Earnings Call: Q1 2020

Apr 29, 2020

Ladies and gentlemen, thank you for standing by, and welcome to Tesla's Q1 2020 Financial Results and Q and A Webcast. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Martin Viecha, Senior Director for Investor Relations. Please go ahead, sir. Thank you, Sherry, and good afternoon, everyone, and welcome to Tesla's Q1 2020 Q and A webcast. I'm joined today by Elon Musk, Zachary Kirkhorn and a number of other executives. Our Q1 results were announced at about 1 p. M. Pacific Time in the update deck we published at the same link as this web cast. During this call, we will discuss our business outlook and make forward looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. Before we jump into Q and A, Elon has some opening remarks. Elon? Thank you. So Q1 ended up being a strong quarter despite many challenges in the final few weeks. This is the first time we achieved positive GAAP net income in a seasonally weak Q1. Even with all the challenges, we achieved a 20% automotive gross margin, excluding regulatory credits, while ramping 2 major products. What we've learned from this is that we've actually learned a lot here. After the Model 3 ramp from 3 years ago, our new products get ramped faster and become profitable sooner. In Q1, we produced more Model Ys in the Q1 than Model 3s in Fremont in the 1st 2 quarters. Thus far, Model Y ramp has been even faster than the Gigaf Shanghai ramp in Q1. Most surprisingly, in other words, we are ahead of the schedule that we were ahead of already. Most surprisingly, Model Y was profitable already in this Q1 of production, something we haven't achieved with any product in the past. Regarding Autopilot, we released a new software update for traffic lights and stop signs to Early Access users in March and to all U. S. Customers with full stop driving package just last week. Our cars will not automatically stop at each stop sign or traffic lights until the driver gets a confirmation to proceed. I should say that the car is actually capable of much more than this, but we are only exposing functionality that we feel quite good about and where we feel that it is probably a safety improvement. We are collecting data from over a 1000000 intersections every month at this point. This number will grow exponentially as more people get the update and as more people start driving the gain. So we will be collecting data from over a 1000000000 intersections per month. All of those confirmations are training on neural net. Essentially, the driver when driving and taking action is effectively labeling reality as they drive, and making the neural net better and better. I think that this is an advantage that no one else has. We're quite literally orders of magnitude more than everyone else combined. I think this is difficult to fully appreciate. It's the reason I'd say it's very difficult to have a search engine that competes with Google because everyone is training Google all the time with their searches. So when you search on something and you click on a link, you're training Google every time you do that. It's very difficult for any new search engine to compete on that basis. So, all those confirmations are training on neural net, and soon cars will be able to drive through an intersection without a confirmation as well as to make turns. And we really feel we're I feel extremely confident that it will be possible to do a drive from your home to your office and most of the time with no interventions by the end of the year. So this is we can almost do this already with the leading edge alpha both that I'm driving in the car. So, let's see, on other technology fronts, we increased the range of Model S and X year again, this time to 391 miles for Model S and 3 51 miles for Model X. And it should be said that actually the real Model S range is 400 miles. But when we did the last EPA test, unfortunately, the ATA left the car door open and the keys in the car. So the car ended this overnight, and so the car actually went into waiting for driver mode and lost 2% of its range, and as a result, had a 391 test. As soon as the EPA reopens for testing, we will review the test and we are extremely confident that we will achieve a 400 mile or greater range with the Model S. But to be clear, the Model S that for the past 2 months, the true range of the Model S for the past 2 months has been 400 miles. And of course, we're not stopping there. We'll always continue pushing for improved range over time and improving handling, acceleration and all the little details that make a Tesla special. For Model Y, we introduced a revolutionary 2 piece rear underbody casting that we are going to be making a single piece casting later this year, meaning that essentially the rear third of the body is cast in a single piece, which is no casting of the size of complexity has ever been done before. In fact, there isn't even anything that is on par with the 2 piece casting for the Model Y. So we're really pushing the envelope on vehicle structural engineering and manufacturing. I'm very excited about this approach as it allows us to reduce the weight, the cost, and improve MBH. It's better in every way, essentially. For Model Y, we also introduced a revolutionary new heat pump, which allows the car to have a higher range. So the Model Y has remarkable range on par with in fact, slightly better than, I guess, the Model 3, and despite being a bigger car that weighs more. And the heat pump is a key contributor to that. It is especially excellent at low temperature driving. And the feedback we're getting from customers who have received the Model Y thus