ChargePoint Holdings, Inc.

Ladies and gentlemen, good afternoon. My name is Emma, and I will be your conference operator for today's call. At this time, I would like to welcome everyone to the ChargePoint second quarter fiscal 2023 earnings conference call and webcast. All participant lines have been placed in a listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question and answer session. I would now like to turn the call over to Patrick Hamer, ChargePoint's Vice President of Capital Markets and Investor Relations. Patrick, please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss ChargePoint's second quarter fiscal 2023 results. This call is being broadcast and can be accessed on the investor section of our website at investors.chargepoint.com. With me on today's call are Pasquale Romano, our Chief Executive Officer, and Rex Jackson, our Chief Financial Officer. This afternoon, we issued a press release announcing results for the quarter, which can be found on our website. We'd like to remind you that during the conference call of management, we make forward-looking statements, including our fiscal third quarter and full fiscal year 2023 outlook. These forward-looking statements involve risks and uncertainties, many of which are beyond our control and could cause actual results to differ materially from our expectations. These forward-looking statements apply as of today, and we undertake no obligation to update these statements after our call. For more detailed description of certain factors that could cause actual results to differ, please refer to our Form 10-Q filed with the SEC on June 7, 2022, and our earnings release posted today on our website filed with the SEC on Form 8-K. Also, please note that we use certain non-GAAP financial measures on this call, which we reconcile the gap in our earnings release for historical periods in the investor presentation posted on the investor section of our website. And finally, we'll be posting the transcript of this call to our investor relations website under the quarterly results section. And with that, I'll turn it over to Pasquale.

Thank you, Patrick. And thank you all for joining. I am pleased to report another strong execution quarter as we posted Q2 revenue of $108 million above the high end of the guidance provided on our Q1 call. Notably, Q2 is our first $100 million quarter, another major milestone in the company's 15-year history. And according to Bloomberg NEF, combustion vehicle sales peaked in 2017. And as we've said before and proven in historic attach rates, our growth closely tracks the arrival rate of vehicles. As consumers embrace the transition to EVs at an accelerating rate, the future of this business is incredibly strong. Year-over-year revenue growth of 93% and sequential revenue growth of 33% continue to demonstrate the company's strength across verticals and geographies. We've improved gross margin from Q1 and realized the operating leverage as forecasted. The category continues to be affected by supply chain dislocation. As we covered in recent earnings calls, we continue to prioritize assurance of supply to support our land and expand strategy and strong upward growth trajectory. This means higher purchase price variances on source components and excess logistics costs. Despite the headwinds, our operations team worked tirelessly to deliver 19% non-GAAP gross margin in the second quarter, up two percentage points sequentially, while achieving impressive growth. Net, we are quite pleased with our performance in Q2, and Rex will provide more color on that in our outlook for the rest of the year. Our installed base of network ports grew to approximately 200,000, a year-over-year increase of 70% and sequential increase of 7%. Of those, over 60,000 are in Europe and over 15,000 are DC fast. And I'll remind you that ports under management is one way to track our progress in our commercial and fleet verticals. as each of these ports generates an annual software subscription. As a reminder, we do not include home chargers for single-family residences in this count, where we also continue to see strong demand. Complementing this, our roaming reach is now over 355,000 ports in North America and Europe. New customers in the quarter contributed approximately one-third of our Q2 billings and we now count 80% of the 2021 Fortune 50 as customers and 53% of the 2021 Fortune 500 as customers. On our first quarter call, we discussed ramping manufacturing of new fleet and commercial AC and DC charging platforms. Customers are telling us that our solutions are meaningfully differentiated and comprehensive. Additionally, our customers rely on us for everything from upfront consultation and planning through build out and ultimately continued optimization of the infrastructure. Turning now to verticals. Commercial, which lagged from a rate of growth perspective during the pandemic, accelerated in the quarter with a global business of 83% year-over-year and 45% sequentially. Regarding our partnership with Volvo and Starbucks, the first site went live in the quarter, an important step in reinventing the road trip. The commercial vertical in Europe was particularly strong with billings up over 300% year over year and 24% sequentially. Fleet continues its growth with strong demand for management software combined with our AC and DC charging solutions that balance charging costs with operational readiness for light to heavy duty vehicles across depot, on route, and take home charging. In Q2, fleet billings grew 135% year over year. and 23% sequentially following a strong first quarter. The vertical continues to be vehicle limited. Residential demand remains remarkably strong. Billings for residential were up over 125% from the second quarter of last year and a sequential increase of 11% versus the first quarter. The growth would have been significantly higher if not for supply chain constraints. In turning to policy, our business model sets us up well to operationalize the U.S. National Electric Vehicle Infrastructure Program. Additionally, the Inflation Reduction Act was signed shortly after the close of the quarter, which includes stimulus for both vehicles and infrastructure across passenger and fleet categories. Our policy team remains engaged with federal and state agencies to help shape programs to ensure a healthy and self-sufficient charging industry. As discussed previously, we do not include these federal programs in our guidance or long-term views of turning cash flow positive. We have long said that what is good for business can be good for the planet too. Our network is fueled over 4.4 billion electric miles to date. We estimate these drivers have avoided over 178 million cumulative gallons of gasoline and over 800,000 metric tons of greenhouse gas emissions. Now I'll turn this over to Rex to discuss financials before we move to Q&A. Rex, over to you.

