Good day, ladies and gentlemen, and welcome to Tesla Motors' third quarter 2010 earnings call. Now, I would like to turn the call over to Ricardo Reyes, Vice President, Global Communications. Your line is open.
Thank you very much, thank you for joining us this afternoon. Welcome to Tesla Motors' earnings call for the third quarter of 2010. With me on the call today are Elon Musk, Chairman, Product Architect, and CEO of Tesla Motors, and Deepak Ahuja, our Financial Officer. Before we begin the call, please allow me to read the following statement to inform you of certain safe harbor provisions under the Private Securities Litigation Reform Act of 1995. During the course of this conference call, we will discuss our business outlook and make other forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are only predictions based on management's current expectations.
Actual events or results could differ materially from those predictions due to a number of risks and uncertainties, including those discussed in the Risk Factors section of our financial prospectus relating to our initial public offering filed with the Securities and Exchange Commission and as amended on June 29, 2010, and our Form 10-Q, as filed on August 13, 2010. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. With that, I'll turn it over to Elon.
All right. As I mentioned in the last earnings call, I mean, generally our approach is to try to provide information, relatively speaking, in real time for most things. That the quarterly earnings call isn't some big revelation or something. It's a reiteration of the progress we've made in this quarter and give a little bit of sense for what's coming ahead. Overall, I think looking at the third quarter, it was a solid quarter of execution on all aspects of the business, including Roadster, Model S, and powertrain. As far as Model S milestones, we've completed the Fremont factory, purchased the NUMMI factory.
We've made great progress on the powertrain prototype and then in the overall vehicle alpha prototype, and I'll talk more about that later. Our overall Model S development remains on track for the mid-2012 delivery to customers. We've obviously finalized the Toyota RAV4 development services agreement, demonstrating a deepening strategic partnership with Toyota. In October, we completed all deliverables for the Daimler A-Class battery packs and chargers , the Mercedes A-Class, and are now shipping production parts. As I think most people have seen, we announced an investment from Panasonic on the order of $30 million. We've continued to add incredible talent at all levels of the company.
In fact, I think on this point, this is probably the most important point, I think, for the ultimate value of any company, is that it is in any given company is kind of the vector sum of the people within it. We're just really adding unbelievable talent. If there's a hiring fair at university or so or something like that, we tend to have the longest line by far when people are queuing up to hand in their resumes and so forth. It's really, I think that is the biggest indicator ultimately of the value of any company and certainly of Tesla. Just going into a little more detail on each of those items.
On the Roadster business, which is perhaps to some degree a proxy for Model S, we had a great quarter. 151 Roadsters delivered globally. Grew 7% quarter-over-quarter. It's actually the best quarter for new orders in over two years. Up 15% in terms of orders from Q2. These are really new orders. It's not as though we're working off some backlog of orders. These orders all either took place in the third quarter or just shortly before the third quarter. These are all new customers, to be clear. We're now in 31 countries around the world. We completed the Odyssey of Pioneers, where we did the first round-the-world trip of a production electric car.
It was very, very exciting. That went through, you know, starting in Brazil and going through Eastern Europe, through Siberia, China, India. We sort of took the shortest route, actually.
Starting in Europe.
Sorry?
Starting in Europe.
It started in Switzerland.
Yes.
Sorry, I'm starting to speak.
Yeah. It started in Switzerland.
Started in Switzerland, continued through Europe, China, India, Japan, U.S., then finished up in Paris. Through that entire period, we were just charging off the local grid. There was no infrastructure installed or anything like that. There's no special things done. It was just charging using the onboard charger of the car. As far as retail expansion, which is continuing to lay the groundwork for Model S growth, we opened a new store in Paris in third quarter, and we expect to open our first store in Asia, in Tokyo, later this week. Milan either end of this year or early next. Washington, D.C., probably sometime in the first quarter.
We're really gonna be focusing on making sure we're getting the store experience, the retail experience as perfected as possible. It's not just gonna be opening up new stores, but also looking at our existing stores and saying, "How do we make that retail experience truly superlative?" I think next year, we'll start to see a little bit more of how we're attempting to perfect the purchase experience and the service experience. That whole effort is being led by George Blankenship. I'm actually very excited about how that is unfolding.
With respect to Model S, as I said, we're on plan for a mid-2012 launch with a slow ramp in production through the end of 2012, reaching steady-state production in 2013. Still targeting 20,000 units approximately in 2013. The Model S development is making good progress on several fronts. In addition to completing the purchase of the Fremont factory from NUMMI, we've bought a great deal of equipment in stampings, paint, plastics, and so forth. In general, our approach here is to buy used equipment because the prices for used automotive manufacturing equipment are incredibly low at this point. We're literally paying pennies on the dollar in a lot of cases.
In fact, in some cases, we paid less than the scrap value of the item because it would've cost more to move the item than to actually buy it. It's really been great as far as lowering our capital cost for production. We also have the operating permits, the manufacturing permits required to enable mass production of vehicles well in excess of Model S production. In fact, we have emissions permits and so forth that would allow ultimately full use of the former NUMMI facility, you know, getting up to on the order of 500,000 units a year, which is obviously a very long-term aspiration, but where we hope to be one day.