far has been universally positive. We're confident this product will be our best selling product ever. So, in conclusion, and just looking for I guess this is a forward looking statement. We are absolutely continuing our Model Y capacity expansion at full speed at both Giga Berlin and Giga Shanghai and here in Fremont when they will let us continue. Localized production in China and in Europe will bring the cost down, making our products even more competitive over time. While many other companies are cutting back on investment, we are doing the opposite. We are absolutely pedal to the metal on new products and expanding the company. And we're really looking forward to being in sometime next year a truly global manufacturer with major factories in North America, China and Europe, and a capacity of well over a 1000000 units a year. There's a tremendous amount to look forward to, and we can't wait to tell you what's going to happen. Thank you. Thank you. And now to Zack's opening remarks. Yes, thanks Martin, and thanks Elon. I'm very proud of the accomplishments of the Tesla team this past quarter. A few things to highlight and add to what Elon just mentioned. We successfully launched, ramped and demonstrated profitability of the Model Y, as Elon mentioned, significantly ahead of schedule. And this is our 2nd large scale product launch since Model 3 in 2017, and it's evidence to the progress we've made on cost control and ramp efficiency. It's hard to understate the significance of demonstrating profitability of this program in its Q1 of production. Our Shanghai Model 3 margins improved dramatically since Q4 of last year, nearing equivalents of Model 3's built in Fremont. This is despite not yet running at full capacity while also managing through the production shutdown in early February. We also announced a long range and performance variant of the Model 3 for our road map, which will positively impact ASPs in China. On order rates, we did not experience much of an impact related to the expiration of government incentives at the end of Q4. In fact, we exited the quarter with our highest ever backlog yet again. Aided by these accomplishments, we were able to achieve our first ever Q1 profit. Automotive gross margin, excluding the impact of regulatory credits, remained strong for all products despite charges taken in Q1 associated with production downtime. We continue to make progress on OpEx efficiency as well as our service and other margins. Our energy business was impacted as well by shutdown activities in Q1 limiting deployments. We also experienced expected launch inefficiencies associated with our 3rd version of the solar roof, which impacted overall profitability. As I've noted before, we expect regulatory credit sales, which are credits we sell to other carmakers, to generally increase with time. This can be seen by the increase from Q1 relative to Q4. And note that most of the credit revenue did not contribute to cash in Q1 and is reflected in the accounts receivable on the balance sheet. Our free cash flows were impacted by the temporary increase in end of quarter inventory for all our products, resulting from the abrupt suspension of production and delivery operations. Had these interruptions not occurred, we were pacing towards a record quarter of deliveries and strong free cash flows. As Elon mentioned, it is extremely important that we remain on track to achieve our long term plans and technology roadmap. We are taking the near term actions required to continue those investments. Model Y in Shanghai and Berlin are proceeding as planned, and we're making progress on improving capacity for Model Y in Fremont and Model 3 in Shanghai. In the near term, our Shanghai factory remains operational, contributing an increasing level of cash flows and profitability to the company. In Fremont, we're working towards restarting production as soon as that's possible. We are also continuing to deliver cars that we were unable to deliver at the end of the Q1. Our vehicle inventory balance increased by 14,000 units at the end of Q1, which was a headwind to free cash flows in Q1, but it's helpful in Q2. Note that one of the most important aspects of Model Y in Fremont and Model 3 in Shanghai is the dramatically improved cash conversion cycle by locally producing and delivering vehicles. While sales and delivery operations have paused in many areas of the world, we are still receiving many online orders despite inability for our customers to experience the product prior to ordering. However, unavoidably, the extended shutdown in Fremont will have an impact on our near term financial performance, and we will need to work through how quickly we'll be able to ramp production to prior levels. More broadly, we remain focused on ensuring our cash flows are managed appropriately. Working capital management, in particular raw material inventory, is the single most important lever in managing our cash flows during this time. The TEFL team has done a great job here. We've also taken actions to eliminate or reduce non critical expenses and optional investments, while continuing to drive efficiencies throughout the business. Overall, we've modeled many scenarios into 2021 and remain comfortable that we have sufficient liquidity to proceed fully with our most important long term investments. It's important to note that Tesla remains an extremely agile and dynamic company, and this is aided by the substantial work we've done over the last year to improve our cost efficiency and productivity, and we have the ability to quickly adjust our spending and planning as required. So thank you again to