ChargePoint Holdings Inc

NYSE:CHPT

Earnings Call Analysis

ChargePoint Exceeds Revenue Guidance Amid Strong EV Market Growth

In Q3 of Fiscal 2025, ChargePoint reported revenue of $100 million, surpassing guidance of $85 to $95 million. Non-GAAP gross margins held steady at 26%. Operating expenses decreased to $59 million, contributing to a dramatic 64% reduction in cash consumption to $24 million. The US EV market saw a record 11% sales increase, fueling infrastructure needs. Moving forward, ChargePoint expects Q4 revenue between $95 and $105 million. Improved margins and cash management reflect operational excellence, with positive EBITDA anticipated in FY2026 as restructuring benefits materialize.

ChargePoint's Positive Financial Upswing

ChargePoint's third quarter of fiscal 2025, which ended on October 31, 2024, proved to be a significant turning point for the company, showcasing its operational excellence amidst the growing demand for electric vehicle (EV) infrastructure. The company reported revenue of $100 million, surpassing its own guidance of $85 million to $95 million, marking a clear indication of robust operational strategies paying off.

Cost Management and Operational Efficiency

The company emphasized a strong control over its costs, reducing operating expenses from $66 million in the second quarter to $59 million in Q3. A remarkable leap was observed in cash management, with net cash consumption lowered to $24 million—64% less than in the first quarter. This tightening of the financial belt is evidence of a strategic pivot towards enhancing profitability.

Market Context and Expansion Opportunities

The call highlighted a rebound in EV sales, with a recorded 11% increase year-on-year in Q3, indicating promising expansion opportunities for ChargePoint. The company’s network charging systems accounted for 53% of its revenue, amounting to $53 million, although this represented a sequential decline of 18%. Nonetheless, subscription revenue growth is noteworthy, rising by 19% year-over-year to $36 million.

Strategic Partnerships and Innovations

ChargePoint continues to solidify its position in the market through strategic partnerships, including collaborations with automotive manufacturers and major deals with port operations. Notable among these was their expansion at the Port of Stockton, California. Additionally, ChargePoint showcased its commitment to innovation with the rollout of new software and hardware products, aimed at diversifying and enhancing customer engagements.

Future Projections and Guidance

Looking forward, ChargePoint is optimistic about its Q4 guidance, forecasting revenues between $95 million and $105 million. The management's commitment to reaching positive non-GAAP adjusted EBITDA by fiscal year 2026 not only reflects an ambitious outlook but also a structured approach to incorporating revenue growth and margin improvements from manufacturing efficiencies.

Sustainable Growth Through Strategic Plans

ChargePoint laid out a clearly defined three-year strategic plan aimed at driving future growth through robust operational performance, innovative software solutions, and enhancing customer experience. The first stages of this plan have arguably already met their yearly targets, positioning ChargePoint to capitalize on the ongoing shift towards electrification.

Cautious Optimism Amidst Market Shifts

Despite external political changes and potential uncertainties in policy, ChargePoint asserts that its strategic position and technological advancements mitigate risks associated with buyer hesitancy. The company enjoys a solid customer base, including 80% of the Fortune 50 companies, thus reinforcing its market leadership and adaptability in a rapidly evolving landscape.

Focus on Profitability and Cash Flow Management

Management articulated a focus on profitability, aiming for cash flow breakeven potentially earlier than anticipated, reliant on inventory reductions and operational efficiencies. The enhanced control over cash burn, highlighted by a 64% reduction, shows ChargePoint’s commitment to maintaining a financially sustainable pathway as the EV market expands.

Earnings Call Transcript 2025-Q3

[Operator]

Ladies and gentlemen, good afternoon. My name is Abby, and I'll be your conference operator for today's call. At this time, I would like to welcome everyone to the ChargePoint Third Quarter Fiscal 2025 Earnings Conference Call and Webcast. [Operator Instructions]

And I would now like to turn the call over to Nandan Amladi, ChargePoint's Vice President of Finance and Investor Relations. Nandan, please go ahead.