Thanks, Pasquale, and good afternoon, everyone. A quick reminder, as in previous calls, my comments are non-GAAP, where we principally exclude stock-based compensation, amortization of intangible assets, and non-recurring costs related to restructuring and acquisitions. Please see our earnings release for non-GAAP to GAAP reconciliations. Revenue was 108 million of 93% year on year and 33% sequentially above our previously announced guidance range of 96 to 106 million. As we have for multiple quarters running, we fundamentally shift what we could build. All verticals are strong from a demand standpoint with a healthy and welcome uptick in commercial AC business, but supply constraints across all products persisted. As before, strong demand and supply constraints translated into higher backlog. Though we worked out a meaningful percentage of our existing backlog during the quarter, our ending backlog grew 26% sequentially from Q1. Network charging systems at 84 million with 78% of Q2 revenue, up 106% year-on-year, and 41% sequentially. Subscription revenue at 20 million was 19% of total revenue, and up 68% year-on-year and 15% sequentially. Other revenue at 4 million and 4% of total revenue increased 23% year-on-year, down 12% sequentially. As we've discussed before, subscription revenue growth is tied to the growth and sales of network charging systems. The percentage is heavily dependent upon mix and trails network charging systems growth by one to two quarters due to back-end loaded system shipments and the timing of subscription activation. Our deferred revenue, which is future recurring subscription revenue from existing customer commitments and payments, continues to grow, finishing the quarter at 168 million, up from 157 million at the end of Q1. Turning to verticals, as you know, we report them from a billings perspective, which approximates the revenue split. Q2 billings percentages were commercial 72%, fleet 14%, residential 13%, and other 1%. Commercial contribution recovered five points from last quarter as demand from retail and workplace customers improved and our teamwork, the supply chain constraints in this area well during the quarter. From a geographic perspective, North America Q2 revenue was 84% and Europe was 16%. In the second quarter, Europe delivered 18 million in revenue and grew 254% year over year and 11% sequentially. Turning to gross margin, non-GAAP gross margin for Q2 was 19%, which includes 7 million or 6 points of purchase price variance logistical costs associated with the supply chain. We expect continued technology-driven margin improvements for our newer products, lower purchase price variances, and improving ASPs to drive recovery in the second half. Despite these challenges, however, we are encouraged at the improving gross margin fundamentals demonstrated in Q2. Non-GAAP operating expenses for Q1 were 80 million, a year-on-year increase of 50% and a sequential decrease of 5%. Excluding higher new product introduction costs in Q1, OPEX was sequentially essentially flat as we focus on delivering operating leverage and managing expenses against environmentally driven gross margin challenges. From an operating leverage perspective, we are pleased to see OPEX's percentage of revenue drop from over 100% in Q1 to 74% in the second quarter. And with our guidance for the year, all I mentioned momentarily, we expect a particularly strong finish on this metric, which is key to achieving our stated goal of free cashflow positive by the end of calendar 2024. Stock-based compensation in Q2 was 26.4 million, up from 15.5 million in Q1. As you may remember from last year, we typically do our annual refresh grants in Q2, so there is a stair step there. We would expect to level out in Q3 through Q1 of next year. at approximately this Q2 expense level. Looking at cash, we finished the quarter with $472 million in cash and short-term investments. We had approximately 339 million shares outstanding as of July 31, 2022. Turning to guidance, for the third quarter of fiscal 2023, we expect revenue to be 125 to 135 million, up 100% year-on-year and up 20% sequentially at the midpoint. We are also confirming our annual revenue guidance of 450 to 500 million, annual non-GAAP gross margin guidance range of 22 to 26%, and operating expense guidance of 350 to 370 million. With that, I will turn the call back to the operator for questions.

Thank you. If you would like to ask a question, press star followed by the number one on your telephone keypad. We do ask today that you limit yourself to one question. Your first question comes from the line of Colin Roush with Oppenheimer. Your line is now open.

Thanks so much. I'm going to jam two questions in here then on this first one. So first, if you guys could comment around any of the, you know, indications that any of the NEVI funds are starting to get prepared to come out, what you're seeing on that front. And then also, you know, indications or activity around commercial vehicle fleet preparations for infrastructure in North America. And if I have a follow-up, I'll squeeze that in as well. Thanks, guys.

Hi, Colin. Happy to answer those two questions. We've been, to take the first one, we've been very consistent on comments related to NEVI on earnings calls and other forms that we've presented in. As a company with the 15-year experience that we have in Mike Noble, Mgmt. engaging and policy heavily it things always take longer than you expect. Mike Noble, Mgmt. And so we don't have any expectation, those will be any significant flow this year at all anything material with respect to nevi it's too hard to predict at this point what the state programs will actually. Mike Noble, Mgmt. manifest this in the form of schedule and and equipment in the ground. next year and for the four years thereafter for the, you know, kind of five-year program run duration. So the net of it is we treat it as upside. It's, you know, it's a great tailwind for that segment of the business that affects one vertical, one of our verticals, and we're in many verticals. And that's just in the passenger car class. that's dealing with the driving beyond your battery range. So, again, we'll treat it completely as upside, and we'll be very conservative with respect to how we plan for that going into next year, because life always has more imagination than we all do. On the second point with respect to fleet vehicles, we are seeing, if you look at the transit category for bus, We are seeing that scale now because those are the most mature with respect to the number of OEMs that serve that segment with, you know, mature product. So transit's moving nicely. Light commercial is, you know, has a lot of overlap with passenger vehicles and just there isn't the volume going into that segment just yet. And same thing with, you know, class, you know, kind of four through eight vehicles and yard haulers that very, very, very right now vehicle limited. But we do expect next year that to start to ease back as OEMs start to hit their production ramps on vehicles. But again, you know, we'll be relatively conservative with respect to that because, you know, until you see it, you don't want to bet on it. But, you know, for us on the fleet side, it's about the logo wins. It's get the customers integrated. It's just as hard to get a five-vehicle pilot off the ground as it is to get a 50-vehicle or a 500-vehicle pilot or deployment off the ground when it comes to software integration, planning, et cetera. So we're laying all that groundwork down.