The manufacturing layout for the Model S production is complete. We held an open house in October with the media to give people a tour of the facility, to give people sort of a firsthand impression of what it's like. We've got partnerships underway with several suppliers to finalize the details of the manufacturing processes and the remaining equipment required in each of the shops. Overall, this facility sets us up very well for a significant expansion of capacity of Model S potentially, and Model S derivatives, as well as a third-generation mass-market EV. The Model S new design powertrain system is undergoing road testing as we speak, as well as lab stress testing.
The goal of having a 45 minute fast charge capability is I think we're highly confident of that system. I think people will be pretty excited when they see the design of our fast charger. It's I think both technologically and aesthetically very appealing. The alpha build of the body in white process is underway with one of our suppliers, [Exponent], in Michigan, and we expect the first body in white to be completed this month, and first completed alpha prototype vehicle driving by the end of this year.
As far as supplier sourcing, we expect to be 100% complete on supplier sourcing by the end of this quarter, with the exception of a few items that are short-term in nature so that this is where it may be advantageous for us to delay making a sourcing decision until closer to production. As far as any long lead supplier sourcing decisions, we expect to be 100% complete by the end of this quarter. As far as reservations, we're a little over 3,000 Model S reservations. This is actually an easy number to figure out. Just put yourself down for a Model S reservation, and you will get a sequence number. This is not exactly a top secret.
I think the fact that we have over 3,000 despite the fact that there's, you know, no advertising, there's a sales force that doesn't sell the Model S, and there's no promotional activities. We're still, you know, reasonably far away from production, and the minimum reservation amount is $5,000, I think this is all very positive that we have over 3,000 Model S reservations. In the second half of next year, we're gonna start turning the focus of our sales force towards the Model S reservations.
That's when we'll try to ramp things up, and hopefully by the start of Model S reservations, our aspiration, I'm not sure if we'll get there, but our aspiration will be that by the time we start Model S production, that we've actually sold out the first year of Model S production, first 12 months of Model S production. Let's see. In far strategic relationships for more details there, Daimler business is progressing very nicely. The Smart, the electric Smart, which is a program which is a total of 1,500 vehicles initially. We delivered a record amount of battery packs and chargers in Q3, which is about 240 units. I mentioned the A-Class, [electric 28] A-Class. We completed development work last month.
We're now shipping production battery packs and chargers. The Toyota RAV4 EV deal, which was about a $60 million development deal, was finalized. We've been delivering RAV4 prototypes now since July. This is a case where Tesla provides the entire electric powertrain, so the motor and gearbox, and inverter, in addition to the battery pack and charger. It's noteworthy that Toyota has chosen to have us provide the complete powertrain. It's a really, like, nice validation of our technology. A bit more about the Panasonic relationship. Worth noting that the Panasonic didn't sort of decide on the spur of the moment to make this investment decision. This is a very long-standing relationship.
We've been working with Panasonic and their Sanyo subsidiary now for six years. They have a very deep understanding of Tesla, where we are, where we're headed. I think it's again a really powerful endorsement of the technology we've developed here and of our company as a whole that Panasonic would choose to invest $30 million at the market price. The Panasonic cells are in use in the [family Smart] battery pack, the A-Class battery pack, and will be in use in the RAV4 EV and also planned for the Model S.
It's worth noting, I made this point before, but that the Panasonic cell that we're using here, although it is physically and from the outside appears to be a laptop cell and that it is 18 mm in diameter and 65 mm tall, the internals are quite different from a typical laptop cell. This is really an automotive cell that we've refined in joint with Panasonic. In contrast to the Roadster, which is really a laptop cell, we've taken knowledge learned from the Roadster program, and we've employed that to basically develop an automotive cell that's better adapted to automotive needs.
You know, results in lower cell costs and higher life and that sort of thing. There's no exclusivity in the Panasonic deal. This is not a, not a case of, you know, where say Panasonic invested money and in exchange got some favorable contractual elements or anything like that. This investment was stood on its own legs. It's really just something that they wanted to do in order to bring the companies closer together.
In terms of operational guidance, just to set expectations on, I want to reinforce, I think we're just at a fairly obvious point that the near-term quarterly profitability is not a particularly meaningful goal because we're spending on the order of $0.5 billion over the next nine quarters or little less than that over the next nine quarters. You can expect to see, you know, some fairly significant expenses there. It's really the only way to execute the business, given that we're going from roughly, you know, 600 units a year of Roadster to 20,000 units a year, sort of a 30-fold plus increase in production volume. We're very focused on long-term profitability and value creation.
I think if you look at the core business of the Roadster and powertrain by itself, you can see that we've created a business there which has good gross margin, approaching 30%. That's to some degree a proxy or microcosm of what's there with the Model S. In capital. Our near-term objectives are just to get that first alpha build, get that first alpha prototype running by the end of this year. It's looking quite exciting. We expect to also have the alpha prototyping, kind of an exploded view at the Detroit Auto Show. This is like something that people who want can take a look at.
