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 2022 Earnings Conference Call and Webcast. [Operator Instructions] 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 brought webcast and can be accessed on the Investors section of our website at investors.chargepoint.com. With me on today’s call are Pasquale Romano, our 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 would like to remind you that during the conference call, management will 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 a 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 to GAAP in our earnings release and for historical periods and the investor presentation posted on the Investors section of our website. And finally, we will be posting the transcript of this call to our Investor Relations website under the Quarterly Results section. And with that, I will 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. According to BloombergNEF, combustion vehicle sales peaked in 2017. And as we have said before, improvement 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 have improved gross margin from Q1 and realized the operating leverage as forecasted. The category continues to be affected by supply chain dislocations. 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 2 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 will remind you that ports under management is one way to track our progress in our commercial and fleet verticals as each of these ports…

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 our non-GAAP to GAAP reconciliations. For Q2, revenue was $108 million, up 93% year-on-year and 33% sequentially, above our previously announced guidance range of $96 million to $106 million. As we have for multiple quarters running, we fundamentally shifted what we could build. All verticals were 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 that we work down a meaningful percentage of our existing backlog during the quarter, our ending backlog grew 26% sequentially from Q1. Network charging systems at $84 million was 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 have discussed before, subscription revenue growth is tied to the growth in 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%,…

Thank you. [Operator Instructions] Your first question comes from the line of Colin Rusch with Oppenheimer. Your line is now open.

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

Hi, Colin. Happy to answer those two questions. We have been – to take the first one we have been very consistent on comments related to Nevi on earnings calls and other forms that we have presented in. As a company with the 15-year experience that we have in engaging in policy heavily things always take longer than you expect. And so we don’t have any expectation as there 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 manifest in the form of schedule and equipment in the ground next year and for the 4 years thereafter for the kind of 5-year program run duration. So the net of it is we treat it as upside. It’s a great tailwind for that segment of the business that affects one vertical, one of our verticals and we are 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 will treat it completely as upside and we will 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 mature product. So transit is moving nicely. Light commercial has a lot of overlap with passenger vehicles and just there isn’t a volume going into that segment just yet. And same thing with class kind of 4 through 8 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, we will be relatively conservative with respect to that, because until you see it, you don’t want to bet on it. But for us on the fleet side, it’s about the logo wins. It gets the customers integrated. It’s just as hard to get a 5 vehicle pilot off the ground as it is to get a 50 vehicle or a 500 vehicle or deployment off the ground when it comes to software integration planning, etcetera. So we are laying all that groundwork now.

That’s helpful. And this gives me a sense of it [ph]. Thanks, guys.

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

Yes. Hi, thanks for taking the questions. I was hoping you can help us understand what was better in the quarter, I guess, what you are able to 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 similar mix trends sort of the kind of lag, 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 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 in 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, yes, a little bit from Q4 to Q1 and nicely from Q1 to Q2. Obviously, you can do the math for 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 of backing us up as well. So, I think this is more of a – it’s more of a consistent C ball game right now until the external environment changes, where we just keep pushing the envelope, but any breakouts that we would expect would be a function of the external weather clearing up considerably from where it is today. So hopefully, that answers your question.

Yes, mostly that is up for the European seasonality. But I guess just the second...

Hello. Go ahead.

Yes, go ahead.

I was just going to say from a seasonality perspective – go ahead.

Yes, please.

You first.

Okay, you can answer Europe, too.

Yes.

Okay. So, just nice to see the sequential improvement in margins and reiteration of the full year guidance, hardware margins stepping up, I guess the software and services step down at least from a GAAP 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 in that segment going forward? I presume that’s going to be a key factor in driving full year margins to the 22% to 26% range you talked about?

And so you are being specific as to the software side of that?

Well, I mean, if you could breakdown how we get to the margin range you provided that would be helpful. But I mean I am trying to understand why the software stepped down as well in the second quarter?

Yes, okay. So the – if you look at the quarter we just finished going from 17% to 19%, you can imagine there is a lot of operational grinding it out that happen to provide those improvements. And it really comes from a broad base of things that we do. And there is everything from negotiating a given component supply to design again new components that have a lower cost profile. We obviously have new product introductions that are happening as we speak and being able to just continually work the process to bring down cost and therefore gross margins up on the hardware side is just something we do everyday. And I think we have got a pretty good start here and coming off the 17% from last quarter. From a software perspective, our subscription line obviously includes both software and our Assure 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 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 is a baseline level and it’s not a low baseline, it’s a high baseline. There is a high bar that we want to accomplish from a driver host support perspective and obviously from a warranty and field support perspective. So I would expect we are investing heavily there and we will continue to do that, but you will 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 you earlier.