That's helpful and just gives me a sense of the ground. Thanks, guys.

Your next question comes from the line of Bill Peterson with JPMorgan. Your line is now open.

Yeah, hi. Thanks for taking the questions. I was hoping you can help us understand, you know, what was better in the quarter. I guess what you're able to, you know, deliver in excess of what you thought maybe at the beginning of the quarter. And then as it relates to the guidance, are you seeing some more mixed trends? Certainly, you know, the EU kind of lagged, I think, on a sequential point of view in the second quarter. But how should we think about trends there, I guess, in terms of seasonality?

Hi, Bill. It's Rex. So in terms of, you know, what picked up in the quarter, as we said in our prepared remarks, we had a very nice performance from the commercial vertical that had a nice little recovery. It was the one part of the business that lagged the most, relatively speaking, of course, during the pandemic. So very, very welcome to see that coming back. And then we just had a very nice performance from the operations teams to bang a product out, to be honest with you. So it was no one thing. It wasn't like anything outperformed something else other than the one commercial thing I mentioned. And so we were able to outperform a little bit at the end of the quarter. But again, nothing systemic that I could describe for Q2. So if you look at Q3 and the guidance for the rest of the year, I think what we see there is We were able to grow from Q4, well, yeah, a little bit from Q4 to Q1, then nicely from Q1 to Q2. Obviously, you can do the math, so Q3 and Q4, good growth, but not outlandish. And we think our teams and our supply chains are up to it just in terms of hitting those numbers. And clearly, we have a nice backlog backing us up as well. So, you know, I think this is more of a, it's more of a consistency ballgame right now until the external environment changes. uh where we just keep we just keep you know pushing the envelope um but you know any breakouts that we would would expect would be a function of the external external weather clearing up uh considerably from where it is today so hopefully that answers your question yeah mostly except for the european seasonality but i guess just the second oh that's good yeah go ahead i'm just gonna say from the seasonality perspective but go ahead

Yeah, please. Okay, I'll answer the question you can answer. You're up to.

Yeah.

Okay, thank you. So just nice to see the sequential improvement in margins and, you know, reiteration of the full year guidance. Hardware margins stepping up. I guess the software and services stepped down, at least from a gap point of view. How should we think about the margin? I guess what was the reason for that, and how should we think about the margins of that segment, you know, going forward? I presume that's going to be a key issue. factor in driving four-year margins to the 22 to 26 range you talked about and so you're being specific as to the software side of the house well i mean if you could break down how we get to the margin range you provided that'd be helpful but i mean trying to understand why the software stepped down as well in the second quarter yeah okay so um

TAB, Mark McIntyre, The if you look at the quarter we just finished going from 17 to 19 you can imagine. TAB, Mark McIntyre, that there's a lot there are a lot of operational grinding it out that happened to provide those improvements and it really comes from a broad base of things that we do. TAB, Mark McIntyre, And it's everything from negotiating a given component supply to design again, you know new components that have a lower cost profile. TAB, Mark McIntyre, You know, we obviously have new product introductions that are happening. um as we speak um and being being able to just continually work work the process to bring down um costs and therefore gross margins up on the hardware side uh is just something we do every day and i think we've got a pretty good you know a pretty good start here and uh and coming off the 17 from from last quarter from a software perspective uh our subscription line obviously includes both software and or a sure warranty product. What most people don't know is that we put our call center costs against our subscription line, which is why the gross margin on that is less than what you would expect from a, you know, a pure software, you know, or pure software or SaaS business. And I think they are, I think the big thing there is going to be to scale because I think there's a, There's a baseline level, and it's not a low baseline. It's a high baseline. There's a high bar that we want to accomplish from a driver, host, support perspective, and obviously from a warranty and fuel support perspective. So I would expect, you know, we're investing heavily there, and we'll continue to do that, but you'll see efficiency and scale gains for that over time as we go into next year.

Thanks, and as you can get back to the European, sorry to interrupt that earlier.

yeah i thought you asked a question about um seasonality uh europe so europe europe had a really good quarter this quarter uh its sequential growth was not as big a number but that's because such a great quarter last quarter um so i think i think europe has definitely gotten on the map here uh as part of the company's strategy and we're executing beautifully uh in that area and if you talk about seasonality more broadly um we uh which i think you did mention we'd had a nice q4 to q1 transition this year first time ever the q1 was higher um can't speculate on what'll happen this year but you know obviously we've got a we've got a lot of momentum in the in the in the company so uh um i would hope that we could we could reproduce that but i don't know yet thanks for taking the questions a nice job again on the execution thank you

Your next question comes from the line of Stephen Gengaro with Stiefel. Your line is now open.