the Tesla team for success in Q1, and we will turn to questions. Thank you very much. So we'll take the first questions from institutional investors compiled by Safe Technologies. The first question from institutional investor is, most Tesla owners have yet to purchase or experience FSD and despite most vehicles having all the necessary hardware, what levers could you pull to accelerate adoption and deepen your data advantage? For example, could you consider offering FSD as a premium subscription? I think we will offer full self driving as a subscription service, but it will be probably towards the end of this year. I should say, it will still make sense to buy FSD as an option, in our view, buying FSD is an investment in the future and we are confident that is an investment that will pay off to the consumer and to the benefit of the consumer. In my opinion, buying the FSD option is something people will not regret doing. I agree. Financially, rolling the upfront purchase of the FSD option into a loan in the vehicle or a lease is will be the least expensive way on a monthly basis to own, plus you preserve the option value of increased value with time. But we do understand that some customers who have ownership or have leased their vehicles did not purchase that option upfront. And so this will enable those customers to spread out the cost of ownership of FSD or subscription at the time. Absolutely. As you mentioned, at a high level, our overall goal is to maximize the area under the curve of customer happiness. That is our goal, and we think that that's the kind of thing that all companies should try to do, and it's what results in long term value creation and loyalty to guest loyalty. Our goal is always really to do the best thing for the customers, and we're confident that if we behave like that, the customers in turn will behave the same way to us. Thank you. The second question from investors is, China recently announced changes to its NEV subsidy program that disqualifies Tesla vehicles from benefiting from the subsidies. To what extent is there room for Tesla to lower manufacturing costs in China and pass those savings to Bayer so they can qualify for the subsidy? Yes. So we are making rapid progress on lowering the production cost in China and we're actually excited to announce on this call that we will be reducing the price of the standard range Model 3 basically tomorrow China time, so the day after tomorrow California time, but tomorrow China time, And that will be a price below the subsidy limit. We feel confident that that will still be a vehicle that delivers a good gross margin. Yes. And on the manufacturing cost portion of the question, the cost of vehicles produced in Shanghai in Q1 is already lower than the cost to produce the Model 3 in Fremont, and there's still significant opportunity left to take cost out. So fixed cost absorption from higher production volumes, which are occurring in Q2 and will occur through the rest of the year. We're not fully localized on the supply chain yet. And so while a lot of the supply chain is localized, it's not complete and there's additional opportunities there. And so we'll continue to bring the price down and expand margin, costs down and expand margin even with this reduction in price that Elon mentioned on the standard range version of the vehicle. Thank you. The next question is, Andy Growe once said that great companies are improved by crisis. In which way has Tesla improved or is expected to improve coming out of COVID-nineteen? Well, it has caused us to look closely at our cost structure and to be more efficient as a company. One horse has to do that in a crisis. And to think about our core beliefs and what do we want to do, and we came to conclusion that the right move is actually to continue to expand rapidly, continue to invest in the future in new technologies even though it is risky and we've talked to some of our key investors and they support that approach as well. So, I think there's clearly an uncertain future ahead. It's a bit of a bumpy road, but I think the long term prospects are extremely good. Anything you guys want to add? I agree with that, Elon. The prioritization on the key projects will enable us to execute more efficiently and faster on them, which I think is great. The other one that I would add is it's always been our vision at Tesla to improve the customer experience and make that as digital as possible. Yes, touchless delivery. So touchless delivery, mobile service, touchless sales has been something that we've been very focused on and made a lot of progress on. Yes, but the Tesla is the only car that you can literally order it in less than 5 minutes on your phone. You can order a car and have it delivered to your doorstep with all the paperwork and everything done. That's it, effortless. And many customers do that. And they're doing it, yes. In fact, a big part of it is just trying to communicate to people that this is something you can do because normally buying a car is quite a pain for most people, they would rather go to the dentist than buying a new car. Actually, my dentist is great. It's really like quite an arduous thing. When the typical retail experience with buying a new car is more painful to people than having a root canal, then you have to say, well, and for Tesla, it is completely as easy as ordering something from the Apple App Store or ordering something on Amazon and just opens a car. Yeah. All right. 