Yes. I thought you asked this question about seasonality. So Europe, Europe had a really good quarter this quarter. Sequential growth was not as big a number, but that’s such a great quarter last quarter. So I think Europe is definitely gotten on the map here as part of the company’s strategy, and we’re executing beautifully in that area. And if you talk about seasonality more broadly, which I think you did mention, we had a nice Q4 to Q1 transition this year, first time ever that Q1 was higher. I can’t speculate on what will happen this year, but obviously, we’ve got a lot of momentum in the company. So I would hope that we could reproduce that, but I don’t know yet.

Thanks. That seems a nice job again on the execution.

Thanks.

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

Thank you and good afternoon, everybody. I was curious if you could talk a little bit about the advertising side and how it sort of fits into your portfolio, there is 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.

Yes. So from us – from our side, Stephen, we view it as a way for certain sub verticals inside of commercial, say, certain retailers, shopping malls, etcetera, 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 or an or – excuse me, an or, it’s very complementary 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 hour in our engagement quiver. We look at it the same way we look at are 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 will 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 charges?

Well, of course, there is always integration when you do stuff like this. But the two applications are very – they are 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 is integrations. And yes, it’s very flexible.

Got it. Great. Thanks for the color.

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

Thank you, and afternoon, everybody. Thanks for all the prepared remarks so far. Guys, maybe just hoping – 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 a step-up in stock-based comp that you mentioned, Rex?

So Gabe, that’s a GAAP question, right?

That’s right because on a GAAP basis, it looks like it declined about 600 basis points. So if it’s just stock-based comp or anything else?

The main differentiator is would be the stock-based comp, obviously, is a big one, right? But because that’s mostly in the line, it’s not a big swinger, and then there is amortization of intangibles as well. So sorry, amortization as well. So – but from a business standpoint, you should track it from a – you should also look at it from a non-GAAP perspective because – that’s when we can get down to what we think are some of the fundamentals operationally of building, selling and making margin on the product. And there, what you see is us doing what we said we were going to do, which is marching up from the – what we hope is the low of the 17% in Q1 and driving that number back up to something closer to the models that we’ve got it out in the street. One thing I would tell you, if you look at the gross margin, we obviously have confirmed guidance for the year. 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 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 progressing, I guess. So it would be the ASP increase. I think you also introduced a new power module on the CPE 250. So just curious how those two are progressing and if that’s making the impact that you expected so far? Thanks, guys.

Yes. 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 fairly late. I think it was in June, and so we haven’t seen enormous impact on that in order do we actually expect to see norms impact on that in Q2. So – and I’ve said this in my remarks, we do expect to see the improved ASPs kicking in Q3, in Q4 across the product side. And that’s mostly North America. That’s not fundamentally a Europe thing. So I do have some good optimism that we will get some benefits there. In terms of new products, 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 is just the stuff we’re doing across the Board to work prices on existing components and then where necessary swap out components for either higher performance, lower costs or both.

Got it. Super helpful. Thanks, Rex.

Thank you, Gabe.

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

Hi, good afternoon, guys.

Hi, James.

So – Hi, Pat, I wanted to dig into fleet a little bit more. Obviously, you mentioned were vehicle limited at this point, but the vehicles are, they are coming. They are coming next year, and they are 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 ramping or expanding your capacity to handle that what’s going to be probably a pretty big surge in volumes.

James, the increase in volume due to vehicles is it will 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 markets. So first of all, we’re always improving the sophistication of our supply chain and CM base, and 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 forecast accurately since we’ve 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 CM downstream, CM partners, they are 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?

Well, I mean it depends on – I mean, obviously, the answer is it just depends on the customer. There are some customers that are already way up the learning curve. They have been piloting things and frankly, hiring people out of our industry, the utility industry, the vehicle industry, etcetera, 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 we can stand in for customers that that have 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, they 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 – still at the vehicle curves. I think fleet much like – or excuse me, our commercial business is going to be inextricably tied to vehicle penetration into the vertical.

Alright. Okay, got it. Thanks, Pat.

[Operator Instructions] Your next question today comes from the line of Craig Irwin with Roth Capital. Your line is now open.

Hi, good evening. 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. We 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, I think it’s easier to answer it from the last question and then work back into the specifics. Environmentally, demand for electric vehicles exceed 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 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 is 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 aligned with the softening macro, but we don’t want to be presumptuous. So again, it’s easier to 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 one of all the subsides. But it is changing color a bit for sure. Hopefully, that’s helpful.