It's just because it really illustrates the strength of Tesla's vehicle engineering. People generally have come to appreciate that Tesla has strong powertrain engineering, but our design team is also very good 'cause aesthetically. We've also developed a very strong vehicle engineering team, as evidenced by the quality of the Model S prototype on the vehicle engineering side. That'll be sort of our near-term thing that we wanna educate people on. As we go later into next year, educate people also on how we've developed a very strong manufacturing team. All right, I'll turn the call over to Deepak who will now review our financial results in more detail.
Thank you, Elon. I think the primary takeaway from the quarter is that in addition to delivering on Model S milestones that Elon has shared with you, we have continued to improve the revenue and gross margin of our existing business. I'll discuss with you our quarterly performance and then touch upon our latest contract with Toyota and the Panasonic investment. Finally, I'll conclude with some thoughts on guidance. While discussing the financials, I'll provide additional commentary on a non-GAAP basis as this is how we measure Tesla's results internally. Our non-GAAP financials exclude non-cash charges related to stock-based compensation and the change in fair value of our outstanding stock warrants. However, as you know, non-GAAP information should only be read in conjunction with GAAP results to evaluate our performance.
A reconciliation of the non-GAAP information is included in our earnings release. Turning first to the P&L, overall revenue for Q3 was $31.2 million, a 10% increase over Q2. As a reminder, in 2009, we were shipping Roadsters aggressively to satisfy customers who were holding reservations for nearly two years. Therefore, we believe that in this case, the sequential comparison of revenue is more meaningful. We report revenue in two categories, automotive sales and development services. Automotive sales consists primarily of Roadster sales and to a lesser extent, the sales of powertrain components to OEMs and zero-emission vehicle credits. On the other hand, development services revenue consists of services we provide to other OEMs to develop electric powertrain components and systems for their vehicles.
Starting with the Roadster portion of our automotive sales, as Elon indicated, we delivered 151 Roadsters in Q3 versus 141 in Q2, a 7% sequential increase. Average selling prices remained relatively constant as compared to the last quarter. However, revenues of the Roadster business decreased 5% sequentially to $18.2 million in Q3 due to a greater mix of leasing versus retail sales in the U.S. market during the quarter and a one-time catch-up in the delivery of certain options in the prior quarter. Just as clarification, the remaining revenue for the leased Roadsters will be recognized in future quarters. Looking at the powertrain components portion of automotive sales, our revenues were up 6% sequentially to $5.1 million in the quarter.
We actually achieved a second consecutive record quarter from the deliveries of battery packs and chargers to Daimler. Overall, automotive sales revenue decreased by 3% to $23.4 million, which can be fully explained by the increase in the lease mix of Roadsters. Development services revenues increased sequentially by 80% to $7.9 million in Q3, primarily due to the continued achievement of milestones for the A-Class agreement with Daimler as well as the amortization of previously deferred revenue. We also started re-recognizing revenue from the shipment of RAV4 EV prototypes to Toyota in Q3. Looking at the total gross margin for the quarter, it was 30% as compared to 22% last quarter, a great result for the company.
This increase was driven primarily by a change in mix between the automotive and the development services revenue, and will continue to vary in future quarters based on the relative mix. The gross margin for our automotive sales was 17%, slightly better than 16% in Q2. This margin is net of adjustments to our warranty reserve, including a provision we have made for the voluntary recall initiated on October 1st. The total cost of this recall from fixing the 12-volt auxiliary cable in the Roadster is not considered material. So far, about 50% of the cars in the U.S. have already been repaired. As a precautionary measure, we have initiated this change worldwide and have fully reserved for the cost of implementing this fix on a worldwide basis.
Our gross margin for development services was 68% in Q3. The timing of the development revenues did not fully match with our R&D expenses booked as cost of goods sold in the quarter. I shared with you previously, it's important to note that the gross margin of our development services is not an indicator of future performance due to these timing differences. Turning to operating expenses, the increase in operating expenses continues to reflect the emphasis we have on the development of the Model S and our spending on infrastructure. R&D expenses were $26.7 million for the quarter on a GAAP basis, and $25.4 million on a non-GAAP basis. Our non-GAAP R&D expenses increased 71% sequentially, primarily due to Model S engineering and production development, work underway at several suppliers.
We also increased headcount by 62 employees in production and manufacturing, or about 22% during the quarter. As we mentioned last quarter, the spending on Model S development will continue to ramp up with increased R&D efforts internally and additional work by our suppliers, but it may be lumpy in some quarters. Looking at SG&A expenses for the quarter, they were $20.4 million on a GAAP basis and $17.9 million on a non-GAAP basis. The 8% increase in our SG&A expenses on a non-GAAP basis from the prior quarter is due to the continued expansion of our company-owned stores and service network globally, especially in Asia, and the recruitment of key talent, as Elon indicated, from all over the world. A quick comment on other income and expense.
This reflects the change in fair value of our convertible preferred stock warrants up to the completion of the IPO in early July and the change in fair value of our outstanding DOE warrant at the end of the quarter. We recorded a non-cash accounting gain of $3.1 million for these changes in fair value in Q3 since our stock price declined in Q3 from the closing price of $23.83 on June 30th. Going forward, we'll only be impacted by the changes in the fair value of our DOE warrant since the preferred stock warrants were net exercised at the IPO in Q3. Net loss for the third quarter was $34.9 million on a GAAP basis, as compared to $38.5 million in the prior quarter.