Thank you and good afternoon, everybody. I was curious if we could talk a little bit about the advertising side and how it sort of fits into your portfolio. There's been some talk about it recently. I'm just curious how you think about that part of the business, sort of the opportunity there and how it kind of just basically fits into ChargePoint's overall product portfolio?

Yeah. So from us, from our side, Steven, we view it as a way for certain sub-verticals inside a commercial, say certain retailers, shopping malls, et cetera, to get started with EV charging. And it's one of many ways that they could engage or get started. So we've developed some partnerships. You probably saw some recent announcements around that. And we really view it as not an and or an or, excuse me, an or. It's very complimentary from a get a site where advertising is going to throw off naturally any kind of revenue that is substantial enough to offset the cost of charging, which is a narrow set of applications, but within that narrow set, another arrow in our engagement quiver. We look at it the same way we look at our charging as a service where we bundle the hardware into the subscription, some of the financing models we brought to the market. We just look at it as another optional engagement model that we have and get some very good partners. on that side as well. So again, it's just, I think about it as a broadening of the business. I don't think it'll change numerically. Our needle on a go-forward basis, it doesn't change our forecast. It just gives our customers more options.

Is it something incorporated into your systems, or is it sort of in tandem with your chargers?

Well, of course, there's, of course, there's always integrations when you do stuff like this. But the two, but the two applications are very, they're, they're, they're, they're very, they're very separate in that respect. And the way that we built it is we don't have a fixed association between the device that's delivering ads and the number of charging ports. We left that flexible for financial reasons because the advertising model is very different depending on the traffic at a site. So it's an engineered solution through some partnerships at a site that yields the best economic outcome for that site's local statistics, right? So the short answer to your question is yes, there's integrations, and yes, it's very flexible.

Got it. Great. No, thanks for the call.

Your next question comes from the line of Gabe Dowd with Cowen. Your line is now open.

Thank you, and afternoon, everybody. Thanks for all the prepared remarks so far. Just a quick clarification on Bill's question earlier, just on the subs gross margin. So is there anything else going on that would drive the sequential decrease, or is it just that step up in stock-based comp that you mentioned, Rex?

So, Gabe, that's a gap question, right?

Yeah, that's right, because on a gap basis, it looks like it declined about 600 basis points sequentially. So just curious if it's just stock-based comp or anything else.

uh the main the main differentiator is uh that would be the stock-based comp obviously is a big one right um but because that's mostly in the cogs line it's not a big swinger um and then there's amortization of intangibles um as well so um sorry amortization as well so um but i i honestly from a business standpoint you should track it from a you should also look at it from a non-gap perspective because that's when we can get down to what we think are some of the fundamentals operationally of uh you know building building selling and making margin on the product uh and and there what you see is is us doing what we said we were going to do which is is you know marching up from the what we hope is the low of the 17 percent in q1 um and uh you know and driving that number back up to something closer to the models that we've we've got out in the street one thing i would tell you if you look at the gross margin You know, we obviously have confirmed guidance for the year. You know, my guess is that we're going to be shaded to the lower half of that at current revenue estimates, but that's something you should just keep an eye on.

Got it. Thanks, Rex. That's helpful. And then maybe just, you know, you guys have obviously said a lot already on margin, but just curious if we could get a little more color on the specific levers that you highlighted previously and how those are, So it would be the ASP increase. I think you also introduced a new power module on the CPE250. So just curious how those two are progressing and if that's making the impact that you expected so far. Thanks, guys.

Yeah, so I'll start with ASPs. I think I'm pretty sure we covered this in the last call. We had one adjustment that we did. very early in the calendar year. And then we had another one that was occurring, uh, you know, fairly late. Um, I think it was in June. Uh, and so, uh, we haven't seen enormous impact on that nor did we actually expect to see enormous impact on that in Q2. So, and I said this in my remarks, we do expect to see the improved ASPs kicking in in Q3 and Q4, you know, across the product line, and that's mostly North America. That's not fundamentally a Europe thing. So I do have some good optimism that we'll get some benefits there. In terms of new products, you know, you mentioned the power module. We do have a new power module. version that is being produced and rolling out that will provide not only performance benefits, but also cost benefits as it hits volume here in Q3 and Q4. So that's another contributor. And then as far as gross margin, generally, there's just stuff we're doing across the board to, you know, work prices on existing components and then where necessary, swap out components for either higher performance, lower cost for both.

Got it. Super helpful. Thanks, Rex. Thank you again.

Your next question comes from the line of James West with Evercore. Your line is now open.

Hey, good afternoon, guys. So, Pat, I wanted to dig into fleet a little bit more. Obviously, you mentioned we're vehicles. limited at this point but the vehicles are they're coming they're coming next year and they're going to ramp pretty significantly and that's going to be a big chunky piece of your business so i guess how are you thinking about your supply chain your contract manufacturers you know ramping or expanding your capacity to handle that what's going to be probably a pretty big surge in volumes but um james the um the the increase in volume due to vehicles isn't

is it'll still have a ramp profile to it and remember we use the same hardware platforms. universally we use the same commercially and fleet there may be some configuration options that are a little bit different between the two the two markets so first of all we're always improving the sophistication of our supply chain and cm base and that's that's an ongoing. optimization process that we would be naturally running, one. Two, I think we're reasonable forecasters, as evidenced by a lot of the things that we've managed to, you know, forecast accurately since we've, you know, been a public company. You can look back at the records there. So we think we're well matched with respect to capacity. We, just as a matter of course, with the factories, we control the test infrastructure. We can scale that pretty much at will. And all our downstream CM partners, they're not capacity limited with respect to the ability to dedicate more and more labor and CapEx to our manufacturing needs. So net net, I don't see supply chain. as the real limiting factor on fleet, I still see it being more vehicle limited.