Excellent. That’s hugely helpful. So if I could squeeze another one in, if possible. So 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 head count, 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 – it’s still, as you said, 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 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 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, what support in laying in the infrastructure ahead of needs there. So really, a lot of the infrastructural positions in the company are really are really getting 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 as 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’d tell our team here all the time as objects in the rearview 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 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 – in the last 15 years, it was pretty much a invest in R&D and sales and not a whole lot else before we were before we were public, just like most private companies do. And so now we’re – 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 Shreyas Patil with Wolfe Research. Your line is now open.

Hi, everybody. I just wanted to ask just one on the – what was the supply chain impact to margin in the quarter? And within that also, is there – 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. Hi, Shreyas. This is Rex. So the impact we’re quoting, it’s about $7 million or 6 percentage points in the quarter of things that we would call purchase price variances or unusually adverse logistics costs, expediting costs as sort of things. So it’s – that’s been reasonably consistent this year. We had a 6 to 9 points in Q1, two different issues of 6 and 3, by the way. And then this quarter, we get at 6%. So the question is – the second part of the question is where do we see that going? Obviously, as I mentioned earlier, we’re going to be working on that. One of the things that you should note, we did have a – there was – so product transition costs also that we had some NPI issues in Q1. In Q2, we had some product – new product introduction transition costs that hit gross margin. So it – we do think fundamentally, there could have been some additional upside there. So I think what’s going to happen is 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 [indiscernible] question of what could revenue have been with – we have a very large backlog. We’ve not actually given a number to that, but it went up 30% plus, I think, in Q1, and then it went up another 26% in Q2. So you can imagine if we could literally just build anything and everything and ship everything, we would have a substantially higher number on the top line. There is a question about that. I can’t give you a number, but it would be materially different.

Okay. And then just if I could squeeze one in, just it looked like – look overall like pretty good improvement in terms of OpEx leverage from Q1 to Q2 but even versus Q4. And especially sales and marketing look like you got some improvement there. I’m just wondering how you think about what were some of the drivers of kind of improvement in OpEx? And then obviously, the guidance is assuming there is 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 even into next year and then obviously, towards that free cash flow breakeven target?

Yes. So I think – so first of all, just to baseline, Q1 was in the mid-80s, Q2 was about 80. The main delta there is some of the NPI costs that I mentioned earlier. So if you look Q1 to Q2, it’s effectively flat. 70% of our operating expenses are people. So we obviously didn’t take anybody else because we grow too fast to even consider that. But we did have slightly slower hiring because one of the things that we’re looking at is trying to do the balance between 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 have been doing some of that down turning over the last two months. So, I think the leverage is going to be significant as we go through Q3, Q4 and into next year because you have got a complete differential in growth rate between the top line sequentially and operating expenses sequentially. I mean there is 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 very helpful. Thanks so much.

Your next question comes from the line of Matt Summerville 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 do pricing alone close that gap? And then I was hoping Pasquale could maybe comment briefly on just overall thoughts on California’s law mandated 100% EVs by the middle of the next decade. There is 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 centered 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 to optimize them, they are 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 have already got, by the way, consumers, when you look at all the consumer studies, right. Consumer demand for electric vehicles exceeded supply. And auto OEMs are going to have to refit their entire manufacturing infrastructure to come up to curve to meet the demand and ultimately only ship electric vehicles. I have got an interesting one for you that I have commented on when I have gotten this question in other forums outside of our earnings call. And then a – 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 will 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 have worked all their supply chain transformations out. So, I like the date certain dangling out there, because I think it’s just – it’s batting cleanup, so to speak, on the conversion to electric vehicles. I am going to turn the PPV versus ASP question back to Rex since he was commenting previously on margin, I will let him take that one. Rex?

Yes. So, very quickly, the 600 basis points is about two-thirds PPV and about a third logistics costs. And as I said earlier, those – they have been – they have definitely been running hot now for several quarters in a row. We do see those coming down. And hard to put a timeframe on that, but 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, do you think that that we can get that 6 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 have done, and those are in full effect now for Q3 and Q4. So, as you can imagine, you announced them in June, but they don’t really take effect until you get to Q3, Q4. And so I think that will be a nice follow-up. And then I think the other things as the environment improves, will naturally decline. So, I would like to think that as those two things converge over the next six months that we would actually be in a substantially better place, will more than cover…

Understood. Thank you, guys.

Your next question comes from the line of Kashy 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 – and apologies if you mentioned this, but just at a big picture level, can you talk about how you are thinking about the impact of the Inflation Reduction Act across just – 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 will take the first one. Rex will take the second. The Inflation Reduction Act, here is what we like about it, a lot. We don’t dislike anything about it is the 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 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, kudos to the authors. The – in terms of impact to the business, the fine print on the usability of the tax credits given the customers’ unique situations tax-wise, is always the wrinkle with the tax credit based incentive or for that portion of what’s in 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 gets lower, you are 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 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.