5 minutes is if you're really going fast, I think you could order a car probably in 90 seconds. Thank you. The next question from an institutional investor is, can you give us a brief preview of the Battery Day by generally highlighting steps life's taking to improve cell energy density and time line for introduction? Yes, actually we don't want to preempt a battery day. We don't want to leave the exciting news for that day, but there won't be a lot of exciting news to tell and I think it will be one of the most exciting days in Tesla's history and we're just trying to figure out the right timing for that. We think probably the right timing will be probably the 3rd week of May. We're not giving a firm date, but we think that probably that's the right timing, Depending upon what we're allowed to do, it will either be in California or Texas. Okay. The last question from institutional investors, could you please update on progress towards development and commercialization of full self driving? How much revenue have you recognized so far? So just a couple of things on the financials for Full Self Driving. And so currently in North America, it's sold for $7,000 as an option. We take roughly half of that as revenue and the other half of it goes into deferred revenue. That's associated with features that will be released with time. Our deferred revenue balance is continuing to grow. It's a little bit over $600,000,000 And so as we release features with time, at the end of every quarter, we take a look at what features have been released, associated value, and then we can release that from the deferred revenue into our financials for that quarter. And then cards going forward, once the feature is released, we can recognize that revenue. So we reduce the amount of deferral and we can recognize that revenue within period. So I mean, this is one of what we think will be one of the most powerful gross margin levers of time as the feature suite is rolled out. Absolutely. There's also a tremendous amount of untapped potential in the fleet out there that could upgrade to turn on Autopilot, basic Autopilot or full self driving, and that's something we will enable just as a simple in app purchase or as we talked about earlier, just towards the end of the year as a subscription. So that's just a lot of untapped potential there. That's not in the deferred revenue line, obviously, but is certainly a great deal of deferred potential that we think is a large portion of which is likely to reach fruition. Thank you. Now let's go to questions from retail investors. Question number 1, Elon has mentioned a 50% compound annual growth target for Tesla in the past. Is this still in line with Tesla's ambitions for the next 5 to 10 years? This would be 4,000,000 vehicles in 2025 and more than 20,000,000 vehicles in 2,030. Is 40% a more realistic target? Well, it's always difficult to predict what the macro situation is going to be. I think very few people would have predicted the unexpected sort of roundhouse that COVID came up with it, sort of came out of nowhere. So, I think in the essence of something some massive force majeure event, but quite massive, I think 50% is the likely number. It's possible that is 40%. I would be very shocked if it's less than 40%, even with force majeure short of World War III. Okay. The next question from retail investors, when will you announce the next giga? How many gigas do you have planned for the next 5 years? I think we will announce the next Gigas possibly as soon as a month. We may announce as soon as next month. There's no prediction, it's just saying that could happen. It will certainly be within 3 months and possibly 1 month, and that would be in the U. S. So, as for how many it will be in 5 years, I don't know right now what that number would be. I guess several more than there are today, but I'm not sure what exactly it would be in 5 years, but some number more than today. I'll also add that our Gigas have gotten bigger And We stopped being called Terra. Yes, with multiple products as well. And so the absolute number of Gigafactories we may ultimately build might be less, but each one is larger. And that's under our belief that just significant efficiencies by having as much as possible and similar product lines under the same roof and as much vertical integration as possible all in one facility. Thank you. The next question is can you give us an update on Solar Roof ramp? How many are you currently able to install per week? What is your installations per week's target for the end of 2021? We were actually gaining tremendous momentum with the solar roof before COVID, and COVID essentially shut us down, both from the ability to install and the ability to get permits. The permit offices were closed and we were shelter in place, all over the place. So we obviously do not install in the if you can't get permits and you can't physically do it, it's physically impossible. But I think the long term trend for stone roof is extremely good, and I'm confident that, let's say, within the next, I don't know, year or maybe even by end of year, we should be installing at a rate of 1,000 a week. That's not in the middle of winter or something. It's like it's taking seasonality, allowing for seasonality, where it's hard to install on roofs that are covered in snow and ice, but like in a, say, spring, I think it's installing, which is the hard part. We actually have demonstrated the ability to hit 1,000 a week burst flood rate for the solar glass roof already, so that's not a problem. It's building up the install teams, building up the 3rd party channel installers, the roofing industry installers, and internally we want to have at least 1,000 solar roof install teams and taking a week or perhaps less than a week to do an install, which gets