On a non-GAAP basis, the loss in this quarter was $34.2 million, as compared to $26.1 million during the prior quarter. We are incurring a net loss despite improved margin from the prior quarter, and we will continue to do so for the next several quarters since, as Elon indicated, we are making significant investments in R&D and in our infrastructure to launch the Model S. While looking at our losses on a per-share basis, please note that the total weighted average common shares were 92.3 million. This resulted in a net loss of $0.38 per share on a GAAP basis and $0.37 per share on a non-GAAP basis for the quarter. Turning now to the balance sheet.
Unrestricted cash at the end of the quarter was $96.6 million, and total cash, which includes our restricted cash in the DOE dedicated account, was $184.7 million. This compares to a total cash of $47.3 million at the end of the prior quarter. As we noted previously, investors should look at a combination of unrestricted cash, restricted cash, and undrawn amounts under the DOE loan to get a full picture of our available cash. Let me walk you through these items. At the end of Q3, our restricted cash balance remaining in the DOE dedicated account was $88.1 million. We had deposited $100 million in this account at the closing of our IPO in early July.
This dedicated account, as you may recall, is used to fund 50% of the advances we would normally receive under the DOE loan facility and is also intended to fund any cost overruns from our powertrain and Model S projects. This structure, just to clarify, does not affect our ability to draw down the $465 million facility. These upfront payments from the dedicated account will be fully reimbursed by the DOE once this account is depleted. The dedicated account is essentially a mechanism to defer but not replace the loan amount. An additional source of cash not accounted for on our balance sheet is $33 million of eligible costs that have not yet been funded by the DOE but qualify for reimbursement under the DOE loan facility.
Of this, about $11.9 million is in deferred requests in connection with the use of the dedicated account. In addition, we estimate that we have incurred but have not sought reimbursement for approximately $21 million as of September 30th. Half of this $21 million will be fu nded in Q4 from the DOE loan, and the rest will be funded upon the depletion of the dedicated account. Looking at the cash flows for the quarter, cash used in operating activities during the quarter was $46 million as compared to $20.2 million used in the prior quarter. Just to clarify, roughly half of the cash used in operating activities is reimbursable under the DOE loan as it relates to our expanding R&D spending. In addition, our inventory was up by about $10 million to support the growth in the powertrain business and Roadsters production.
We expect inventory to continue to increase over the next few quarters as we have elected to build Roadsters at a faster pace than our sales forecast. This is given the constraint that Lotus production of Roadster gliders will stop by year-end 2011, and we intend to continue with Roadster sales in 2012. Looking at capital expenditures for the quarter, they were $66.5 million as compared to $9.8 million last quarter. Although the Fremont facility and related asset purchases were completed in October, a total of $56 million related to this acquisition was included in this quarter's capital expenditures since these funds had been partially paid or set aside in an escrow account.
Offsetting our cash usage in the quarter was the drawdown of $11.1 million from our DOE loan at interest rates ranging from 1.7% - 2.2%. As of September 30th, we have drawn down $56.6 million of the loan facility. We expect that the entire $465 million DOE loan facility will pay for most of the costs related to the engineering, development, and facility expenses for the Model S until its launch, and for all such expenses on our powertrain activities on a reimbursement basis. Think of this as a remaining line of credit of $408 million. Just to clarify, these loans extend until 2022 and allow us to borrow at Treasury rates with quarterly principal repayments that start at the end of 2012.
Before moving on to guidance, I'd like to comment on two recent events. As Elon indicated, we signed an agreement with Toyota in October to develop a full powertrain for the electric version of the Toyota RAV4. While we are still working on the final specifications of the powertrain with Toyota, we currently believe that this contract, when fully implemented, will generate approximately $60 million in revenue for us. We expect to recognize this revenue over approximately the next six quarters. Once the specifications are finalized, we'll be better able to comment on the timing and the size of the revenue. In addition, we're developing a limited number of early prototypes for the RAV4 for about $9 million in revenue. Just as clarification, the sale of production parts will be a separate agreement when Toyota proceeds with the production of electric RAV4s.
Secondly, last week we concluded the $30 million investment from Panasonic. This transaction resulted in Panasonic's purchase of 1.4 million shares of common stock directly from Tesla at a price of $21.15 per share based on the average of trading highs and lows from October 25th to 29th. Panasonic owns about 1.5% of Tesla's common stock. When Panasonic approached us with this proposal to invest in Tesla, we felt that this was a logical next step in our multi-year relationship, one that began several years ago with the purchase of battery cells from Sanyo, which Panasonic now owns. While we do not have an exclusive relationship with Panasonic, we are jointly developing a cell that's customized for our battery packs to improve both performance and reduce costs.
