additionally, we are updating our customer service software to expedite call resolutions. These updates are not revolutionary, but rather an adaptation of existing technology from other sectors. We have shared our expectations regarding sustaining G&A costs per store, highlighting a significant reduction over the next three to five years. This year alone, we anticipate that software updates will lead to a reduction in sustaining G&A by approximately 20% compared to Q4 of last year.
Operator, Operator
Your next question comes from the line of Stephen Gengaro from Stifel.
Stephen Gengaro, Analyst
I have two points. First, you had a strong first quarter and reaffirmed your guidance for the year. Regarding your 2025 plans, you mentioned reaching EBITDA breakeven, which seems somewhat conservative given your current trajectory. I would like to hear your thoughts on those expectations and what factors are influencing them.
Badar Khan, CEO
We are very pleased with this quarter. There are three more quarters ahead, and we recently provided our guidance for the year, including our EBITDA breakeven target. We believe it's too early to make any changes to that. Given the evolving competitive landscape we've discussed, we are currently in discussions with several site hosts across the United States who are on the verge of installing DC fast charging stations for the first time but have encountered obstacles. We are ready to consider taking over some of those sites if they align with our return expectations, which could potentially accelerate our store growth in a more efficient manner. As I mentioned earlier, we are benefiting from several favorable trends in charge rates. Improved charge rates are boosting customer confidence in on-the-go DC fast charging. Additionally, all the original equipment manufacturers are talking about releasing more affordable vehicles later this year and into next year. These elements suggest that we have the potential to perform even better. While it’s too early to discuss 2025 during this call, we may address it in the Q2 and Q3 calls.
Stephen Gengaro, Analyst
I had another question, which you partially addressed. When you discussed the various financing options and indicated the possibility of accelerating growth beyond 800 to 900 stores per year, it seems to imply that if that is achievable, there are ample opportunities and locations you've identified that would be profitable and fulfill your IRR requirements, even with a higher rate of store expansion. Is that correct?
Badar Khan, CEO
That's exactly right, Stephen. We have over 50 strategic relationships with site hosts across the country. We have identified more than 100,000 potential sites, but there are over 10,000 that actually meet our return expectations. With the recent changes in the competitive landscape, those sites are likely to be very appealing for us to pursue. As for capital allocation, once we cover our costs and start generating positive EBITDA next year, the question becomes whether we return capital to shareholders or continue investing to expand our locations. The unit economics clearly indicate that it benefits everyone if the company grows our store base faster than the 800 to 900 target, given the expected returns. That will be our focus moving forward.
Operator, Operator
Your next question comes from the line of Christopher Pierce from Needham.
Christopher Pierce, Analyst
Can you talk about what you've observed over the past year? Are you seeing a shift in the industry where those who were considering Level 2 sites or equipment are now leaning towards Level 3 due to customer demand for faster charging speeds? I'm trying to understand how the perspective on this industry's growth towards 2030 has changed, as Level 2 seemed to be the main focus, but now Level 3 appears to be gaining traction. I'd like to hear your insights on this.
Badar Khan, CEO
Yes, that's a great question, Chris. The landscape is beginning to recognize the potential of Level 3 charging in a way that may not have been possible a few years ago. I mentioned the charge rates in my remarks, and I felt it was important to elaborate on that because there's a significant advantage for direct current (DC) public fast charging. If charge rates improve and enable vehicles to charge in much less time—perhaps even half the current duration—people will likely feel more at ease with public charging, reducing their reliance on home charging. Site owners will also want to offer that option to their customers, which is something customers value. This trend is unmistakably headed in one direction. The key question is how much market share DC fast charging will capture from overall charging in the coming years. We believe this will continue to increase, not only due to improved charge rates but also because as vehicles become more affordable, customers who don't have private driveways will be more inclined to purchase these vehicles and thus will depend more on public charging options, favoring faster charging solutions.
Christopher Pierce, Analyst
Okay. And you talked about demand-based pricing is something you guys might experiment with down the road.
Badar Khan, CEO
Yes.
Christopher Pierce, Analyst
Can you discuss the pricing situation? Are you experiencing any price pressure given the growth of EVs and the slower growth of charging equipment? Are there specific times during the day when you do feel pricing pressure on your network, or is this not something you are noticing right now?