you 1,000 a week roof installations. We see demand is good, production is good, so it's really all about the install. And then like I said also building up the training, the very diverse group of companies in the roofing industry to also install solar roof that I think will scale, allow us to scale far beyond 1,000 a week. We're also seeing a lot of interest outside of North America, so we do expect this to be a product that is international and actually seeing a tremendous amount of interest from China on the solar roof. So we're confident this will be a very significant part for the company over time. Thank you. The next question is can you elaborate on Tesla's plan to enter the residential and or commercial HVAC market? Can you provide some basics of how your system will work? Will you consider the heat pump water heater market as well? Well, as I said on Twitter, I'm personally extremely excited to build a kickass HVAC system that also has sort of hospital grade particle filtration, basically HEPA filtration that filters out viruses, bacteria, pollen, fungi, and it also neutralizes acidic alkaline gases that is quiet and efficient. These are all things we've achieved in our cars, by the way. In fact, I know a lot of people realize, but the Model S and X are the only cars in the world that have a hospital operating room grade, like HEPA filters built in. They're very big, so but you can get to a particle count that is insanely low with our cars. And 3 and Y have like MERV 16 or 15 capable filterings also, which is It's not like Model 3 and Y are there are no slouchiness. Model 3 and Y are also they're way better than any other cars, the best of my knowledge. They're not quite as good as possible operating room, but they're extremely good, way better than any other normal car. And we're continuing to improve the full results on 3 NY. These actually have a big effect on health even in normal just day to day living is reducing particle count and it has an effect on allergies and all sorts of things, so it's really air quality is incredibly important. Even in a non COVID situation, it's extremely important. So Eric, taking all those things that we've learned and applying to how much HVAC would be and commercial HVAC would be just very exciting, and then if you're condensing water, why not also have it be a water source? If you have water, you possibly could then heat the water and have a water heater as well. Yeah, use it as a heat source if you need it instead of the outdoors when the outdoors is really cold or the other way around, so lots of options. It could be a hell of a product. So we just have to yes, Tesla, we have a tendency to buy it from than we can chew on the product front. So we're going to make sure we have a lot of irons in the fire here for new products, the Cybertrucks, Mi, New Roadster, and the Gigafactories in various parts of the world, and it's pulling up Model Y and autopilot and the solar roof. New technologies. Yes, exactly, Powerwall, Powerpack, Megapack. We are seeing tremendous demand for stationary storage, more than we can supply, at least for 2020. Thank you. The last question from the retailers, when will Tesla start acquiring utilities like the Hornsdale Power Reserve and Moss Landing instead of selling them battery storage? Does it make sense for Tesla to buy bigger plants and convert them? We haven't really thought about that yet. It's not out of the question, but our brain is full. Excuse me, sir, our brain is full. It's not out of the question. Our overarching goal is to help accelerate the advent of sustainable energy, the three elements of that are sustainable power generation, then you've got to store the power, stationary storage, and then you've got to have electric transportation. But we don't have like specific market share goals or anything like that. It's just to the degree that we can accelerate the advent of sustainable energy, we think that's a fundamental good for the world and we want to do that as fast as possible. But it's not, like I said, market share growth It's going to have a tough, it's just the faster this happens, the better off the world is. Thank you very much. And I think now we can move to analyst questions. Thank you. Our first question will come from Adam Jonas with Morgan Stanley. Please go ahead. Thanks everybody. I hope everyone's safe and healthy. I got one question, one follow-up. And I would point out, I've had a root canal before and I would agree, Elon, it was less painful than buying a car. Exactly. I mean, really it's yes, exactly. Yes, it's a big problem actually. It's a big problem. Yes. Different conversations. Zach, first for you, any real time update on company liquidity at the end of April? Some companies have, given the circumstances, gone out other way to give a little color on that. Just want to give you a shot at that. And I got a follow-up. Yes. It's a fair question. I don't have any additional color to provide. So $8,100,000,000 in cash and cash equivalents at the end of Q1. We're managing it very closely. As I mentioned in my opening remarks, we do have an increase in inventory of vehicles that we were unable to deliver at the end of Q1. So we're making progress delivering those through April, which is helpful for liquidity. And as we've been looking at liquidity, we've been looking at this over the next 18 months. And there's ups and downs to the liquidity. Currently now, as we're not producing, we still have payables from Q1 that we're paying off. But then in a couple of months, we'll quickly be through that and then we'll have a gap in payables since we don't have any parts coming