We'd like to formally welcome Panasonic as a strategic partner and shareholder. I'd like to offer some thoughts on guidance. Since we remain focused on the long-term objective of delivering the Model S, we will provide limited guidance on our short-term financial results. Specifically, we'll provide annual financial guidance on revenues only. For 2010, we project $110 million-$115 million in revenue. This guidance is unchanged from the last quarter. As we mentioned in the last earnings call, we do expect Roadster sales to grow over time, but small fluctuations are likely to occur due to seasonality during the winter months. As the winter months are beginning in all our core markets, we may see Roadster deliveries drop slightly in the upcoming quarter. Since we've already assumed this in our plans, we are comfortable leaving our revenue guidance unchanged.
With regards to Model S reservations, as Elon mentioned, we have received slightly over 3,000 Model S reservations as of September 30th.
We plan to disclose this number, obviously. We will not provide further guidance on this number. Since we're not actively focused on getting Model S reservations at this time, we do not regard the number of new Model S reservations received in any given quarter to be an indication of our performance, at least for the next year or so. I'd like to conclude at this point by letting you know how excited we continue to be about our long-term opportunities. This ends our prepared remarks. Operator, can you please open the call for questions?
Yes Sir. Ladies and gentlemen, If you have a question or comment. Please press star then one your telephone.Our first question is from Patrick Archambault of Goldman Sachs. The line is open.
Hi. Thank you. Good evening.
Good evening.
Hi.
I just wanted to. A couple of questions. You know, on the RAV4 program, has Toyota given you any kind of indication of, you know, what volume they would be targeting down the road with the electric version of that vehicle?
You know, obviously, there's a great deal of long-term potential. The approach that Toyota's taking, and I think it's the sensible one and similar to the one that Daimler's taken, is to start off with a, you know, sort of a test fleet, essentially, that's on the order of a few thousand vehicles. Evaluate that in the market to figure out what the market interest is in the car, iron out any, you know, operational, you know, any kind of bugs. You know, how, you know, how do you Does it work under, in all circumstances, in all environments with higher, you know, higher liability? Obviously Toyota's gonna be, is, as is Daimler, they're both very sensitive to reliability.
You know, there's long-term potential, but the initial phase of the deal, as with Daimler, is in the sort of the couple thousand units range.
Okay. One other one. You'd mentioned stage three, you know, kind of charging being something that was, you know, encouraging in terms of, you know, some of the testing you've done with your powertrain program so far for the Model S. Is that something that you might actually plan to have available by the launch of the Model S? Or is that just something for later on down the road that you could, you know, make an option for, you know, further generations?
That's a good question. We do feel that the fast charging, or just to be precise, what we mean by fast charging is we're talking about something which is approximately an 80 kW charger that is a direct DC input to the battery pack. It bypasses the internal charger in the vehicle and goes direct to the battery pack. That charger is something that's developed by Tesla and is essentially taking the onboard chargers that are in the car and ganging them together in effectively in parallel to provide the 80 kW class charge. The default car will come with either a 10 kW charger onboard charger or a 20 kW onboard charger, depending upon what options you select.
That is something that we expect to have available coincident with the start of Model S production, and we'll pick a few strategic locations along major interstates to deploy these fast chargers. This isn't quite the right time to talk about the details of those plans, but you can, I think you'll start to see those plans get a little more fleshed out in the second half of next year in terms of exactly where we would start deploying those. I think you know, you'll certainly see it's probably in similar places to where we've already deployed chargers for the Roadster, such as along the Highway 101 in California. I don't wanna go too much into details of that.
We'll, that's certainly something over time that we'll address. To finally answer your question, that is something we think is important and will be available at the time of Model S production.
Okay. Can I push you for one last detail just in terms of, you know, the kind of charge time that you're sort of contemplating for that? Do you guys have an idea of that for that, you know, sort of fast charging option?
Yeah, absolutely. It's a 45 minute charge approximately. The default pack size is roughly 70 kWh. That means an 80 kW charger will charge that in roughly 45 minutes, assuming that you know, you're not going from complete zero to complete 100%, which is almost never. You know, you're going from somewhere, something around 5%-10% level to sort of 85%-90% level. That's about a 45 minute charge.
Okay. Gotcha. Lastly, I guess just one more, you know, strategic question. Since you know, have sort of last interacted with Most of the investor base during the IPO. Can you tell us a little bit if, you know, anything on the competitive landscape has changed for you guys, you know, either, you know, plans for new entrants on the car side or, you know, maybe even on the battery on the powertrain side as well?
I can't say that there's been any significant change that we're aware of. In fact, if anything, I think the actions of Toyota and Panasonic would affirm that Tesla is the technology leader in this arena. You know, there may be, obviously there may be things we're unaware of, but as far as things we are aware of, we don't see any changes.
Okay, great. Thank you very much.
Thank you. Our next question is from Rod Lache of Deutsche Bank. Your line is open.
Hi, everybody. Was hoping you could just elaborate a little bit more on the outlook for the battery pack business as sort of a revenue opportunity. If you sort of aggregated the Smart, the A-Class, the RAV4, and other things that you're that you're targeting, what would you anticipate as, you know, maybe one year or two from now, this battery pack business actually representing, not the development cost, but actually in terms of the technology sales?