Badar Khan, CEO
We have very different customer segments using our network, including rideshare and high-frequency, high-usage customers. Together, these higher usage customers account for over half of our kilowatt hours, which I consider to be quite loyal and predictable. We aim to attract even more of them. When it comes to pricing, different times of the day appeal to various customers. We are adjusting some of our higher usage customers to times with less demand on our network, such as early morning or off-peak hours, which typically have lower rates. This allows us to free up locations for less frequent users who may not be as price-sensitive. We're implementing time-based and location-based pricing. Although demand-based pricing is not new, we are now deploying it, with about 5% of our network currently using dynamic demand-based pricing. We plan to expand this over the year, expecting it to result in solid improvements to our margins, which have already increased over the past year. Our charging business margins have doubled in that time, significantly due to the leverage in our cost of sales.
Christopher Pierce, Analyst
Okay. I have one last question for Olga. Regarding ancillary revenue, we've observed considerable growth. Although we are dealing with smaller figures, what is the margin profile of this business? The 10-K mentions software digital revenues, so are we looking at a gross margin of around 75% to 80% for that type of business? Is that also contributing to an increase in gross margin, or am I misunderstanding that?
Badar Khan, CEO
Olga, do you want to take that question?
Olga Shevorenkova, CFO
Yes. Sorry, I muted myself. So yes, most of that revenue is coming from PlugShare. It's the charging company which we bought roughly 3 years ago. But it also includes our behind-the-fence fleet contracts, which is a couple of them, which we talked about on prior earnings calls. So the margin profile is a mix of the 2. And of course, any software-driven revenue, including PlugShare, will be very high margin. So you look at any SaaS type of a company and you'll get an idea of what kind of gross margins we're talking about. The other business which gets mixed in here, which is behind the fence, has a more eXtend-like margin profile, which will be in the low double-digit territory. So there is a bit of a game of a revenue mix happening here. But considering that it's a still relatively small revenue contribution, most margin trends have been played by the interplay of eXtend in the core charging business rather than ancillary.
Operator, Operator
Your next question comes from the line of Andres Sheppard from Cantor Fitzgerald.
Andres Sheppard-Slinger, Analyst
Congratulations on the quarter. I wanted to revisit the utilization rate, which appears to be increasing rapidly, which is great. I understand you do not provide guidance, but any direction you could share would be appreciated. How should we approach the network throughput for the rest of the year? You've mentioned seasonality briefly, but at this pace, should we expect that gigawatt hour to exceed 200 or 215 for the year? In other words, how should we view the network throughput for the remainder of this year?
Badar Khan, CEO
Yes. Let me ask Olga to share some insights about 2024 specifically. As you can see from the compelling unit economics slide we discussed in our recent webinar, the utilization of the top 15% of our network is already at 41%. We do not anticipate that 41% utilization will apply to our entire network. In fact, we expect to see utilization in the low 20s over the next 3 to 5 years. We don't foresee anything higher than that to achieve double-digit returns. This can provide a perspective on medium-term utilization. The throughput per store, which determines revenue, is a result of both utilization and charge rate. So, Olga, could you share your thoughts on 2024 specifically?
Olga Shevorenkova, CFO
Yes. So as you correctly mentioned, we do not guide to gigawatt hours, but maybe I can give you a little bit of a path to get to there yourself. So we gave color during our last call that we expect eXtend revenue to be roughly 35% of our revenue this year at the midpoint of the range and the range is to $220 million to $270 million. So if you subtract that, right, then the rest of the variability comes from still a prevailing uncertainty of EV sales this year. So as always, it comes from uncertainty on the final number or the throughput number. So if you take our average pricing, which you can derive from our financial statement, you can very easily get a range of gigawatt hours that we are thinking about for this year.
Andres Sheppard-Slinger, Analyst
Okay, that's helpful. So can we assume some increased seasonality in Q4 since that's typically the strongest quarter for EVs? I'm trying to understand whether we should expect a smooth, gradual increase each quarter or if we need to consider some seasonal fluctuations throughout the year.
Olga Shevorenkova, CFO
Yes. So we do expect smooth. However, again, EV sales is something we don't have control on and do not kind of understand exactly how it will play out for the rest of the year. We have an expectation that it will be smooth. But if you think about specific seasonality and driven patterns, then, Bureau of Transportation statistics actually publishes that publicly available data. And you could see how the driving patterns play out between the quarters by using that information. I think it will be actually quite helpful.
Badar Khan, CEO
Andres, just to remind you, EV sales are certainly a revenue driver. However, our throughput increased four times faster than the growth of EV vehicles in operation from one quarter to the next, as we've mentioned several times. This growth comes from new sales, as well as an increase in DC fast charging market share, rideshare expansion, and more affordable vehicles, allowing customers without private driveways to charge on public infrastructure. Therefore, our revenue results from all these factors combined, and we anticipate continued growth throughout the year.