Okay. Okay. And then when you're talking to your potential fleet customers, where are they in their process of getting prepared for these deliveries?

Oh, I mean, it depends on, I mean, obviously the answer is it just depends on the customer. There's some customers that are already way up the learning curve. You know, they've been, you know, piloting things and frankly hiring people out of, you know, our industry, the utility industry, the vehicle industry, et cetera, to kind of get ready for this. And then there are others that are a little bit more nascent in their understanding of things. So it's a spectrum. But again, I think, you know, we can stand in for customers that, That have a bit a bit less aptitude because we have really fantastic consultative and design build services very comprehensive software really one stop shopping and for customers that are further up the learning curve that want to. be engaged more we can certainly support that as well, so again, I think the real if I were in your shoes and modeling I would be looking at the it's still at the vehicle curves, I think. fleet, much like our commercial business, is going to be inextricably tied to vehicle penetration and to the vertical.

Right. Okay. Got it. Thanks, Ben.

As a reminder, we do ask that you limit yourselves to one question per person. Your next question today comes from the line of Craig Irwin with Roth Capital. Your line is now open.

Good evening, and thanks for taking my questions. So I was hoping you could give us a little bit more color maybe around the supply chain issues that are moving behind you. You obviously made some really good progress in the quarter. But are there discrete items that we can look at that should provide a direct uplift in the fiscal third and fourth quarters? And how do you feel about the longer term trajectory recovering to some of the historic performance levels and targeted performance levels that were shared at the time of the SPAC merger?

Craig, you know, I think it's easier to answer it from the last question and then work back into the specifics. Environmentally, demand for electric vehicles exceeds supply by a long margin. So if the macro environment, and no one has a crystal ball on the macro environment, but if the macro environment for consumer goods, begins to, you know, hit some rough patches, the vehicle demand is still going to be there on the electric vehicle side sufficient to basically consume the production capacity of most OEMs. So we should still see the growth, and as we still see the growth facing into a supply chain environment that will have less mouths to feed, we should see a continued improving trend there. What we're seeing actually in supply chain right now, is there's still a bit of randomness associated with where the sticky factors are. But where it was much more broad-based a year ago, much more broad-based with respect to everything from sheet metal to plastic to electronic components, it is centering now, the pressure points are centering much more, not exclusively, but much more around electronic components. And so we think that's actually pretty well lined with a softening macro, but we don't want to be presumptuous. So again, it's easier to, you know, plan for headwinds continuing and then be pleasantly surprised when the headwinds aren't there because I don't think anyone has a perfect crystal ball as to when a ball has subsides. But it is changing color a bit for sure.

Excellent. Hopefully that's helpful. That's hugely helpful. So if I could squeeze another one in if possible. headcount additions, right? You're investing and you're growing. Can you maybe share with us the areas at your company that are a priority for growth on the headcount? Are we really focused on R&D or the bid teams? Are you looking for engineers, salesmen? What is the hiring focus at ChargePoint right now?

I mean, the hiring, you know, it's still, as you said, you know, we're managing operating expenses to... slightly lower gross margin performance than our guidance range had at the beginning of the year outlined. And so we've basically are shaping OpEx, but we're still growing, as you said, and still hiring pretty much across the board. In terms of where the biggest scale pressures are in the company, you can think about our infrastructure as a company that's growing You know, effectively 30% quarter over quarter, which most companies don't see in a couple of years. You can imagine what we're doing internally from a scale perspective, not only in operations, but support in laying in the infrastructure ahead of needs there. So really a lot of the infrastructural positions in the company are really getting an investment. Another thing that we're doing is we're investing heavily in internal business systems and our internal business applications team. And the reason for that is what used to be something that we could handle in a less automated fashion with some manual steps is quickly when you're at our growth rate, very quickly eclipses what you can handle. in like a quarter or two. So what I, the thing I tell our team here all the time is objects in the rear view are closer than they appear. It's an interesting applicable line in that the close rate of issues, of scale issues is unprecedented because you're growing so fast. So that's, you know, qualitatively how management here and literally every charge pointer thinks about where the investments need to go so you can use that as a lens. With that said, we're still growing R&D, but we preloaded R&D growth over the, you know, the last 15 years. It was pretty much invest in R&D and sales and not a whole lot else before we were public, just like most private companies do. And so now we're, you know, it's much more evenly weighted and much more heavily weighted in the long term towards things that are going to enable us to scale.

Thank you for that. Congratulations on this really impressive growth. Thank you. Thanks.

Your next question comes from the line of Shreya Spatil with Wolf Research. Your line is now open.

Hey, everybody. Just wanted to ask just one on what was the supply chain impact to margin in the quarter and Within that also, how should we think about what the revenue or the shipments could have been if not for the supply constraint? I guess what I'm trying to think through is the underlying growth, the underlying level of demand that you're seeing and your ability to supply that demand in a more unconstrained environment.