You mean, by technology sales you mean units, production units delivered?
Correct.
Rod, as you know, we've always been a little reticent to make any kind of predictions or forecasts on the powertrain side of things because it's so dependent on the decisions of like maybe 1,000 OEM CEOs and their associated teams. It's in part dependent upon Tesla's performance, but it's in part dependent upon their just what they decide strategically. We've always really downplayed the powertrain business. But it's something there that has a lot of potential.
Unlike cars we make ourselves, where the consumer is like a fairly objective decision-maker, you know, and where we feel like destiny is really much more with something that we control our destiny in that situation, so we're more comfortable making predictions there. I'm just not super comfortable making predictions when it's dependent on just the decisions of a small number of people at the strategic level.
You mentioned about a dozen CEOs. Should we take that to mean that there are other automakers that you've had discussions with that might be considering working with you in addition to those that you've announced so far?
Yeah, there certainly are other conversations that are happening. It's difficult to say whether those will materialize into anything real. I think there's, you know, there's a good chance that there may be one of them that does, but we also have to factor in what Tesla can really handle. You know, if we take on too much business too soon, we won't be able to do a good job for everyone and still keep the Model S on track.
There actually have been deals that we've turned down, that we thought were just not a good use of resources, because we didn't necessarily believe in how that product would end up being a compelling product or that it would be of sufficient scale. There have been, there are many conversations and I think there's, you know, there's a good chance that there'll be some additional deals. We aren't vigorously pursuing those because we do wanna make sure that we execute well on the Model S, on the Daimler business and on the Toyota business.
Okay. Can you maybe just elaborate a little bit more on the cash walk? You know, maybe just comment a little bit about just when you, when you net out the timing differences, how would you expect cash to end up at the end of the year? Where would the debt be, if you can? Also in terms of just as a separate question, when you look out at the development of the Model S, what at this point appears to be the biggest gating factor, if anything? Is there something on the horizon that you would call out as being the biggest challenge that would maybe cause the timing to move, if anything, on the launch of the Model S?
Deepak, do you want to take the first part of it?
I'd prefer not to answer specifically what our cash position is, but I think, as I've shared, Rod, clearly that we have a well-identified piece which is reimbursable from the DOE. Sometimes we have a lag effect depending on the whole process of reimbursement and also how we use the dedicated account. I think you'll have full clarity and visibility of how cash is being spent and how it's coming in on a natural basis.
Deepak, have your expectations for capital spending changed at all, just given the comments you've made about how you're able to buy equipment at, on pennies on the dollar? Has there been any update to your expectations on the capital spending associated with the project?
On the Model S, our spending is in line with our broad plans, including our planned contingencies that we have. There's been no fundamental change.
Okay.
Yeah. I'd say there's just to add a little bit of color to that is we've achieved just, I think, some amazingly great deals on automotive equipment that's like just literally in some cases, less than the scrap value of the metal, of the machine. But we've also decided to make some additional expenditures on the Model S program to add some features here and there, make the car incrementally more compelling in one place or another. It sort of balances out to some degree, but overall, we're pretty much tracking to our expectations on capital expenditure. You know, an example is like Panoramic Roof. You know, that wasn't in the original things for Model S, but we looked at outsourcing the Panoramic Roof.
We didn't find one that, a panoramic roof that was just, you know, perfectly done. We really put together a team and we're making a panoramic roof that's really, again, I think gonna be best in class or best in best really, not best in class, best. You know, it's obviously very focused on the aesthetic appeal of the vehicle as well as the functionality. We want this to be something that is truly supportive. You know, it's the, in the words of Zoolander, it must be really, really good looking.
And so, um-
In terms of gating factors, you know, milestones that would be represent a bigger challenge that could move timing around, is there anything in your mind that you need to clear in terms of hurdle to, you know, that can change the timing?
No, it's looking pretty good. You know, I think, my answer on the timing risk would be or, you know, what issues, drive our timing risk would be really kind of what I put earlier this year, which is, you know, when you get to the final systems integration and you're really refining the details of like the safety systems and the airbag functionality and the nuances of the crash testing and achieving full five-star crash safety certification by 2012 standards, which is a much higher standard than the 2010 standard, it's getting all those nuances just right, to a very high standard that is really the risk at the end.
That's, you know, people will see a car, you know, towards the end of next year that is to all appearances, indistinguishable from a production car. You say, "Well, why is, why weren't they delivering cars in about 2012?" It's because perfecting the details takes time. That's, that's I think, although somewhat of a nebulous answer, that's really I think what I would consider to be the timing risk is that we won't ship the car unless it's, unless it's really great.
Mm-hmm. Great. Thank you.
Thank you. Yeah.
Thank you. Our next question is from Joshua Paradise of Morgan Stanley. Your line is open.
Wanted to check in a little bit on the RAV4 project and try to understand how the powertrain that you're developing for the RAV4 either overlaps with or is different from the Model S and whether you have the same teams working on it or different teams?