in. So it does go up and down a little bit. But in looking at the long term horizon, which is how we're managing it right now, we feel pretty comfortable with the liquidity position of the company. Yes, I should say we are a bit worried about not being able to resume production in the Bay Area and that should be identified as a serious risk. We only have 2 car factories right now, one in Shanghai one in Bay Area, and Bay Area produces the vast majority of our cars, all of S and X and most of the 3 and all of the Y. So the extension of the shelter in place or frankly I would call it forcibly imprisoning people in their homes against all their constitutional rights, that's my opinion, and breaking people's freedoms in ways that are horrible and wrong, and not why people came to America or built this country. What the fuck? Excuse me. Outrage. So, but it will cause great harm not just to Tesla, but to many companies. And while Tesla will weather the storm, there are many small companies that will not. And all the people's everything people have worked for their whole life is being destroyed in real time and we're going to have many suppliers and are having many suppliers that are having super hard times, especially the small ones, and it's causing a lot of strife to a lot of people. Well, Elon, on that point, you mentioned people that gave their lives to build the country. My thoughts for you on this. There have been a lot of comparisons drawn to the, say, the U. S. Economy to the early 1930s when Roosevelt began a series of new deals in infrastructure projects or post World War II when Eisenhower launched the U. S. Highway Act and when JFK launched the Apollo program, which you could say was influenced by the Cold War clearly, and you benefited from and our space program benefited from. What would be your message to U. S. Lawmakers on this call as we in addition to your opinions on shelter in place, but thinking longer term, your message to U. S. Lawmakers coming out of the crisis, specifically around EV infrastructure and a chance to kind of work with taxpayers to support sustainable transport renewable energy. I'm wondering if you see this as a chance to make the crisis and all the loss and lives lost not be in vain. Thanks. I think it's high time we invested in infrastructure in this country. We have a lot of crumbling highways and fridges and frankly when I visit China, I see their infrastructure as being much better than ours. It's great. Europe has better infrastructure. It's really quite sad. The U. S. Infrastructure, especially sort of roads and highways, is where it is today, and our airports, in a lot of cases, are an embarrassment. And it's not just a question of money, it's a question of will. Sometimes we spend a lot of money on these things, but what do we gain for it? So, yes, we really need to be thinking about what is the transportation of the future and not the transportation of the past. If this was 'nineteen, 'twenty, do you want to be investing in steam engines or into locomotion engines? Obviously, it's not steam engines. So this is a time to think about the future and also to ask, is it right to infringe upon people's rights as what is happening right now? I think the people are going to be very angry about this and are very angry. It's just like if somebody wants to stay in their house, that's great. They should be allowed to stay in their house and they should not be compelled to leave, but to say that they cannot leave their house and they will be arrested if they do, this is fascist. This is not democratic. This is not freedom. Give people back their goddamn freedom. Okay, Our next question comes from Emmanuel Rosner with Deutsche Bank. Please go ahead. Hi, good evening. Question on Model Y. I was hoping you can elaborate a little bit more on the drivers of how the gross margin is already positive at such low volume. How much of it is a function of the criminality with the Model 3? What other factors should we think about? And what does that mean for the outlook for the eventual gross margin on Model Sure. A couple of thoughts there for why. The first is it does carry a higher ASP. So on the revenue side, it carries a higher ASP than Model 3. And the deliveries that we started with were of the higher ASP versions of the cars. So we started with deliveries of performance initially. And so that helps create some of the margin. And that will come down with time as more variants are released and we have more of a steady state mix. But it's similar to the ASP trends that we had with Model 3 when we launched that product in Fremont 2 years ago. On the cost side, I think you hit on a couple of the buckets. The commonality is huge. It's very important. And in addition to that, manufacturing processes are very similar to Model 3 as well. And so we have experience with that both with Model 3 in Fremont and then as well in Shanghai. And it helps to have an existing factory with existing workforce and knowledge here as well. So the ecosystem to support and launch the product is there. There remain a lot of opportunities to take continue to take cost out of the car. The number of vehicles that we've built in the Q1 is quite limited relative to where we'll go. Yes, it's good. We take cost out of the car and to make the product better. So it's not make the product worse. Any tool can take cost out of a car and make it worse. We want to take cost out of the car, figure out how to make it lighter and simpler. And so it's what's called just incrementally improve as well as incrementally lowering cost. But for a 5 seater Model Y, we expect marginal cost back car