Yes, it's Rex. So the impact we're quoting is about $7 million or 6 percentage points in quarter. of things that we would call purchase price variances or unusually adverse logistics costs, expediting costs, those sorts of things. So that's been reasonably consistent this year. We had a six to nine points Q1, two different issues, a six and a three, by the way, and then this quarter again at six. So the question is, The second part of the question is, you know, where do we see that going? You know, as I mentioned earlier, we're going to be working on that. One other thing that you should note, we did have a, there was some product transition costs also that, we had some NPI issues in Q1 and Q2. We had some product, you know, new product introduction transition costs that hit gross margin. So it, you know, we do think fundamentally there could have been some additional upside there. I think what's going to happen is, you know, growth into Q3 and Q4, some easing of the supply chain issues that we see will help us drive gross margin. And then on the kind of the woulda, coulda, shoulda question of what could revenue have been, you know, with, we have a very large backlog. We've not actually given a number to that, but it went up 30 plus percent I think in Q1, and then it went up another 26 percent in Q2. So you can imagine, you know, You know, if we could literally just, you know, build anything and everything and ship everything, we would have a substantially higher number on the top line. There's a question about that. I can't give you a number, but it would be a materially different.

Okay. And then just if I could squeeze one in, just it looked like, you know, it looked overall like, you know, pretty good improvement in terms of OPEX leverage from Q1 to Q2, but even versus Q4. Okay. And especially, you know, sales and marketing look like, you know, you got some improvement there. I'm just wondering, you know, how you think about, you know, what were some of the drivers of kind of improvement in OPEX? And then, you know, obviously the guidance is assuming there's continued improvement in the back half, but just at a high level, how you're thinking about the main drivers that will support continued OPEX leverage, you know, even into next year and then obviously towards that free cash flow break-even target.

Yeah so I think so first of all just a baseline Q1 was in the mid 80s Q2 was about 80s main delta there is some of the MDI costs that I mentioned earlier so if you look Q1 to Q2 it's effectively flat you know 70 percent of our operating expenses are people so we obviously didn't take anybody out because we're growing too fast to even consider that but we did we did have slightly slower hiring because one of the things that we're looking at is trying to do the balance between you know the gross margin being where we want it to be versus OPEX and then managing losses with the target of being cash flow positive in 2024 so we've been doing some of that some of the that dial turning over the last two three months so um you know I think the leverage is is going to be significant as we go through Q3 Q4 and into next year uh because you've got it you've got a complete differential in growth rate between The top line sequentially and operating expenses sequentially, I mean, there's just a complete disconnect there. So it's going to keep getting much, much better from a leverage perspective. I don't actually see the number itself going down, but I see the rate of increase trailing very much, the rate of increase that the top line is going to be giving us.

Okay, that's really helpful. Thanks so much.

Your next question comes from the line of Matt Somerville with D.A. Davidson. Your line is now open.

Thanks. I just want to put a finer point on the 600 basis points worth of hit. How much of a solve will pricing end up being? In other words, how much can pricing alone close that gap? And then I was hoping Pasquale could maybe comment briefly on just overall thoughts on California's law mandating 100% EVs by the middle of the next decade. There's a bunch of other states that typically follow California. How does that inform or potentially change or accelerate your go-forward strategy?

Thank you. I don't think, great question. I don't think it changes our forward strategy at all. And the reason is most, virtually all auto OEMs sell globally. And if you look at what's already been put in place with respect to bans on internal combustion vehicles, 2035 is about the centroid of the number that's already been put in place in a lot of different places around the planet, especially in Europe. And it's impossible to maintain R&D on the internal combustion side and the battery electric side because the platforms are, you know, to optimize them, they're substantially different in the end. So the net of it is I really support what California has done in terms of aligning with a lot of the bans that have already been put in place. But I don't think it materially changes, I don't think it really materially changes the adoption rate of electric vehicles. You've already got, by the way, consumers, if you look at all the consumer studies, right, consumer demand for electric vehicles exceeds supply. And, you know, auto OEMs are going to, you know, have to refit their entire manufacturing infrastructure to come up to curve to meet the demand and ultimately only ship electric vehicles. I've got an interesting one for you that I've commented on when I've gotten this question in other forums outside of an earnings call. And that a 23, any stated ban, any stated ban is a good thing because it begins to put residual value pressure on an ICE vehicle. And I don't think that'll have much effect now, but I think in one or two buying cycles of vehicles, it will accelerate the early retirement of vehicles when the supply is there from an auto OEM perspective, when they've worked all their supply chain transformations out. So I like the date certain dangling out there because I think it's batting cleanup, so to speak, on the conversion to electric vehicles. I'm going to turn the PPV versus ASP question back to Rex, since he was commenting previously on margin. I'll let him take that one.

Yeah. Rex? Yeah, so very quickly, the 600 points basis points is about two-thirds PPV at about a third logistics costs. And again, as I said earlier, They have definitely been running hot now for several quarters in a row. We do see those coming down. Hard to put a timeframe on that, but, you know, the external market does seem to be improving a bit. And as Pat said, as opposed to having this broad base, it's a problem everywhere. The problems are getting more focused and narrower, which I actually think is a positive sign. And then on the other piece of your question, I think where you were going is, you know, do you think that that, you know, we can get that six points to go away or at least be covered by ASP changes. I do think our ASPs are going to move northward nicely given the price increases that we've done, and those are in full effect now for Q3 and Q4. So as you can imagine, you know, you announced them in June, but they don't really take effect until you get to Q3, Q4. So I think that'll be a nice bump. And then I think the other things as the environment improves will naturally decline. I'd like to think that as those two things converge over the next six months that we'd actually be in a substantially better place.