Yeah. There are a lot of similarities between the RAV4 powertrain and the Model S powertrain. Obviously, the RAV4 powertrain is integrated with RAV4, Model S powertrain is integrated with the Model S. There are system integration challenges that are different between the two. But the core elements will be substantially similar between the Model S and the RAV4. It does create a little bit of a drag coefficient on Model S development, but more on the systems integration side rather than the core elements. It's something that we're making sure does not affect the overall timing of the Model S program.
Okay. The intellectual property that gets developed in that process, does Tesla own all of that? Does Toyota own some of it? Can you go and potentially sell it to or use it for another OEM?
The, the core elements remain Tesla IP. The things that relate to the systems integration with RAV4 are Toyota IP. It certainly it's possible for us to sell powertrain to a manufacturer. We're not constrained in that regard. We have clear ownership of Tesla IP in this circumstance. Yeah, we didn't prevent us from doing other deals. Doesn't constrain us with the Model S. As one would naturally assume, anything which is proprietary to a Toyota vehicle remains with Toyota. I should point out also that the RAV4 battery pack is a smaller battery pack than the Model S. It's on the order of a 40 kWh battery pack.
It's comparable in size to what's in the Mercedes A-Class.
Just one more. On the Roadster sales in the quarter, can you give some breakdown of how many of those were in new locations, new stores, and what the same-store sales trends look like?
Yeah, we're not really releasing that level of detail. I'm not sure it's at this point with the Roadsters being, you know, there's not a huge number of Roadsters being sold, so I'm not sure one could derive statistically relevant trends from that. It's, you know, so I think that's gonna become a much more important question as we get into the Model S.
We don't believe that same-store sales is a relevant metric because sales of our Roadsters happen through a variety of channels.
Yeah, it's also hard to trace the, you know, exactly where the sale originates. It's not like, you know, like Starbucks would be much more of a localized phenomenon, but it There are many cases, particularly for the Roadster, where our, you know, our clientele will be, you know, coming through New York, but they live in Dubai, you know, or they live in Luxembourg and they're going through London or something like that. That's why we've got Roadsters delivered now in 31 countries and, you know, we only have, like, 14, 15 stores open right now, so.
15 including Tokyo, right?
Yeah, 15 including Tokyo this week.
Yeah.
Right. Okay, great. Thanks a lot.
Yeah.
Thank you. Our next question is from Jeff Evanson of Dougherty & Company. Your line's open.
Morning, gentlemen. Afternoon. Thank you for taking my questions. I guess my first question is, have you recognized any revenue from the $60 million development contract with Toyota?
Jeff, Deepak here. We signed that contract in October, so we have not recognized any revenue related to that $60 million contract in Q3. However, we have started shipping early EV prototypes of the RAV4 based on the earlier agreement that we signed with Toyota, and we have recognized revenue related to that in Q3.
That would have gone through the automotive sales line, correct?
No, that would have gone through the development services, revenue line because that's a development program, so it's not a production-
It's very small numbers.
Yeah.
Yeah.
Sure.
It's very small.
Okay. You know, I've certainly heard some of the chatter that you might actually evaluate doing some of the build of the RAV4s in Fremont. Could you talk a little bit about your thought process around that decision?
Well, to be clear, this is very much a Toyota decision. I mean, they're our customer and we'll do what, you know, what they'd like us to do. We do think that there's some wisdom and value in doing final assembly at the Fremont plant. It's gonna be really up to Toyota to make that final decision though.
What is some of that value versus what are some of the trade-offs you see, Elon?
Well, particularly in the, you know, in the initial fleet, I think being close to where the powertrain's manufactured is valuable. If there are any, you know, issues, bugs, whatever that needs to be fixed with the powertrain, the, you know, the RAV4 gliders are close by and we can make those changes effectively. I think there's definitely some symbolic value. Yeah, it's but I think for, it's just being close to where the powertrain's produced is, at the point of final assembly is probably wise for the initial production.
I wouldn't expect that, you know, if the RAV4 moves to more of a high-volume situation, I would expect that probably is at a Toyota plant. We think there's some value initially at least doing the RAV4 final integration at the Fremont.
Jeff, just to clarify, as I mentioned earlier, the revenue from the sale of the production powertrain components to Toyota are not included in the $60 million development agreement.
Yep. I got that, Deepak. Thank you. Moving on to Model S, could you talk about some of the key learnings you've had so far from the initial testing of the Model S powertrain?
No, no big surprises really. You know, we've now done multiple iterations on multiple powertrains with the Tesla Roadster, so certainly multiple iterations on battery packs with the A-Class, Mercedes A-Class, and the Smart. Overall it's looking good. I mean, I think we're starting to make significant cost savings as well as performance improvements in the battery pack, motor, transmission, power electronics. The packaging is incredibly compact, which I think is great, and allows for huge cargo capacity of the Model S. Like, the Model S is looking like it's gonna have twice the cargo capacity of, well, roughly twice the cargo capacity of a 5 S eries BMW, which is, and it's about the same.
The Model S is about the same size, outer dimensions as a 5 Series, and it's looking like it'll have twice the cargo space, which is pretty cool.
Okay, good. Two quick detail questions. Would you be willing to share what the leasing mix was in the quarter, please?
Our leasing mix in the U.S. market was about 30%. Overall, in the, you know, for considering all our sales, it was about 20%.