[Unknown Executive]

Good afternoon, and thank you for joining us on today's conference call to discuss ChargePoint's Third Quarter Fiscal 2025 Earnings Results. This call is being webcast and can be accessed on the Investors section of our website at investors.chargepoint.com.

With me on today's call are Rick Wilmer, our Chief Executive Officer; and Mansi Khetani, our Chief Financial Officer. This afternoon, we issued our press release announcing results for the quarter ended October 31, 2024, which can be found on our website. We'd like to remind you that during the conference call, management will be making forward-looking statements, including our outlook for our fourth quarter of fiscal 2025.

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 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 on September 9, 2024, and our earnings release posted today on our website and 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 certain historical periods in the investor presentation posted on the Investors section of our website. And finally, we'll be posting a transcript of this call to our Investor Relations website under the quarterly results section.

And with that, I'll turn the call over to Rick.

[Richard Wilmer, executive]

Good afternoon, and welcome to ChargePoint's Third Quarter Fiscal 2025 Earnings Call. Today, I will walk through key financial results for the quarter, implications of the recent U.S. elections and a review of progress made on our strategic plan. Let's start with the third quarter.

Our relentless pursuit of operational excellence is translating into positive results as we align our business for growth and manage our operating expenses. We finished the quarter with revenue of $100 million, exceeding our guidance range of $85 million to $95 million. Non-GAAP gross margins remained steady at 26% and inventory slightly lower than it was in the second quarter. Operating expenses were also down at $59 million compared to $66 million in the second quarter. In the quarter, we reduced our cash consumption to $24 million, which is down 64% from Q1 of this year. We continue to manage our cash with extreme rigor.

The third quarter was notable for the expansion of our work with automotive manufacturers and partner. Projects for General Motors, deploying our software for a new use case with a major faster network in the U.S.A. We expanded our footprint at U.S. ports, doing a sizable deal with the Port of Stockton in California. We recently joined forces with 6 USA services. Sixth and ChargePoint will be working together to test ChargePoint solutions that select 6 rental locations in U.S. markets with high EV adoption rates.

With our partner Energy Efficiency Pros, we did a large installation for RedBull's delivery fleet. More installations at IKEA locations went live and we cohosted a fleet webinar with them to share the case study.

The recent U.S. election is likely on many of your minds, but ChargePoint currently does not see any dramatic changes on the horizon that we expect will materially impact our business. We have established our market leadership over 17 years amidst changing political environments, and we will continue to drive the secular shift towards clean transportation. Significant investments have been made across sectors prepare for this shift. We believe electric vehicles are far superior to their internal combustion counterparts, and we do not predict any reversals on the road to electrification.

Last quarter, I mentioned green shoots in demand, and we continue to see encouraging signs in the market. Charging network operators have been reporting an upswing in charger utilization, a trend we are also seeing at ChargePoint. This is good for the industry as a whole and good for ChargePoint as a supplier of software and hardware to the aforementioned networks. This all demonstrates the need for more infrastructure with our utilization outpacing our port growth yet again in the third quarter. This pressure has prompted customer inquiries about incremental chargers.

The utilization pressure is the result of more EVs on the road. The U.S. saw a record EV sales third quarter, up 11% year-over-year according to Cox Automotive. It was also a record quarter for the EV market share in the U.S., continuing the stable and sustainable growth pattern I mentioned in our last earnings call.

In terms of our own growth, our Mitch port count now exceeds $329,000, representing 20% more active ports in the field year-over-year. We count 80% of the Fortune 50 companies as customers and we estimate we have avoided the consumption of nearly 500 million gallons of gasoline.

In our last call, I introduced ChargePoint's 3-year strategic plan. This plan remains anchored upon our 4 cornerstones of a class-leading software platform, hardware innovation, delivering a world-class driver experience and operational excellence. Year one goals included finalizing our leadership team, revising our product road map, rightsizing and ensuring operational excellence. Three quarters into this fiscal year, we have accomplished all of this with the hiring of our new CRO, David Vice, being a recent highlight. David joined us in September and he is aligning the sales organization to drive growth.