It will more than cover the six. Understood. Thank you, guys.

Your next question comes from the line of Kashi Harrison with Piper Sandler. Your line is now open.

Good afternoon, everybody. Thank you for taking the questions. Just two quick ones for me. Pasquale, just at a big picture level, can you talk about how you're thinking about the impact of the Inflation Reduction Act across your business in light of your discussion around demand above supply capacity? And then Rex, could you maybe clarify for us, do you expect to be at the bottom end of the guidance range for OPEX? And that's it for me. Thank you.

So thank you for the question. I'll take the first one, Rex. I'll take the second. The Inflation Reduction Act, here's what we like about it a lot. Well, we don't dislike anything about it as a headline. What we like about it is that it has reasonably balanced incentives for both commercial and fleet vehicles, as well as the associated infrastructure. So it's Very key for us from a policy shaping perspective to see policies that look at the whole picture in totality and don't create effectively demand hotspots or incentive hotspots, so to speak. And, you know, this one looks like it tried to address that in reasonable balance, and it's always tough to do that in something as large as that, as a bill like that. So, you know, kudos to the authors. The, in terms of impact to the business, You know, the fine print on the usability of the tax credits given the customer's unique situations tax-wise is always the wrinkle with a tax credit-based incentive or for that portion of what's in our IRA. So it's hard to call, but again, because we are probably over the next couple of years still going to be supply limited on vehicles relative to demand in both fleet and passenger cars. I don't necessarily think the infrastructure pressure and the subsequent demand on our business will change a whole lot, but it does, I think on the margin, get the smaller companies off the blocks because there is a little grease to the skids there, right? If you look at the quotes that I made in my prepared remarks with respect to the Fortune 50 versus as you move down through the Fortune 500, The penetration rate, you know, gets lower. You know, you're upwards of 80% at the top of that range, and it gets, it's still substantial. It's still better than 50%, but it starts to move down. And as you trickle into the, you know, the diffuse mass of businesses out there, having some incentive may get them off the blocks a little bit faster. But I don't think it, frankly, I don't think it would move our forecast substantively.

You want me to take that second piece?

Yeah, on that second piece around operating expenses, I'd say two things. One, as I said earlier, on the gross margin side, if you do the math for Q3, Q4 against guidance, you would probably ascertain that we're looking at shading towards the lower half of that range on gross margin. And as a result, you know, we want to be responsible from a headed to cash flow positive perspective. And so we are feathering back our operating expense estimates. So I would expect to be in the lower half of that range as well.

For the year.

Excellent. Thank you.

Your next question comes from the line of Ryan Greenwald with Bank of America. Your line is now open.

Good afternoon, guys. Thanks for the time and the updates. Just to dive a little deeper on the advertising network partnership discussed a bit earlier, any incremental color you guys can provide around what monetization looks like and how revenue and cost from the partnership will ultimately be shared?

I, you know, without the partners on the line, I don't want to venture any commentary there. I'm not being evasive. It's just from a confidentiality perspective, I just, it's a, It's something I just don't want to comment on right now. But you can probably infer what the monetization looks like. We're, on our end, what I can tell you about how we're looking at it is we're not trying directly to monetize the advertising, so to speak. What we're, what the model does is it supports a one of a couple of buying options from us to provide the infrastructure. So from a charge point, you know, perspective, it will look like we sold or used our charging as a service program into a particular customer, right? And the way that the revenue monetization works on the advertising is through the partners to offset that cost and provide a profit. So we're not trying to basically monetize the advertising directly.

Understood. That's helpful. And then on IRA, you alluded a bit to the qualification nuances for the tax credits. At this point, have you seen any customers kind of look to pause any second half solutions previously planned for some clarity and for the credits to ultimately take effect?

I've gotten no alarm bells from our sales force of any significance that there's any stall in the marketplace from an IRA perspective. I'm sure there's an account here or there that may do that, but in the law of large numbers, it's not changing our forecast, and I'm certainly not seeing anything broad brush.

Great. I'll leave it there. Thanks so much.

Your next question comes from the line of Stephen Fox with Fox Advisors. Your line is now open.

Hi. Good afternoon. Just one for me, please. You mentioned a commercial uptick related to recovering from the lag from COVID. I was just curious now that you've had a recent positive trend there, how you're thinking about inflection points on the commercial side, how some of the post-COVID conversations are going with hotels or Starbucks or office managers, et cetera. Any kind of comments on the new normal there would be helpful. Thanks.

You know, this is what I call an all whoosh, no bang industry. Because it's so broad. So I would not expect commercial to have a massive dislocation in a quarter. It just, the business just, it's got too much inertia. It just doesn't work that way. What we are seeing is an, it's just unprecedented the level of engagement from a broad base of sub-verticals in the commercial space. Everything from parking operators, commercial real estate operators, hospitality operators, you know, retailers, you know, across the board, everyone's got the wake-up call now for sure. And it's definitely broad-based. So, you know, all the things that we're investing in for scale, is is specialization of our sales force specialization of our channel specialization of our sales enablement materials and our support capabilities to enable each one of those verticals to get the best possible counsel from us on how to approach charging in their parking lot um so i think i think you know you'll you're seeing it in our growth rate right you're seeing you're kind of seeing the evidence of it in our growth rate and remember that lags Our growth rate that we report on is a very lagging indicator. The leading indicator into the sales force is just a tremendous level of interest across the board.