to be comparable to the Model 3 once we have reached, say, to 10000 or 20000 units or something like that. Speakers, you're back online. Hi. Sorry, we got disconnected for some reason. What was the question again? Okay. Let's go to the next question, please. The next question comes from Ben Kallo with Baird. Please go ahead. Hey, thank you very much. Just wondering about the sell strategy in Reno. You have obviously integrated there, but you're buying cells, I think, in Shanghai and then what we think in Germany. And so how are you looking at that going forward? And then could you just talk about Mission Mizuho and that Board addition and kind of the process with adding him to the Board? Thank you. Sure. From a sales perspective, with all the partners we've had historically in the future, we're just looking for competitive technology and competitive pricing. I think we'll talk a little bit more about this at Battery Investor Day, like how we're approaching all of it. But yes, I mean, we don't have like one model we're restricting ourselves to pursue. We're just trying to find what's best for the products in the long run. And then there's a question about the Board. Sorry, I couldn't we cannot hear the second part of the question. Yes. I was asking about Mr. Mizuno entering the Board and kind of the process behind that and what he brings to the Board. Oh, I think we all need a hero. And obviously, it brings Premier's amount of experience investing at the highest levels in the world and has done co work at the Japan Petro Fund, which is the largest, I think, funder of any kind in the world. And generally, the conversations of the years, I'm just showing incredible insight into how the securities the global security markets work and what he thinks is whether errors for reform, it just it seems like to have a strong philosophical underpinning about how to make the future better and obviously shares our view regarding the environment. And just a very sensible, smart person who brings luck to the Board. And I think just generally recognized as such by many people. I guess, linking into the Panasonic relationship, maybe just how is that relationship going here? And is there any read through on bringing them on to the board? Thank you. No, I think this is Scott Knight too with the Pass Night relationship. I mean, I have a great relationship with the Panasonic CEO. We meet regularly 1 on 1 and talk all the time. So that relationship is strong. He would bring more of a broader and a global strategic view to the Board. Thank you. Let's go to the next question, please. Our next question will come from Gene Munster with Loop Ventures. Please go ahead. Congratulations on the progress. Jon, you talked about full autonomy by the end of the year. I would love for you to walk through the rollout strategy of the Tesla Network app and how that's going to look prior to the robo taxi stage? Are you going to gradually take over human routes with autonomous capable routes over time? Or how do you see that playing out? Well, it's pretty much going to play out as it has played out, which is we'll release more and more functionality. Before we release any functionality, it goes through extensive testing. Of course, we run it we have a simulations team that has a very good simulation in the real world. So we run any code changes through battery tests and simulation. Then we have global QA team, which I'm on actually. I'm one of the on the global QA And we test the releases in the real world, real world plan out, the differences between the real world and the simulation, which are very many because the world is very complex and weird. And then we release it to a small group of private beta testers within the company, then to a larger beta audience, including the last side of the company, then to early access Tesla owners, and then finally a broader release. And so there are many stages that these things go through. So by the time something is being going to wide release into the U. S, it has gone through all of those stages. And the software that's at the very early stage is much more advanced than what people are seeing. So, let's just kind of go through a very rigorous safety process. So essentially, we need to figure out if you get very good at complex intersections, get very good at complex turns in intersections, and things like busy malls in a parking lot or office park or special events and sporting events, that kind of thing, and those eventually come back. Those are extra hard cases, but it's all tracking very well. I feel like the Autopilot's engineering team is we just have an extremely talented group, and deeply involved with the team. So we talk every week and meet every week when we can because now physical meeting is difficult. So I have quite a deep understanding of where we are, where we're headed. And I feel like we have tremendous amount of momentum and we'll have the functionality, that's right for full self driving by the end of the year. After that functionality is released, there's still another step, which is to improve the reliability of it once it is released. So you can have cool self driving with the human supervised by the driver. And then if we keep improving the reliability to the point where it no longer needs to be supervised by the driver, and we provide a vast body of data to regulators to show them that this was the case. And then presumably the regulators, depending on which jurisdiction it is, would get approval for the autonomous cars that can drive with no human onboard. Obviously, the regulatory approval process, that's difficult for us to predict with accuracy