Priority for year 2 of the strategic plan is the rollout of our next-generation software and hardware products. Our next-generation software aggregates our grave features and capabilities into one formidable platform. Within this platform, a customer will be able to manage anything from a network of chargers to a corporate lead of cars, trucks or buses. When we roll out these integrated capabilities, we expect to delight our CPO, commercial and fleet customers with the first major proof points of the software-first initiative. The new hardware solutions will be proof points of our enhanced product design and manufacturing strategy, which leverages partners to bring our products to market faster at a lower cost and at improved margins.

Year 3 of the plan is when we expect to reap the full benefits of a top-performing organization, a next-gen portfolio of innovative software and hardware products and operational excellence. To ensure a world-class driver experience, we are continuously improving network reliability. Last quarter, we deployed an AI solution to make it easy for the drivers to report problem stations with detailed and actionable information. We knew it would resonate with our drivers, but the results have far exceeded our expectations.

Within the first 10 weeks, we received actionable reports that enabled us to resolve nearly half of all reported issues across thousands of stations more efficiently. This tool is materially helping us improve station uptime and increase customer satisfaction.

We continue to focus on operational excellence. Proof of this comes in the form of our third quarter results. September sales and marketing-focused reorg has opened the door for new ideas and approaches and our CRO has been aligning the team for revenue growth and scalable processes. The financial benefits of September's rightsizing became evident at the end of the quarter and the additional benefits will materialize in the fourth quarter and beyond. We are focused on driving revenue growth while carefully managing our operating expenses.

Excellence is also defined by outstanding customer support, and our support capabilities are now winning as deals over the competition.

In conclusion, we have accomplished the first year goals of our strategic plan and done so ahead of schedule. Our Q3 revenue and improved OpEx are proof of this. We are encouraged by the record EV sales in the industry, and we continue to see network utilization demonstrate the need for more charging infrastructure. We are now concentrating on returning to growth and streamlining operations to continue on our path to positive non-GAAP adjusted EBITDA, which is targeted for a quarter in fiscal year 2026.

I will now hand the call over to our CFO, Mansi.

[Mansi Khetani, executive]

Thanks, Rick. Revenue for the third quarter was $100 million, above our guidance range of $85 million to $95 million. Network charging systems at $53 million accounted for 53% of third quarter revenue. This was down 18% sequentially and down 29% year-on-year. Subscription revenue at $36 million was 37% of total revenue, up 1% sequentially and up 19% year-on-year. Subscriptions continue to demonstrate healthy growth. Other revenue at $11 million was 10% of total revenue. This was up 28% sequentially and up 81% year-on-year due to growth in net transaction fees for processing payments and onetime project revenue.

Turning to verticals, which we report from a billings perspective, third quarter billings percentages were: Commercial 61%, Fleet 15%, Residential 18% and other 6%. The Commercial segment has normalized as a percentage of total billings after several large express plus TC shipments in the second quarter. Fleet remained stable, but the pushouts we outlined last quarter due to permitting and construction delays persist. Note that this is business that we expect to capture in future quarters. Our highly rated home charger, the Home Flex, continued to be a bestseller and contributed a strong share of billings in the third quarter. From a geographic perspective, North America made up 83% of third quarter revenue, and Europe was at 17%. Europe remains challenging for the entire EV sector amidst policy and incentive uncertainties.

Non-GAAP gross margin for the third quarter was 26%, consistent with the second quarter. Gross margin improved by 44 percentage points as compared to the third quarter last year, a quarter that was impacted by an inventory impairment charge. Non-GAAP operating expenses for the third quarter were $59 million, down 12% sequentially and down 28% from $81 million in the third quarter last year. In September, we reduced our non-GAAP operating expenses by an estimated $38 million on an annualized basis.

In the third quarter, we saw a partial impact of the September restructuring. The full impact on our run rate operating expense profile will be evident in the fourth quarter. Non-GAAP adjusted EBITDA loss for the third quarter was $29 million, a fourth consecutive quarter of improvement. This compares to a loss of $34 million in the second quarter and a loss of $97 million in Q3 of last year. Stock-based compensation in the third quarter was $21 million, up from $19 million in the second quarter and down from $33 million year-on-year. Our inventory balance decreased by $7 million in the third quarter from an all-time high in the second quarter.