Your next question comes from the line of Christopher Souther with B. Reilly. Your line is now open.

Hey, thanks for taking the question here.

Just real quick, you talked about increases in hardware ASPs really being U.S.-based. I'm curious why we're not also increasing in Europe as well. Maybe just talk a little bit about the market dynamics there, and then how should we think about kind of software pricing over time kind of more broadly as that fleet piece, you know, continues to pick up here and gain steam as well as You know, the residential side, you know, kind of just strategy around, you know, pricing for the software there. Thanks.

Hey, Chris, would you mind repeating the question? You've got a pretty muddy line.

Sorry about that. Yeah, on hardware ASPs, you talked about the increases being really U.S.-based. I'm curious why we're not also increasing in Europe as well. And then maybe just a little bit about the market dynamics driving that, and then On the software pricing, you know, can you talk a little bit about how that should grow over time or decline over time with fleet being a bigger piece and residential also kind of popping in? Thanks.

I heard you loud and clear that time. Thanks for repeating the question. So on the hardware front, from a hardware ASP perspective, in North America, obviously, we've got a very great market position here. So there's some elasticity of this possible in North America. When you go to Europe, we're relatively recent entered into that market. It's highly fragmented, as you know. There's a lot of competition over there. And so we're busily, for lack of a better term, we're training, educating or training the market to understand the full value of a fully integrated network solution that ChargePoint provides that we believe is superior to whatever other people are doing. You know there's there's there's work to do there, to be honest, to be able to educate the market and bring the overall level pricing more in line with what we're custom seeing here so then from a software perspective. We did do a good adjustment from a tour or selling prices here back in February, and then we have what you would expect from any software company which is annual escalators that we. have in place on most of our contracts. And so you would expect to see that, you know, creep up over time just because that's what software companies do. It's a cost of living kind of thing. And then what's going to be very interesting to see, and I would love to forecast this for you, but I can't, but the overall level of software content in the fleet space is going to be a meaningful adder to us. Certainly from a dollar's perspective, the rest of the business that we're going to be doing with fleet is going to be a big enough number that I don't know where the percentage will shake out, but I know that the dollar content there is going to be attractive.

Your next question comes from the line of Atai McKaylee with Citi. Your line is now open.

Great. Thanks. Good afternoon, everybody. Just two quick ones for me. First, a point of clarification, Rex. For the lower end of the guidance for the gross margin, just to make sure that revenue is not included in that, that that was just for the gross margin side. And then on the bridge from the first half to second half gross margin, any sense of how much the pricing element that you've spoken about on the call, how much that accounts for that incremental gross margin step-up point?

yeah so uh first clarification um my commentary on gross margin and opex was specific to gross margin and opex and and there's there's no shade there's no shading on the uh uh on the the revenue line at all so i'm very very confident that we've got uh the q3 guide and the annual guide there in our gun sites uh obviously the main limiter there is just the the ability to build um so hopefully that clarifies that and then from a first half second half perspective You know, again, I think gross margin is going to be a combination of things that will improve the trajectory there. And it's, again, everything from, you know, the price increases kicking in can't hurt. And so, obviously, that would be very helpful. There's a lot of work that we're doing with our CMs, and it's everything from what they charge us to do what they do, what they charge us to get it shipped, and then, of course, what we're paying for parts. We'll fundamentally improve incrementally there just by getting better at operations. I think you may have seen we hired Rick Wilmer as a gentleman to join us and focus heavily, particularly on the, you know, that operations front supply chain side of things. So we're very optimistic there. And then, you know, we have a very strong R&D team that does a nice job of doing things like, you know, we had an original power module. Now we have a new version of the power module, and it does, It's better, faster, cheaper, which, of course, you're not supposed to be able to pull off, but that's definitely what it is. So I think it's the combination of all those things is why we believe that the gross margin is headed back where it needs to be. That's very helpful. Thank you. Thank you.

This concludes today's Q&A session. Patrick Hamer, I turn the call back over to you.

Thank you, Emma, and I'll pass it back to Pascal Arbano, our CEO and president.

Well, first of all, you know, When you cross through your first $100 million revenue quarter, there's a long list of people to thank. It's really internally for a 15-year-old company and a lot of people that have worked tirelessly to get to this point. I have to say thank you. So to all the charge pointers out there that have been really pushing it to scale, as I mentioned in one of the answers, You know, the quarter over quarter growth here is an enviable multi-year growth rate for most companies. And the team here feels that, and they've risen to the occasion, and we're really proud of what they're doing. And we're making the necessary investments, obviously, to give them an even broader foundation to stand on. So thank you to all the charge pointers out there that are listening. And then I want to thank our customers and our partners. You know, our customers make this all happened for us. And they, you know, they trust us. And that's an honor to be trusted by so many companies. And to, you know, have to, you know, could have come through for them, especially under very demanding times. So, you know, again, a large thanks to the ecosystem out there that makes this place go. And thank you very much to everyone that listened in, asked questions. I'm glad we had quite a bit of time. We had 45 minutes for Q&A, so it was very robust, and we have a lot of, you know, a lot of analysts that are putting a lot of time into modeling the company, so we really appreciate that. Thank you very much, and we'll talk to you next quarter.

This concludes today's conference call. Thank you for attending. You may now disconnect.