because it's out of our hands. But for the rest of it, I feel very good about where we are. Around. So to summarize, we want we're going to get owners full autonomy, some level of that by the end of the year. Then a human in the loop Tesla Network app sometime, is it first half of next year? Would that be the hope? Do you mean like, what kind of car drive with no person in order? With a person initially a person to observe, would that be with the Tesla Network app, would that be early part of the year of 2021? Is that the hope? If it's described as a hope, I would say that that's probably a fair description. Regulatory is a massive any high level thoughts? I understand the regulatory is a massive unknown. But if you're going to put a guess on it, where would we start when do we start seeing robo taxis? So, I think it's quite likely, in my view, again, I could be wrong, As you've seen with Tesla, we're ahead in some areas and we're behind in others because when I give a guess, I give to guess that I think is the likely midpoint, not the point with lots of margin. If this is normal distribution, I give you the 50th percentile, not the 3 segment optimistic or pessimistic. So then that necessarily means at least half of my predictions will be wrong and half will be right. Or they might be right, but offset by a few weeks to a few months, in some cases a few years. But I believe that everything I've ever said would come true, did come true. It may have come true late, but it did come true. So, functionality is not my strongest suit, but I always come through in the end. So I think we could see robotaxis in operation with network fleet next year. Not in all markets, but in some. Thank you. And let's go to last question, please. The last question will come from Pierre Ferrout with New Street. Please go ahead. Hey, thanks for taking my question. One on gross margin first and your impressive performance in Q1. So there are 3 moving parts that they win from credits, of course, the Model Y ramping even if it broke even, it probably took average gross margin down. And of course, you had like Fremont being closed, shut down the last week of the quarter. It probably was the start of an extra cost. And so when I looked at how gross margin evolved sequentially, excluding these three moving parts, I felt like your auto gross margin could have been up like a couple of points sequentially. So I wanted to check with you if that estimate would make sense. And then I will have a follow-up on Energy Storage. Thank you. Sequential market improvement margin improvement. Yes. So the three things that you mentioned, I had a little bit of a hard time hearing the full question here because we're having a bit of network difficulty in the room. I'll do my best here. So when we look at margin, we do exclude credit as you have, so I agree with that. Model Y ramping, bringing down overall margin, I agree with that as well. So it was lower than the overall average and that will increase with time. And shutdown inefficiencies in both Shanghai and in Fremont also weighed on margin. And the Shanghai margin was below the average as well, even though it's increasing quickly and approaching Model 3, it still looks below the average. And so I think that sentiment of your question was, if you were to remove those factors, was there a sequential increase in gross margin? I haven't specifically calculated that, but I think your intuition is right. We saw strength in gross margin across the board, as I mentioned. And in particular, S and X gross margins continue to improve despite slightly lower volumes there and higher fixed cost amortization. So there's good progress happening both on the ASP side and the cost reduction side for our products in production. And I think this also lends itself to the power of the gross profit contribution to the company once we get through these ramp inefficiencies, we get them up and running again, we increase capacity so we can spread out fixed costs and continue to execute on cost reductions on our products. We feel very optimistic about that path going forward. Thanks. And I had a quick follow-up on Energy Storage, if you can hear me well. I think like I can't remember, I think from the very first days I heard you on the call, you've always mentioned that demand for energy storage is always outstripping supply and you have more orders than you can make. And so I'm kind of thinking there will be there should be an inflection point in that business at some point and it's going to be driven by your ability to add much more manufacturing capacity like battery manufacturing capacity? And at a high level, how are you thinking about that In terms of timeline, I think what we've been doing with both our partners and internally is looking at how to reduce the fundamentally the cost of investments in new sale capacity. Because when you look at a car, a vehicle product, there's a lot of things in the vehicle besides the sales. When you look at an energy storage product, it's really just the sales. And so to really grow the energy storage business, it's all about sale investments. And so that's what we've been focused on. And I think not to give too much away, but that will be one of the things we address in better in Investor Day is how we're focused on that. And when we have that in the place we want, it will be a lot easier to scale that business. Thank you very much for all your great questions. Unfortunately, this is all the time we have today, and we'll speak to you again in 3 months' time. Thank you very much, and have a good day. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.