As we continue to sell through finished goods on hand, this should release a significant amount of working capital and we expect to free up cash next year. We ended the quarter with $220 million cash on hand. We reduced net cash consumption to $24 million for the third quarter, which is down 64% from Q1 of this year and is lower than our adjusted EBITDA loss for the third quarter.

While we continue to rigorously focus on cash management, we have access to a $150 million revolving credit facility, which remains undrawn. We have no debt maturities until 2028, and we have existing capacity on our ATM.

Turning to guidance. For the fourth quarter of fiscal 2025, we expect revenue to be $95 million to $105 million. While we are least with beating our guidance in the third quarter, we continue to be prudent in our forward guidance as a result of our recent improvements to the sales and marketing organization.

In conclusion, our Q3 was solid with revenue beating our expectations. As Rick outlined in his remarks, we have taken meaningful steps throughout this year to improve operations and have achieved a more efficient cost structure. This has improved our adjusted EBITDA each quarter this year and reduced our cash usage, a trend that we expect to continue as we progress towards profitability.

We believe the trough is behind us. We are improving on all metrics within our control and with the recent reorganization of our sales structure, we are now well positioned to capitalize on the opportunity ahead of us.

With that, I will turn the call back to the operator for questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Colin Rusch with Oppenheimer.

[Colin Rusch, analyst]

Could you talk a little bit about the margin trajectory that you're expecting on the gross margin side? Obviously, you guys have adjusted some of the manufacturing, the component supplies shift a little bit, but I just want to get a sense of how that's trending for you and how we should think about that on a multi-quarter basis?

[Mansi Khetani, executive]

Yes. Colin, I can take that one. So from a gross margin perspective, we ended the quarter with at 26% in Q3. I expect it to be flattish to maybe improve slightly in Q4, but the majority of improvement or meaningful margin improvement will be realized next year as we sell through our existing inventory and really start seeing the benefits of our Asia manufacturing.

[Colin Rusch, analyst]

Okay. That's super helpful. And then just in terms of the sales process, can you talk a little bit about the efficiency per head count that you're seeing with the sales team as well as the win rate that you guys are seeing in terms of the bids and how that's flowing through the sales one.

[Richard Wilmer, executive]

Yes. Thanks, Colin, for that question. I've really been pleased with our new leader, David Vice and the impact he made in, quite frankly, a quarter that was disrupted through the restructuring that we executed during the quarter. But the promise we've made across a variety of initiatives in the sales and marketing area yielded results in Q3, and I'm optimistic about the continued impact those changes will have going forward. They include things like areas of focus on certain segments by geography clarifying roles and responsibilities within the sales and marketing organization, leveling sales skills. Standardizing processes for moving deals through the deal stages -- let me take those through to win in execution, a focus on our partner program, our channel partner program, improving that, along with the way we generate interest in the company's products from a marketing perspective and process that through into the sales organization for execution.

[Operator]

And your next question comes from the line of Bill Peterson with JPMorgan.

[William Peterson, analyst]

I wanted to come back to your comments that you're not expecting any material changes, I guess, with the incoming administration. I think it's pretty well known that there's expectations around tariffs and potentially 30 D tax credit going away. But -- but maybe, I guess, on the tariff side and your cost structure, trying to -- I know you're working with partners in Asia. If there were to be a tariff implemented, how should we think about the impacts to your margin expectations would you reflect any capacity back to North America? How should we think of -- does this give you caution on how to think about the margin expansion in the next year and beyond?

[Stephen Gengaro, analyst]

It's speculative exactly what's going to happen based on what we know so far, Bill, but we don't manufacture in China. For one thing, we also have manufacturing operations up and running in the United States and we've had those for a long time. So if it became cost effective to shift more production to the U.S., that's clearly an option that we have available to us right now today if we need to do that.

[William Peterson, analyst]

Okay. You commented earlier that Europe has been challenged. We saw a lot of negative earner growth trends for many of the countries. France is pulling back on subsidies. I guess I'm trying to get a sense of how you feel about the strategic rational with Europe at this stage. Would you consider divestment or the balance sheet as your year program unfolds? Or I guess maybe at asking another way, how synergistic are the businesses at this stage?