Okay. Can you give us some sense of what we should expect for share count next quarter? What would shares have been in this quarter, fully diluted shares have been if you'd been profitable, if you have that number?
If we were profitable, we would be using 97.8 million shares. Q4. Our Q3 numbers were a weighted average, based on when we went public. Q4 is more an indication of the full quarter.
Right.
At that, it will be $97.8 million.
Call it $98 million.
That'll be 98 as well.
Okay. Yeah.
Yeah.
$98 million.
Approximate, yes.
All right. I guess one other quickie.
Yeah.
Correct me if I'm wrong, is operating lease vehicles net on the balance sheet a new line item, and what is it?
Yeah, we just broke that out to clearly show what we were carrying on our balance sheet for the leased Roadsters that we have so far.
Okay. I thought you were outsourcing that.
The leasing, the financing in a sense for that is coming from us. We have partnerships on the retail financing end, with Bank of America. There are other banks providing retail financing. On leasing, it's been done through us directly.
Okay. Great. Thank you very much.
All right, thank you.
Thank you. Our next question is from Himanshu Patel of JPM organ. The line is open.
Hi, good afternoon, guys.
Hey.
Hi, Himanshu.
Couple questions on the Panasonic relationship. You know, you've been working with Sanyo for six years. I'm just curious, you know, what was the impetus for them taking an equity stake now? What kind of changed recently to kinda come to this stage at this point?
Yeah, just to be precise on the Sanyo versus Panasonic. Initially, in the early days, our relationship was just directly with Sanyo. In the last, say three, four years, that's transitioned to primarily a relationship with Panasonic acquired Sanyo, just complicating matters. If you look past the acquisitions and look at the actual cells, the initial cells we were working with Sanyo, they transitioned to Panasonic cells with the A-class and the Model S and so forth.
As far as what was the impetus, I think it was essentially just to have a closer relationship with Tesla. I think they kinda see a lot of potential in us. It was sort of a gesture of faith and support and interest. As I said, there's no contractual obligation that we have to buy Panasonic cells. They are our, and they were independent of any investment. They were our sort of preferred source of cells. They make the most advanced lithium-ion cells in the world. I think it's sort of just almost a gesture of friendship, if you will.
I think they see long-term value as a strategic partner.
Yeah.
With, Tesla, and they wanna cement that.
Yeah, exactly.
Okay.
I still encourage you to ask them directly. I think it's, as with Toyota, it was sort of, you know, and with Daimler before that, it was kind of a, you know, just how do you bring companies closer together? What are the things you can do? One of the things you can do is acquire, you know, become a shareholder.
Elon, you know, you mentioned that the RAV4 battery pack is roughly, you know, 40 kWh , sort of similar to, I think, the A-Class. Has there been any thought by Toyota and Daimler to do some co-collaboration here on some of this stuff, jointly with you in kind of some sort of three-party structure?
They've not talked to us directly about that. I, it's possible there may have been strategic talks at the Toyota-Daimler senior level. I know that companies do cooperate in some other areas. I don't wanna speak for them as far as any three-party relationship.
Okay.
Using visual image there for a moment.
Going back to the issue of RAV4, electric RAV4 production potentially at NUMMI, what are the governing factors from your perspective as to why you would not do it? Is the negative here simply that that could be a sort of a big distraction to ramping up the Model S? Is that sort of the long and short of why you would not wanna support something like that?
Well, I think if Toyota really wanted us to, you know, we'd look at trying to accommodate them. Yeah, I think we, it's really want to make sure we're laser-focused on bringing the Model S to market on time and making it a superlative car. Just in terms of a focus, it's a question of focus. It's, I think it's going to be wise for us to, you know, really be focused on the Model S. I think a lot of fast-growing companies try to do too much too soon and end up then not doing a good job. You know, end up doing sort of a mediocre job in a number of areas.
We just wanna be really focused on kind of the primary activity, which is bringing the Model S to market, making sure it's a phenomenal car.
Where are the gliders coming from? What physically, what location are they gonna be produced in?
I believe the RAV4 plant is in Canada.
Okay, very good. All right, thank you.
Bye.
Thank you, sir. Next question is from Patrick Archambault of Goldman Sachs. Your line is open.
Hi, yeah, just actually 1 housekeeping one. Is there any chance you could give us just the international versus, you know, domestic sales for the Roadsters, just per our models?
Yeah, in Q3, Roadsters in the U.S. were deliveries were slightly over 50%, and the rest was Europe and Asia-Pacific.
Yeah, which, with most of that really being Europe.
Okay, great. Thank you very much.
Thank you. I'm showing no further questions or comments at this time. I would like to turn the call over to management for any closing remarks.
Really, I think, Chris, we said pretty much everything. I tried to address any questions people have. Thanks, everyone. This is gonna be an exciting couple years, but I think not always with good news, but I think mostly with good news. Thank you.
Thank you.
Thank you. See you in Detroit, everybody.
Yep, see you then. We're definitely worth coming to Detroit if you can make it. It's gonna be cool to see the exploded view of the Model S. All right, bye.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.