Let me take that second. Yes, on that second piece around operating expenses, I would say two things. One, as I said earlier, on the gross margins side, if you do the math for Q3, Q4 against guidance, you would probably ascertain that we are looking at shading towards the lower half of that range on gross margin. And as a result, we are going to be responsible from a data 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 update. 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 costs from the partnership will ultimately be shared?

Without the partners on the line, I don’t want to venture any commentary there. I am not being evasive. It’s just from a confidentiality perspective, I just – it’s something I just don’t want to comment on right now. But you can probably infer what the monetization looks like we are on our end. What I can tell you about how we are looking at it is we are not trying directly to monetize the advertising, so to speak, we are 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 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 are not trying to basically monetize the advertising direct.

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 credit to ultimately take effect?

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

Great. I will leave it there. Thanks so much.

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

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

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. 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, retailers across the board, everyone has got the wake-up call now, for sure. And it’s definitely broad-based. So, all the things that we are investing in for scale 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. So, I think you will – you are seeing it in our growth rate, right. You are seeing – you are kind of seeing the evidence of it in our growth. And remember, that lags right. Our growth rate that we report on is a very lagging indicator, a 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. Riley. Your line is now open.

Hey. Thanks for taking my question here. Just real quick, you talked about increases in hardware fees really in U.S. based. I am curious why we are 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 the fleet piece continues to pick up here and gain steel as well as the residential side, kind of just strategy around pricing for the software there? Thanks.

Hi Chris, would you remind repeating the question. You have got a pretty muddy line.

Oh, sorry about that. Yes, on hardware ASPs, you talked about the increases being really U.S. based. I am curious why we are 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, 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 – yes. From a hardware ASP perspective, in North America, obviously, we have got a very – a great market position here. So, there is some elasticity as possible in North America. When you go to Europe, we are a relatively recent entrant into that market. It’s highly fragmented, as you know. There is a lot of competition over there. And so we are busily for lack of a better term, we are training – educating or training the market to understand the full value of a fully integrated network solution that ChargePoint provides it, we believe is superior to what other people are doing. But there is work to do there, to be honest, to be able to educate the market and bring the overall level of price more in line with what we are accustomed to seeing here. So, then from a software perspective, we did do an adjustment from – to our 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 creep up over time just because that’s what software companies do, and 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 just worry, but I can’t. But with the overall level of software content in the fleet space is going to be a meaningful adder to us certainly, from a dollars perspective, the rest of the business that we are 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 Itay Michaeli 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, I just want to make sure that revenue is not included in 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 have spoken about on the call, how much of that accounts for that incremental gross margin step up?

Yes. So, first clarification, my commentary on gross margin and OpEx was specific to gross margin and OpEx and there is no shading on the revenue line at all. So, I am very confident that we have got the Q3 guide and the annual guide there in our gun sites. Obviously, the main limiter there is just the ability to build. So, hopefully, that clarifies that. And then from a first half, second half perspective, 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 the price increases kicking in can’t hurt. And so obviously, that would be very helpful. There is a lot of work we are doing with our CMs, and it’s everything from what they charge us to do what they do, but they charge us to get a shift and then, of course, what we are paying for parts. So, I think we will fundamentally improve incrementally there just by getting better in operations, I think you may have seen we hired Rick Wilmer, who is a gentleman to join us and focus heavily, particularly on that operations from supply chain side of things. So, we are very optimistic there. And then we have a very strong R&D team that does a nice job of doing things like. We had an original power module. Now we have a new version of the power module, and it has it’s better, faster, cheaper, which, of course, you are not supposed to be below, but that’s definitely what 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.

It’s very helpful. Thank you.

Thank you.

This concludes today’s Q&A session. Patrick Hamer, I will turn the call back over to you. End of Q&A:

Thank you, Emma, and I will pass it back to Pasquale Romano, our CEO and President.

Well, first of all, when you cross through your first $100 million revenue quarter, there is a long list of people to thank it 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 ChargePointers out there that have been really pushing it to scale, as I mentioned in one of the answers the quarter-over-quarter growth here is an enviable multiyear growth rate for most companies. And the team here feels that, and they have risen to the occasion, and we are really proud of what they are doing. And we are making the necessary investments, obviously, to give them an even broader foundation to stand on. So, thank you to all the ChargePointers out there that are listening. And then I want to thank our customers and our partners. Our customers make this all happen for us, and they trust us, and that’s an honor to be trusted by so many companies, and to have to could come through for them, especially under very demanding times. So, 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 am 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 analysts that are putting a lot of time into modeling the company. So, we really appreciate that. Thank you very much. And we will talk to you next quarter.

This ends today’s conference call. Thank you for attending. You may now disconnect.