[Richard Wilmer, executive]

We're committed to or the more main committed to Europe. Despite the short-term uneasiness there. I think the long-term prospects look strong. Furthermore, we've got multinational customers that -- by being present both in Europe and North America, give us a competitive advantage to serve them across both continents and those are some very important customers to us. So we will continue to focus on Europe.

The other thing I'll tell you is that the focus on sales and marketing that we executed in Q3 was very North America centric. And we're now going to turn a lot of that focus to Europe and have no reason to expect similar improvements like those we saw in North America.

[Operator]

And your next question comes from the line of Mark Delaney with Goldman Sachs.

[Mark Delaney, analyst]

Rick and Mansi, you both alluded to your view that the business has troughed and you see some signs to be optimistic heading forward. In light of everything you're seeing in the broader market, you spoke a bit on Europe, we've already spoken a bit on public policy. Maybe you can just block a little bit more on what gives you that confidence around the business momentum heading into the fiscal year?

[Richard Wilmer, executive]

Yes. I think the other thing that gives us confidence is the continued diversity of EV selection that rolls into the market from the auto OEMs. I think that we are firmly convinced and probably biased that EVs are far superior to an internal combustion engine cars as a product in general. And knowing that we now have a broader selection of vehicles coming both in the price point, size, shape, form, class I think that's going to continue to drive EV adoption. So I'm very optimistic that a broader selection of cars is going to help move things forward.

[Mansi Khetani, executive]

And specifically, Mark, in terms of where we see revenue growth coming from there a number of green shoots, one is closing deals that have already been pushed out from this year. In many cases, we're getting indications of potential expansions as well. On the fleet side, there are large deals that we've already won, specifically in the bus space that are expected to ship next year. On the commercial side, there are government and nevi related wins that we've already booked that are expected to ship next year as well as auto dealership deals we've won. Residential has been a strong sector for us as well, and we have forecast of growth in volumes from our channel partners. And then, of course, there is a continued increase in subscription revenue. So all of this will contribute to a growth in revenue for us specifically next year.

[Mark Delaney, analyst]

That's helpful. And my follow-up question, I think more for you, Mansi. You spoke about some additional conductions you expect to flow through this coming quarter. Can you be a bit more specific around what to expect around OpEx or OpEx savings? And how sustainable that lower run rate maybe in the coming year? And I guess just to conceptualize what that might mean to the extent there is downside to the business from the top line perspective, and I understand that's not your expectation, but if there were because of macroeconomic or policy changes, do you think ChargePoint could take more cost out? Or would that be hard to do given how much you've already done on that front?

[Mansi Khetani, executive]

Yes. So overall, on the OpEx side, as I mentioned in my prepared remarks, we took out $38 million of an annualized OpEx on a non-GAAP basis through our September restructuring. So we saw that averages to about $9-ish million a quarter, and we saw 2/3 of that impact coming through in Q3. And in Q4, we'll see the fourth quarter impact. So we're not expecting anything additional in addition to the restructuring that we did in September for the Q4 operating expenses run rate. This unit will continue through next year. Obviously, there would be some investments that we will make in certain areas of the business where we see it prudent to do so and where we get direct revenue benefits. But other than that, I think this is a pretty good run rate going into next year.

And then the second part of your question in terms of overall -- there is -- we are always looking at OpEx to see -- to find efficiencies. There are so many areas like P&E, there are facilities spend, there are -- their software spend external consulting services, et cetera, that we can and will continuously look at to see where we can get more synergies from.

[Operator]

And your next question comes from the line of Steven Fox with Fox Advisors.

[Steven Fox, analyst]

First question, just to round out the question on the backdrop. Is it safe to say you're also not seeing any buyer hesitancy related to the new politics from any network customers or anything like that? Can you just give us a sense if there's been a reaction there? And then I had a follow-up.

[Richard Wilmer, executive]

Steven, thanks for the question. No, we've seen literally 0 change in terms of buying behavior from our customer base.