Andres Sheppard-Slinger, Analyst
Yes, I believe it is also due to the increasing average utilization rates per charger, as you mentioned earlier.
Badar Khan, CEO
Yes.
Andres Sheppard-Slinger, Analyst
Okay. Maybe just one last question. And by the way, Olga, sorry, I wish you all the best in your future.
Olga Shevorenkova, CFO
Thank you.
Andres Sheppard-Slinger, Analyst
We'll certainly miss you. One last question for you is regarding liquidity. Can you remind us about the $176 million in liquidity as of Q1, excluding any potential external funding? What is the expected run rate with that liquidity available? Is it still expected to extend well into 2025? What was the message regarding that?
Olga Shevorenkova, CFO
Correct. We're confirming that still a message. However, I'm not excluding any grants which we will be collecting. It's not necessarily a big driver, but as we discussed at lengths at the previous call, we have applied and have been awarded a variety of different grants across the country from a variety of different programs that are awarded to us. And the collection is just a question of execution and time. And so when we talk about cash, that is certainly included because that is part of the business model.
Operator, Operator
Our next question comes from the line of Bill Peterson from JPMorgan.
William Peterson, Analyst
I wanted to ask about reliability and uptime. How are the trends going on your network? Also, can you quantify the operational benefits from the renewed program that you started employing last year? What have you seen thus far?
Badar Khan, CEO
Yes. We see significant improvement. When considering the customer experience, uptime is a key component, and having managed many asset-based businesses in my career, I can confirm that uptime is essential to the customer experience and it continues to enhance. Additionally, ensuring that the payment process is quick and efficient is important, as is having a charger available when a customer arrives at a site. This is why we aim to install more chargers per location and have received substantial feedback from customers indicating a preference for faster sites. Therefore, we are focusing on introducing a 350-kilowatt charger. Uptime is certainly improving. The software updates I mentioned earlier, which involve predictive maintenance and diagnostic support, are aimed at further enhancing uptime this year, which will lead to fewer truck rolls, reduced customer calls, and lower costs for the business. Overall, we feel optimistic about the progress.
William Peterson, Analyst
Okay. And then I want to try to talk about gross margin trajectory. I guess taking into account your expectations around utilization, network throughput, how should we think about the gross margin sector based off of what you talked about earlier, time of day, charging price increases? But I guess also potential, I guess, energy rate either increases or at least time-of-day charges? And then to remind us, is there any seasonality for that in terms of how that would flow through on the gross margin line?
Olga Shevorenkova, CFO
Yes. So the gross margin we reported over 30% for Q1. However, in my prepared remarks, I mentioned that we had a $2.5 million of breakage revenue regarding our Nissan contract, which inflates the margin. So like adjusted gross margin is in the high 20s. And the expectation for the rest of the year is mid to high 20s. So there is a seasonality to that number because we are seeing a customer of various utilities. And utilities tend to have summer and winter tariffs. And summer is defined in a variety of different ways across different utilities. But it tends to be around the real summer versus around the real winter. And summer tariffs are a little higher than winter. In some cases actually they're quite a bit higher than winter. So you should expect to see a little lower margin over the summer period, picking back up by Q4 to the winter time.
Badar Khan, CEO
And maybe, Bill, if I could just make sure that when we talk about gross margin, we are always talking about the entire business, both our charging business as well as our non-charging revenue. We have provided disclosure for you to see for yourself margins in our charging business specifically, and they were roughly 15% last year. In 2022, they increased to about 28% in 2023. In the first quarter of 2024, they were in the mid to high 30s for the charging business itself.
Olga Shevorenkova, CFO
Yes. And so let me maybe clarify my answer as well. Business when I quoted the absolute numbers, when I talked about the dynamics, it's related to charging business. When we talk about the dynamics in the eXtend business, just to add to what Badar said that you probably see a stable gross margin profile throughout the year versus Q1 and Q4.
Operator, Operator
And this concludes our question-and-answer session. I will now turn the call back over to CEO, Badar Khan, for some final closing remarks.
Badar Khan, CEO
Thank you, everyone, for joining the call. We had another outstanding quarter, setting another record. As mentioned, we have strong unit economics and operating leverage that contribute to significant EBITDA in the near term and establish a growth engine that provides strong returns for our investors. The evolving competitive landscape offers even greater opportunities for EVgo to enhance growth and yield stronger returns by leveraging our various competitive advantages. I look forward to sharing updates on these advantages, as well as our priorities and progress, in future calls. Thank you again, everyone.
Operator, Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect.