CRGE - Charge Enterprises Inc. (CRGE) Q1 2023 Earnings Call Transcript
2023-05-15 11:33:06 ET
Charge Enterprises, Inc. (CRGE)
Q1 2023 Earnings Conference Call
May 10, 2023 10:30 ET
Company Participants
Christine Cannella - Vice President, Investor Relations
Andrew Fox - Founder, Chairman and Chief Executive Officer
Leah Schweller - Chief Financial Officer
Presentation
Operator
Good day, everyone and welcome to the Charge Enterprises First Quarter 2023 Financial Results Webcast. I am Matthew. I will be your operator for today’s webcast. Today’s webcast is being broadcast over the Internet and is also recorded for playback purposes. After the speaker’s remarks, there will be a previously solicited question-and-answer session. For opening remarks and introductions, I would like to turn today’s webcast over to the Vice President, Investor Relations with Charge Enterprises, Christine Cannella. Please go ahead, Ms. Cannella.
Christine Cannella
Thank you, Matthew. Good morning, everyone. I am Christine Cannella, Vice President of Investor Relations with Charge Enterprises. Welcome to Charge Enterprises first quarter 2023 financial results webcast. You will find our press release and our 10-Q along with a copy of today’s slide presentation on the Investors section of our website at www.charge.enterprises.com. If you are following along today with our earnings presentation, please turn to Slide 2.
Joining me for today’s discussion are Andrew Fox, Founder, Chairman, and CEO; and Leah Schweller, Chief Financial Officer. Andrew will give a review of our key business highlights from the quarter, Leah will then walk you through a review of our financial performance and then we will answer your questions. We are conducting a moderated Q&A session answering the questions you have submitted. We thank you for your questions.
Moving on to Slide 3, we would like to remind you that much of the information we will be speaking to you about today, including the answers we give in response to questions may include forward-looking statements within the provisions of the federal securities Safe Harbor law. In today’s press release and in our SEC filings, we detail material risks and uncertainties, many of which are beyond our control and could cause our actual results to differ materially from our expectations. These forward-looking statements apply as of today and we undertake no obligation to update these statements after the call. For a more detailed description of certain factors that could cause actual results to differ, please refer to our Form 10-Q filed with the SEC and our earnings release posted on our website and filed with the SEC on Form 8-K. Please note that our press release and our webcast today include non-GAAP financial measures. Reconciliations of these non-GAAP financial measures are set forth in the press release we issued today and the slide presentation with today’s webcast, which are provided on the company’s website.
With that, I am pleased to turn today’s webcast over to Andrew.
Andrew Fox
Thank you, Christine and welcome to Charge’s first quarter 2023 earnings webcast. Starting on Slide 4, for those of you who are new to our story, I would like to begin by providing an overview of our business. I will then outline our business accomplishments, along with factors that have led to our achievements during the first quarter of 2023. At Charge Enterprises, we make it easy for our customers and their clients to go electric. We offer turnkey scalable one-stop solutions and services. We design, engineer, install and maintain critical infrastructure for both EV charging and broadband. We have two capital light segments. Our infrastructure segment, which includes A&S, our wireless 5G infrastructure and smart monitoring business, BW electrical services, our electrical contracting services business, EV depot, our real estate solution for commercial and fleet operators and Charge Infrastructure, our EV charging infrastructure business, also known as CI and our telecommunications segment, which provides connection of voice calls, SMS and data service to global carriers.
I would like now to discuss our accomplishments during the first quarter of 2023. Revenues for the quarter were 19% higher year-over-year at $194 million. We benefited from strong underlying trends in our EV charging, broadband and electrical infrastructure businesses. We expect these strong tailwinds to drive positive adjusted EBITDA in the first quarter of 2024. We are incredibly pleased to have surpassed a milestone for our infrastructure segment, booking approximately $107 million in backlog at the end of the first quarter 2023 demonstrating growing demand for our product offerings, while establishing a reputation for delivering to our clients in the industry. During the first quarter, we continued to add and scale partnerships with top electric vehicle supply equipment or EVSEs jointly pursuing opportunities to become a preferred vendor for several automotive OEMs and large retail groups.
Let me elaborate on just one segment of the entire EV infrastructure market, the automotive retail industry, which has about 18,000 franchise dealerships. We have initial stated goal to win project engagements with a thousand of these dealerships by the end of 2025. Through the end of the first quarter, we have engaged with 15% of our targeted goal. Our expense so far indicates that the average project size for dealership is approximately $365,000, which could also vary depending on the size of the dealership, type of chargers to be installed and transmission needs. If we capture and provide full solution for 1000 dealerships, we could achieve $365 million in aggregated revenue and $65 million to $80 million in gross profits on the initial installation services on auto dealers alone over the next 3 years. It’s important to note this is just one customer segment and only their initial investment.
We also continue to develop strategic alliances during the quarter, including our recently announced partnership with Eaton and Autel Energy and continue to actively evaluate opportunity with first movers and conformers in electric vehicle industry as the adoption of EV advances. For example, Eaton and Autel Energy, global manufacturers of EVSE and energy storage together with Charge we will be able to provide complete EV charging infrastructure solutions for fleet electrification, energy storage and charging as a service and in the future possibly much more complex solutions such as micro-grids.
Moving on I wanted to take a few minutes to give an update on our CI business. In the second half of 2021, we formed our CI business unit that focuses on EV charging infrastructure and is capitalizing on the unprecedented opportunity to facilitate the nationwide transition to electric vehicles. During 2022, we accomplished a meaningful build out of our CI team and strategically pursued our customer base. We are able to make these investments with profits generated by our other subsidiaries. We have recruited an experienced team of auto industry veterans and have built a foundation for growth by creating a high touch multi-phase process offering to customers within our EV charging infrastructure business.
We view dealerships as a platform to create and grow a diversified future revenue streams as various products and services develop in the years ahead. We are planting the seeds for future growth by investing in software development, establishing partnerships and monitoring and maintenance services. These investments position us to expand into other customer segments beyond the dealer network, including fleets, depots, malls, churches, multifamily and commercial office space and other destinations. We are currently focusing on what we believe are the first movers of the critical EV charging infrastructure requirements. The nation’s 18,000 franchised auto dealers, to whom the auto manufacturers have articulated a significant mandated spend for onsite EV charging infrastructure to support the transition from combustion to electric vehicles.
Our goal is to capture a significant portion of this market beginning with the automotive industry needs. Today, our infrastructure segment has both completed and active projects in 39 states, with our CI business currently working on projects in 28 states and engaging with approximately 24 automotive OEMs. Today, the environment supporting EV charging infrastructure has never been stronger. The current political, economic and technological climates are all key macro drivers favoring demand for electric vehicles. The tailwind for EV adoption are being supported by the many recent mandates in the federal government, such as the Infrastructure Investment and Jobs Act, the IRA EV tax credit and the recent EPA proposal for more aggressive guidelines to reduce emissions.
In addition, there are aggressive investment plans by the major auto OEMs that are propelling the EV industry into the forefront and Charge with its scalable white-glove solutions is well-positioned to service this essential EV infrastructure need. While we are committed to developing this business, becoming a long-term partner for our customers and strategically investing in our fast growing EV charging infrastructure operations, we are laying the foundation that will enable us to diversify our customer base and allow for future growth as EV adoption proliferates. This is only the beginning. The lack of adequate charging infrastructure is one of the greatest roadblocks to EV adoption.
We at Charge are excited to deliver our services to clients to further enable electric vehicle adoption throughout the country. We believe that Charge is at the forefront of overcoming this hurdle, positioning us to lead, succeed and help create a more sustainable future, building and continually maintain the infrastructure, the EVs is paramount to electric vehicle adoption, which is the cornerstone to Charger’s mission.
Now, I would like to turn today’s webcast over to Leah to go over our financial performance.
Leah Schweller
Thank you, Andrew, and good morning, everyone. Today I will walk you through our financial results, including our key financial measures, which are revenue, gross profit, an adjusted EBITDA on a consolidated and a segment basis.
Let us begin on Slide 6, Charge revenue and gross profit quarterly trends. As a reminder, our Infrastructure segment contains our high-speed broadband, EV charging, electrical contracting, and fleet parking businesses. Revenues are derived from projects that can range from a few weeks to 24-months, and include 5G tower installations in building wireless networks, electric vehicle charging solutions and complete social electrical services. Revenues within our Telecommunication segment are generated via the routing of voice data and SMS text messages, and can vary quarter-to-quarter as a result of volume mix with different partners as well as macro trends and global events.
Looking at our results for the first quarter of 2023, and five-quarter trend, revenues increased by $31 million or 19% to $194 million this quarter compared to the first quarter of 2022. The 19% increase in revenue was driven by increases in both of our business segments. But consistent with the last five quarters, our infrastructure segment pro forma revenue growth has outpaced that of our telecommunication segment. In the first quarter of 2023, our infrastructure segment revenues grew 40% year-over-year, while in comparison, our telecommunication segment grew 16% year-over-year.
Gross profit rose 9% to $6.7 million versus $6.2 million last year for the same period, driven by growth in our Infrastructure segment partially offset by lower gross profit from telecommunications due to partner mix. Consolidated gross profit margin was 3.5% for the first quarter of 2023, down slightly versus the prior year period, which was 3.8% due to mild margin pressure in both segments partially offset by an increasing proportion of revenues coming from our higher margin infrastructure segment. We continue to experience margin pressure on voice business within our telecommunication segment, which decreased 0.4% this quarter from 1% in the prior year period. We are expecting to enhance the gross profit profile over time in telecommunications by increasing SMS text message volume, which carries a higher gross margin.
Our Infrastructure segment, gross profit margin decreased to 21.9% in the current quarter from 24.2% in the prior year period, primarily due to higher labor costs that began in the second and third quarters of 2022. The escalations in labor costs, we experienced in 2022, driven by high levels of inflation, we believe are now stabilized for the most part. We also experienced slightly low emergence within our nascent CI business, as we are currently heavily weighted to the earlier phases with customers, which carry a lower profit margin. Our goal is to increase margins over time as we grow the CI business to scale, integrate monitoring and maintenance services, and expand on the dealer platform to create opportunities that will drive of margin expansion in the future. We also have plans to benefit from efficiencies and opportunities through collaboration across business lines. For example, our ANS and BW businesses are able to leverage the union and non-union workforce in a combined customer base to create more opportunities.
Turning to Slide 7, we will discuss the Infrastructure segments revenue and backlog trends. In our Infrastructure segment, revenues for the quarter increased $8 million or 40% to $27 million. The increase was driven by growth within our ANS, BW and CI businesses. ANS and BW have experienced significant double-digit growth year-over-year in each period presented, including the first quarter of 2023 both have also grown sequentially from the second through the fourth quarter. As I mentioned on our last earnings call our infrastructure businesses, specifically ANS tend to have seasonality, resulting in sequential declines from Q4 to Q1. While, we are not yet breaking out revenue for CI as the business gathered revenue momentum in the second half of 2022, and nearly doubled sequentially from the fourth quarter of 2022, to the first quarter of 2023.
Within our infrastructure segment, we report the remaining project revenue to be completed in the future as backlog. As we announced a few weeks ago, we reported record backlog of approximately $107 million as of March 31, 2023. CI accounted for over 20% of this failure, and was minimal last year at this time. Backlog levels can fluctuate quarter-to-quarter based on seasonality and completion or booking of large longer-term projects, specifically within BW, as the duration of its projects can last up to 24-months. We also recently announced that as of March 31, we have achieved approximately 15% of our stated goal of engaging with 1,000 U.S auto dealerships. The combination of the significant growth in CI backlog, and new customer acquisition across diversified automotive brands demonstrates that we are doing what we said we would do. Build our CI team, develop white glove services, acquire customers, expand our backlog and ultimately drive revenues.
Let us move to Slide 8 to discuss adjusted EBITDA. We focus on adjusted EBITDA is the closest measure of our true operating performance. It removes the impact of non-cash items, such as stock compensation, depreciation and amortization. For the first quarter, adjusted EBITDA loss was $2.5 million compared with adjusted EBITDA loss of $1.8 million in the prior year period. As expected infrastructure adjusted EBITDA declined sequentially from Q4, due to seasonality and year-over-year from Q1 2022 due to investment in people and processes within CI to build our EV charging infrastructure business.
Telecommunications adjusted EBITDA dropped sequentially and year-over-year, in part due to investments made in SMS text capabilities in advance of recognizing associated revenues. Corporate segment expenses were $3.9 million for the quarter, which is lower than three of the four quarters in 2022. We continue to implement cost-cutting measures in order to allow further investment across our segments, when necessary to grow our business. While, we experienced losses on an adjusted EBITDA basis, we see 2023 as a pivotal year for Charge; we expect to deliver positive adjusted EBITDA in the first quarter of 2024. As Andrew laid out earlier, we believe our CI business has powerful earnings potential within the vast and ever growing addressable market of EV charging and the critical infrastructure needed to support it. And I want to emphasize this for everyone today. We have made the necessary investments upfront to build a team, both at CI in the corporate level, and advance of revenues to support the company for decades to come and deliver for our customers.
Turning to Slide 9, before we go into the full P&L, I would like to take a moment to talk about a change in accounting principle for recognizing stock-based compensation expense. Effective January 1 2023, we elected to Change from a graded vesting attribution method to a straight-line attribution method. This change resulted in recognition of a cumulative benefit to stock-based compensation of approximately $18 million net of tax. We believe the straight-line attribution method is the predominant method used in our industry more accurately reflect our awards are earn and better align our stock-based compensation expense with that of our peers. The effects of the change in accounting principle will be retrospectively applied to all periods in 2022.
In addition, starting in the first quarter of 2023, we are now allocating the expense to the segment level. We will file an 8-K with the SEC today, describing the change in accounting principles and reflect this change to all periods presented. There are no other changes to our financials within the 8-K.
Looking at the full P&L for the quarter, we saw strong growth in revenues and gross profit. I would point to the increases in G&A and salaries and benefits, where our upfront investments in people processes and capabilities that I just spoke about are reflected to grow all of our businesses and support the corporate structure. Depreciation and amortization grew year-over-year, due to intangibles established in conjunction with acquisitions. We finished the first quarter with a strong balance sheet with positive net working capital, and $40 million of cash and marketable security.
I would like to reiterate. We see 2023 as a pivotal year for Charge. We expect to deliver positive adjusted EBITDA in the first quarter of 2024. We plan to do this through continued strong growth and solid fundamentals within our broadband and electrical services business’s growth within our EV charging infrastructure business, materializing on the heels of our investments in our team and service capabilities, and continued close management of operating expenses. We are proud of our performance in the first quarter and view the sustained revenue growth, record level infrastructure backlog and customer engagement within CI as an endorsement of our business model in the foundation you have built to support future growth. Andrew?
Andrew Fox
Thank you, Leah. This is an exciting time for Charge Enterprises as we set the foundation for future growth. We will continue to adhere to our strategy and operate the very best of our ability as we continue to build every day.
Operator, we are ready for Q&A.
Question-and-Answer Session
Operator
As a reminder, today’s questions were previously solicited. The first set of questions is from Pavel Molchanov with Raymond James. In recent months, you announced charging related partnerships with Alltel and Eaton. Can you clarify how these partnerships are different? Are you purely sourcing equipment from each supplier?
Andrew Fox
Thank you for the question Pavel. These are strategic alliances that in addition to providing high-quality hardware and energy storage options for our customers also deliver new business development channels for various industry segments that need the infrastructure to transition from ICE to BEVs. This amplifies charges service offering while providing Eaton and Alltel with the trusted alliance to service customers. These relationships will allow us to present clients with solutions that have specific needs depending on the business use case.
Operator
The consultancy [indiscernible] Group recently forecasted that North America wireless CapEx will be down 10% to 20% in 2023. Is this decline matching up with what you are seeing on the markets?
Leah Schweller
Hello, Pavel. Several of the major carriers are leaded to lower CapEx spend in 2023 in their recently filed 10-Ks. Our team members, who have been in the industry for over 20-years, believe the hype of 5G spending was last year. With less CapEx spend expected in ‘23 and ‘24, followed by maintenance mode in 2025. This is considered a standard cycle for the industry when new technologies rolled out. However, based on our conversations with our long tenured large customers, we expect to see continued growth in this area of our business.
Operator
Next would be questions submitted by Amit Dayal with H.C. Wainwright. How much of the Infrastructure segment backlog will be recognized or delivered in 2023?
Leah Schweller
Thanks for your question Amit. When it comes to the recognition of our backlog, it’s important to remember that the timing is impacted by the mix of projects that we have at any given time. Our ANS business has projects that range from as short as a few weeks to over six months. Our CI business has projects that can take 3 months to 12 months, and our BW business had some short-term projects. But overall tend to have larger projects that can last up to 2-years. With the mix of our backlog, as it stands at the end of the first quarter, we expect to recognize a significant portion of that backlog during the remainder of 2023. It is also important to note that some projects may come into backlog and are either partially or completely recognized into revenue within the same quarter and therefore never show in the backlog number, we disclose externally.
Operator
In regard to your EV charging infrastructure business, I understand you are focusing on contracts with dealerships. Help me to understand, how to look at the recently announced partnerships, are you obtaining contracts through these partners?
Andrew Fox
We are in the early days, but the goal of signing these partnerships is to benefit both parties. One example is mutually referring customer. Charges point of differences customized charging solution. Have relationships in partnership with major EVSEs including Eaton and Alltel provide the necessary capabilities to meet our customers’ needs.
Operator
Thank you for providing insight for gross marginal improvement in the Infrastructure segment. Can you give me a sense of what to expect year-over-year for gross margin for the Telecommunications segment in 2023?
Leah Schweller
Amit, we do not give guidance, but I will point out that we have experienced increased margin pressure in our voice volumes in the middle of 2022 and we are still lapping impact during the first quarter. As we move forward in 2023, the pressure from a year-over-year perspective should lesson. Earlier we announced our investment in SMS, which should increase gross margin over time. The gross profit dollars we anticipate from SMS will begin this year. However, due to the high revenue base within telecommunications, it will take a little longer for a meaningful improvement in gross margin percentage.
Operator
Can you provide an outlook on operating expense expectations for 2023?
Leah Schweller
Amit, there are two things that I would point out. First, the majority of our investment in people in CI and corporate, occurred during the middle and end of 2022 and so for on a full year basis that will drive upward pressure on operating expense. Second, as I mentioned earlier, we continue to implement cost-cutting measures to allow us to selectively invest in areas to grow our business. Ultimately, our focus is to keep tight management on operating expenses to help deliver positive adjusted EBITDA in the first quarter of 2024.
Operator
The next question comes from Chris Pierce with Needham. Can you walk us through the sales cycle for a dealership client? Where are the pain points? What can Charge do to ease those pain points and keep the process moving forward?
Andrew Fox
Hello, Chris. Appear the pain points are lack of knowledge, understanding total cost of ownership, along with speed and certainty for what has been promised. Charge’s sales cycle is based on a three-phased approach. First is our on-site assessment to analyze the cost and power availability at the site. Second, design and engineering, which provides a plan set for permitting, submission and approval, and finally construction, installation and commissioning. The entire sales cycle supported by our internal client engagement design, engineering and dedicated technical project management team. The results is a very customized solution for every client that address their pain points and prepares them for the future.
Operator
We will now go to questions sent by Tate Sullivan with Maxim. Are any of your broadband telecommunication customers transitioning fleet to electric, might some of these customers need EV charging installations and maintenance and monitoring work?
Andrew Fox
Hello, Tate. We are poised and ready to partner with our customers, when they are ready to ship their fleet to electric and when the fleet inventory is available. We will be there for them. The shift to fleet is in the early stages, so that’s why we are focused on dealerships, who may have the mandate to upgrade their infrastructure now.
Operator
Andrew, how did CRGE develop its goal to work with at least 1,000 of the automotive dealerships in the U.S by the end of 2025? Does this number represent a portion of auto dealers you have talked to?
Andrew Fox
There are approximately 18,000 retail auto dealers in the U.S. The initial target is based on approximately 10% of the 10,000 major market dealers. And that’s those who sell at least 1,000 cars a year. Charge believes this to be a reasonable target, keeping in mind the current challenges on extended lead times for utility service upgrades. We are pacing nicely to achieve this target. Furthermore, let’s not forget, this is a sliver of the total addressable market that, we can service.
Operator
The next set of questions are from Poe Fratt with Alliance Global Partners. Will the revenue mix change over the remainder of the year? How about the margin profile?
Leah Schweller
Thanks for the question, Poe. We expect the mix of revenue to continue to shift to our infrastructure business over time as the strong momentum in CI continues an ANS and BW continue their growth as well. As I mentioned in my prepared remarks, we have seen the Infrastructure segment grow at a faster pace than Telecommunications segment and we expect that trend to continue.
Operator
Any meaningful impact from the Lumio partnership in the first quarter?
Andrew Fox
Poe, we have not experienced any financial impact yet. We are developing software with Lumio that will be used to help capture customers interested in home charging or solar panels as they buy electric vehicles at dealerships. We are optimistic that this deal and deals like this can have meaningful financial impact in 2024 and beyond. We see the ecosystem that we are building around the dealership community as a platform for future revenue opportunities.
Operator
Will it make sense at some point to split the company into two different companies, for example, telecom and infrastructure?
Andrew Fox
At some point in time, it might make sense to split the company in two different businesses. However today, we believe keeping the company as one is the best interest of our shareholders. We will continue to carefully evaluate the potential benefits and drawbacks.
Operator
What are one or two things that investors are missing?
Andrew Fox
Poe, why limit me to two, let me give you a few. We are capital-light company in a high growth area. We have a foundational business such as ANS and BW with solid fundamentals. We have delivered double-digit revenue growth. We have grown our backlog to $107 million, and we have made meaningful progress towards our goal of 1,000 dealerships. Today, our initial focus is on dealership with a significant mandate spending. Next, we will move to a broader cross section of EV customers, such as fleet, churches, multi unit real estate and other destinations. Additionally, our EV charging infrastructure business is expected to provide new revenue streams beyond installation, such as maintenance, monitoring, and service contracts. Most importantly, we expect to deliver positive adjusted EBITDA in the first quarter of 2024. Poe, I could not be more excited about the opportunities ahead.
Operator
Ladies and gentlemen, this concludes the question-and-answer portion of today’s webcast. At this time, I will turn the webcast back to Andrew Fox for closing remarks.
Andrew Fox
Thank you for participating in today’s call. We look forward to your continued support. Operator?
Operator
Ladies and gentlemen, that will conclude Charge Enterprises first quarter 2023 financial results webcast. We wish you a great day. Goodbye.
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Charge Enterprises, Inc. (CRGE) Q1 2023 Earnings Call Transcript