[Steven Fox, analyst]

Okay. Fair enough. And then if we could do just so maybe a little bit deeper dive on the gross margins, looking at software versus hardware. Are we thinking that the improvement for at least a couple more quarters is just more of a mix of software? Or do we start to see the hardware margin start to improve based on everything that you talked about so far.

[Mansi Khetani, executive]

Yes. So hardware margins have improved as well. As you saw in this quarter, hardware margins were lower than last quarter. It was mostly due to some incremental freight charges for some raw materials that were moved from a U.S. ACMs to Asia, and more like a onetime impact. So ada margins should continue to go up steadily. Hardware margins also kind of are influenced by final mix of product. So depending on where the mix lands that will cause some fluctuations. But overall, like I said before, the more meaningful improvements in hardware margin will come around middle of next year when we actually start seeing benefit of our Asia manufacturing.

[Operator]

And your next question comes from the line of Joseph Osha with Guggenheim Partners.

[Joseph Osha, analyst]

Mansi, you talked about continuing to free up working capital as you sell down inventory. I'm just wondering, is there any kind of obsolescence or price risk that you face is that you -- as the time line to bring that inventory expands? And then I have one other question.

[Mansi Khetani, executive]

So Joseph, just to clarify you saying, is there any obsolescence risk in our inventory?

[Joseph Osha, analyst]

Yes. Sorry. That's a much more eloquent way of putting it.

[Mansi Khetani, executive]

Sorry. So I mean, pretty much all the product that we have on our inventory right now is products that we're actively selling. We did, as you can remember, take some write-offs earlier maybe 3, 4 quarters ago on the old generation products. So now all of our inventory is of goods that we're currently selling, and we expect to sell those through over a period of time. There is always some write-off each quarter. We have variances in terms of maybe changes in standard costs or maybe some really old E&O stuff, which is smaller. So it's kind of normal course of business that we will continue to do every quarter.

[Joseph Osha, analyst]

Okay. And then my other question is just looking at the cash OpEx burn, obviously, you all had a lot of luck bringing that down and continue to work on it. Can we -- do you pretty much have that where you wanted at this point, the idea of being that use improvement comes from top line growth? Can we think about it that way?

[Mansi Khetani, executive]

Yes. So on cash, we were really pleased with our cash usage for this quarter. As we mentioned, we brought it down to $24 million, which is significantly lower than the $66 million in Q1 and $50 million in Q2. The main reason was -- well, there were 2 reasons. One is we brought OpEx down so that directly impacts our cash usage. And the second one was inventory. This quarter, we actually managed to bring inventory down. Last couple of quarters. We've been building inventory balance. And so we've been investing and using our cash to bring that inventory on board. This quarter, we saw a reversal of that trend, and we actually freed up cash and used our cash but because of that. And that's what we've been saying. We should see that accelerate through next year as we bring down inventory in an even more meaningful way.

Generally speaking, because of the business that we're in where capital like we don't have any CapEx or very, very little CapEx. Our cash burn should mirror our EBITDA loss pretty closely, and that's basically my goal. That's what we want to get to. We did that this quarter. Actually, this quarter, our cash burn was even slightly lower than our EBITDA loss. We'll continue to see that trajectory going forward. And as we get closer to EBITDA breaking, then we should get to cash flow breakeven. Now we could get to cash flow breakeven a little bit earlier if we see more release of working capital because of reduced inventory.

[Joseph Osha, analyst]

Maybe I didn't state the question quite correctly. The cash OpEx, can we think about that as basically being flat the non-GAAP OpEx going forward?

[Mansi Khetani, executive]

Okay. I'm sorry. Q4 will see the full benefits of the September restructuring. So it should be better than Q3. And then after that, we think it's more or less in a good place. We're not guiding as of now to next year's OpEx. But for Q4, you should see an improvement versus Q3.

[Operator]

And your next question comes from the line of Chris Dendrinos with RBC Capital Markets.

[Christopher Dendrinos, analyst]

I just wanted to follow up on the longer-term outlook for '26 and the positive EBITDA comment. Can you just maybe, I guess, walk us through some of the levers that you all have to achieve that? Is that really just a function of revenue growth? Or are there additional levers that you all have to, I guess, manage on your side outside of the kind of macro demand environment?

[Mansi Khetani, executive]

Yes. Thanks, Chris. So you saw this year, we've made significant progress towards getting to adjusted EBITDA positive by managing our cost structure. So that helps on the OpEx side pretty significantly. The 2 levers that will get us there are revenue growth and gross margin improvement, right? So revenue growth, as I laid out, there are a number of green shoots that we're seeing that gives us confidence in that in revenue growing next year. And then on the gross margin side, as we start seeing benefits of manufacturing next year, we should see that trending up as well. So we'll see a combination of all of those 3 factors getting us there.

[Operator]

And your next question comes from the line of Chris Pierce with Needham.

[Christopher Pierce, analyst]

Rick, I just want to make sure I follow up something you said. Year 2, which is next year, you're going to have next-generation software and next-generation hardware. Does the next-generation software work on hardware in the field? And then I just want to understand the timing of the inventory drawdown and the introduction of next-generation hard weather?

[Richard Wilmer, executive]

Got it. So let me take the first part of that, Chris. So all of our software is absolutely backward compatible with all of our prior products and will obviously support all the new products that we'll be introducing. Furthermore, we have talked many times about the fact that we -- our software platform is open. So we manage a lot of third-party hardware with our software that's not even ours. So we're fully compatible across the board with prior generation and third-party hardware. What was the second part again, Chris?

[Christopher Pierce, analyst]

I'm just curious about the timing. You talked about next-generation hardware coming next year, but you've got this inventory build right now that you're looking to draw down. I just -- it seems like they're both kind of landing at the same time, if I have that right? Or I just want to understand the timing the dry down versus building inventory next-generation hardware?

[Richard Wilmer, executive]

Yes. So we are very diligent about aligning supply with demand. And we're confident that as we introduce new products, the products if they do replace a prior product and are not something new that will manage that transition effectively to avoid any significant obsolescence of an older product. And we've looked at that very carefully and are confident that we're in fine shape in that regard.

[Christopher Pierce, analyst]

Okay. Perfect. And then can you just touch on the essential cloud plan that you released that you talked about at the end of October? This -- does this sort of put you on the path to being an owner-operator or quasi owner-operator since you're taking revenue from the drivers now and this allows customers to have a lower monthly cost burden. I just want to understand the path that you're on? Or if this is just more of a special project for multifamily dwelling type buyers?

[Richard Wilmer, executive]

No, good question, and thanks for asking that question. It definitely does not put us into the position of being energy seller. That is not our business. That would put us in competition with our customers, and we have no plans to do anything like that. So this is really an easy to buy or an easy-to-consume way to take care of your licensing requirements to ChargePoint. So rather than every year get a renewal notice for your software or your enhanced warranty services, we just deduct that from your driver revenue until the amount you owe us for those services are paid and then you could cover the rest. So you forgo the hassle of we'll notice this as a customer and having to get a quote from us and pay the invoice. It just happens automatically. It also improves our internal efficiency because we don't have to do all that renewal work on an annual or however long term in the licenses.

[Operator]

And your next question comes from the line of Gabe Daoud with TD Cowen.

[Gabriel Daoud, analyst]

Was curious if you can maybe give us a bit more color on this software you deploy for GM, a new use case with a major fast charging network in the U.S. Just curious if you could maybe talk a little about that and if you outlined or identified additional use cases for this new software, I guess?

[Richard Wilmer, executive]

Yes, we won't go into details about that. It was a significant project. And it also applies to things we can do with other auto OEMs.

[Gabriel Daoud, analyst]

Okay. Okay. Fair enough. And then just as a follow-up, Mansa, you mentioned gross margin next year will ultimately also depend on mix. So I was curious if you can maybe level set a bit and give us an update or maybe rank within the portfolio like Level 2 CP 6000 now the more margin-rich product versus CT4K or CPF50 in a new 1 like more margin-rich. And -- similarly on the DC side, which express offering would be the most margin rich at this point?

[Mansi Khetani, executive]

Yes. So we're selling both CT4K, which is our legacy AC product as well as the CD6K, which is a more premium product and both are both our margin rate. All of our ACE portfolio is margin-rich. And on the DC side, with the Asia manufacturing coming on board, that will help the DC margins more significantly.

[Operator]

And your next question comes from the line of Patrick Gullet with Stifel.

[Unknown Analyst]

It's Pete on for Steven Jager. You've been optimistic about some green shoe potentials next year and seeing customers significantly expand their deployment plans. I'm curious if actually things have shifted one way or another -- and then any comments you could provide specifically on the fleet side?

[Richard Wilmer, executive]

Yes, I think in general, across all segments, especially in North America, we're seeing demand that is pleasing to us. And again, with the improvements we've made in terms of sales and marketing execution, we're executing on that demand better. So -- it seems to be pretty evenly spread across all segments, at least in North America, again, with a bit slower market growth in Europe at the moment. And in fleet, in particular, I think we've got some exciting opportunities there, and those tend to come in large deal chunks, and we've got some pretty exciting things there that we're working on that I'm looking forward to next year.

[Unknown Analyst]

All right. And then looking into next year with the Asia manufacturing, coupled with potential increasing higher-margin subscription revenue. Could you talk about any associated ramp in margin understanding you still get through the inventory on hand? But just looking for insight on how margin progresses throughout the year? And then any thoughts on a more competitive market for product sales impacting margin?

[Mansi Khetani, executive]

Yes. So thank the first part, regarding margin expansion next year. Yes, you are correct. We do expect margin to expand next year. We'll start seeing it happen around middle of next year. And you are also correct, both hardware and subscription margins should expand, however, because of the Asia manufacturing coming on board and their subscription margins expanding because we will continue to see a larger size of subscription revenue in overall revenue as well as more efficiencies and economies of scale.

What was the second part, sorry, of your question?

[Unknown Analyst]

Just like any thoughts on a more competitive market for product sales impacting margin?

[Richard Wilmer, executive]

Yes. The competitive landscape, it moves around. But in terms of the overall strength of the competition, it doesn't seem to change on an overall basis in an appreciable way. The thing we have noticed is that all the investments we've made in our support organization -- the example of our AI picture to resolution feature that we rolled out last quarter. Those are starting to make a real differentiating factor for us. we're winning deals on our ability to support our customers and make sure our networks stay up and stay reliable.

[Operator]

[Operator Instructions] And your next question comes from the line of Craig Irwin with ROTH Capital Partners.

[Craig Irwin, analyst]

I wanted to ask for a little bit more color around the sort of base assumptions in your forecast for growth and the return to positive EBITDA or I should say, the achievement of positive EBITDA because it will be a very important milestone. Can you maybe give us color on the relative contribution you expect from new products in verticals that you don't already serve versus new products in -- that are updates as you've referred to them multiple times on the call versus organic growth and a positive trajectory for products that you already have established channels and relationships and customers for?

[Richard Wilmer, executive]

Good question, Craig. Nice to hear from you. I think next year, the new products that serve new use cases and categories will not contribute much. Those are really going to be developed and launched as we move through the year and start to show significant financial benefit in the following year. So the majority of the revenue in the upcoming fiscal year, our fiscal '26, which starts on February 1 will come from our existing portfolio.

[Craig Irwin, analyst]

Excellent. And then just as a follow-up question. We're hearing a lot of interest about sort of an accelerated change over to Nat on the part of many sort of third-party network operators. Can you maybe comment a little bit about the availability of the necessary hardware to make that change, whether or not that's something that you could earn incremental service dollars on as these networks are looking to pursue growth with the Tesla fleet, versus the non-tested fleet, which has been a big boom for many of them over the last few years?

[Stephen Gengaro, analyst]

Yes. Another good question. Thanks, Craig. We're in good shape there. We've got our Omni port solution that we've publicly announced it's going to begin shipping here very soon. And our parking lot is full of them, and they are used frequently and it's a really elegant solution that basically makes the connector on your car irrelevant. You can come to ChargePoint station no matter what you have as long as you you've got the Omni port solution installed. And we do expect customers to spend money upgrading to that solution as we move through into next year.

[Operator]

And ladies and gentlemen, that concludes our question-and-answer session and today's conference call. We thank you for your participation, and you may now disconnect.