Earnings Call: Q1 2019

Apr 24, 2019

Good day, ladies and gentlemen, and welcome to the Tesla Q1 2019 Financial Results and Q and A Webcast. My name is Sherry, and I will be your coordinator for today. At this time, all participants are in a listen only mode. Following the prepared remarks, there will be a question and answer session. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Martin Viecha, Senior Director of Investor Relations. Mr. Viecha, you may now proceed. Thank you, Sherry, and good afternoon, everyone. Welcome to Tesla's Q1 2019 Q and A webcast. I'm joined today by Elon Musk, JB Straubel, Zachary Kirchhorn and a number of other executives. Our Q1 results were announced at about 2 pm Pacific Time in the update letter we published at the same link as this webcast. 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. During the question and answer portion of today's call, please limit yourself to one question and one follow-up. But before we jump into Q and A, Elon has some opening remarks. Elon? Thanks, Martin. On Monday we hosted our 1st ever Autonomy Investor Day showcasing our new in house designed full self driving computer and our AI based software trained by more than 400,000 Tesla vehicles. All Tesla cars being built today have all the hardware necessary for full self driving, and over the air updates will enable our customers to use the Tesla ride hailing network fleet and generate income, which as we said on Autonomy Day a few days ago we think is somewhere between $10,000 $30,000 a year, in some cases perhaps more. We're the only company in the world producing our own vehicles and batteries as well as our own in house chip for full self driving. We're in a position unlike anyone else in the industry. And in 2020, we expect to have a 1000000 robo taxis on the road with the hardware necessary for full self driving. We believe we'll have the most profitable autonomous taxi on the market. Last quarter we experienced a massive increase in delivery volume in Europe, similar to what North America experienced last year, as well as a massive increase in delivery volume to China. As far as challenges go, this was a good one to have because we bought vehicles and consumers bought them. But this rapid increase in overseas volume strained our logistics operation and resulted in over half of our global deliveries occurring in the final 10 days of Q1. This was the most difficult logistics problem I have ever seen, and I've seen some tough ones. So I'll say it again, like we've literally delivered half of all vehicles produced or half of all deliveries occurred in literally the final 10 days of Q1. As a result, a large number of vehicle deliveries shifted into Q2, which caused Q1 net end count to be negatively impacted, as we said we could not get the vehicles to customers physically in time. In response to this, we are in the process of regionally balancing our vehicle bills throughout the quarter. This will make the This will put much less strain on Tesla, result in a much better delivery experience for customers, and have a very positive effect on our working capital in the middle of the quarter. In Q1, Model 3 was yet again the best selling premium car in the U. S, outselling the runner-up by almost 60%. It's worth dwelling on that for a moment, just how absurd this is compared to predictions that were made several years ago. There's literally, for the best of my knowledge, 0 predictions that this would happen if you go back just even 5 or 6 years ago, then an electric car would be the best selling premium car in the U. S, and we believe over time it will be the best selling premium car throughout the world. In fact, in Norway in March we set a record for the highest sales of any car period ever, and that'd be something similar in Switzerland as well. So these are really incredible achievements by the Tesla team. Since the introduction of standard range and standard range plus, nearly 70% of tradings from Model 3 have actually been non premium vehicles, where people are actually paying more for a car than they have ever paid for a car. They never anticipated paying this much for a car, but because they want the Model 3 more than they ever wanted a vehicle, they're willing to pay more to get a Model 3. Keep in mind, global expansion for the Model 3 has just begun, and this segment is vastly larger internationally than it is in the U. S. We're continuing to make significant improvements to our vehicle lineup, including updating the Model S and X production line to accommodate the next generation of powertrains. So we announced this yesterday, and we're now in production with the significantly more advanced powertrain for the Model S and X, as well as an upgrade to the suspension system to have active adaptive damping in the suspension system and to enable charging at 200 kilowatts, which is and there are a number of other small changes. If anyone is thinking about upgrading their Model S or X, this is a great time to do it. We also introduced a loyalty program where if somebody is an existing Tesla owner and they buy a performance Model S or X, they get the LucaS upgrade for free, so this is as a thank you and appreciation to existing Tesla customers. So they have a longer range. The Model S now has a range of 3 70 miles, actually a PA range of 370 miles, and MotorTrend test drove the car a few days ago and drove nonstop all the way from San Francisco to Los Angeles at normal highway speeds, and they said they could have even gone faster, and they were in a headwind as well. So this is pretty remarkable that an electric car can go nonstop between the 2 biggest cities in California. I mean I remember back when I was driving gasoline cars, I always had to stop at a gas station. This is literally better than a gasoline car, with the rare exception. And there's also an increase in power, accelerates faster, just better in every way. We're able to do this without increasing the size of the battery pack, which is a testament to the powertrain team for being able to improve the efficiency of the powertrain by such a significant margin. So with the recently announced product improvements on Model S and X as well as continued expansion of Model 3 globally, we expect our order rate to increase significantly throughout the year and commensurate with our production levels. In terms of other products, I'm very excited about the future for other products, especially for full self driving, which will fundamentally transform transport as we know it. The Tesla Semi Truck, Model Y, improvements to Powerwall, PowerPack, the Solar Roof Version 3 on the energy side, and no question in my mind that Tesla has the most exciting product roadmap of any consumer product company in the world. Finally, I want to thank our employees for their incredible work and our customers for their continued support. Thank you very much, Elon, and I think Zach already would like to have some remarks as well. Yes, thank you, Martin, and thanks, Elon, as well. Overall, as we reflect on the progress of Q1, this was one of the most complicated quarters that I can think of in the history of the company, and it was ambitious even by Tesla's own standards. The global expansion of Model 3 was a huge theme within the quarter. We launched the standard range lineup for Model 3, product retooling for Model S and Model X, which Elon just talked about with the range enhancements and suspension upgrades, and then we implemented various pricing adjustments and worked through the corresponding impact that had on our order mix in deliverable cards. So there's 2 key themes that I'd like to discuss briefly and then we'll open it up to Q and A around cash and profitability for the quarter. First, on the cash front, we exited Q1 with $2,200,000,000 in cash and cash equivalents on hand. This was a $1,500,000,000 reduction from our 2018 ending cash balance. This reduction is attributed to 2 factors. The first is that we paid off $920,000,000 convertible note on March 1. Note for those of you looking to the cash flow statement, $188,000,000 of this is flowing through our operating cash flows. The balance to the $1,500,000,000 reduction is more explained by the working capital impact of expanding Model 3 operations overseas. The two components to this, which we've discussed, is that an international operation naturally commands additional working capital because of transit times, but then also the stress on our delivery operations meant that not all of our cars were delivered. Both of these factors, which occurred in Q1, we do not expect to repeat in Q2, and we expect our quarter ending cash balance to continue to increase going forward. I'll also note that we're tracking in April to the largest month of deliveries for month 1 in the history of the company. On the working capital point, as Elon noted, 50% of our deliveries in Q1 occurred in the final 10 days of the quarter. This is because we prioritized international builds for the first half of the quarter and then U. S. Local builds in the second half. This led to a binary inflow of Model 3 cars to EMEA in China and significantly stressed their delivery operations. We also faced import issues in Shanghai and Beijing and worked through those, but that also skewed deliveries towards the final couple of days weeks of the quarter. So we're addressing this by regionally unbalanced by building regionally balanced, but we've already executed on this for Model 3 and S and X will be implemented in the next week or 2. The secondary benefit of this is that it enables us to run stable operations throughout the quarter, so we don't have to staff many of our delivery areas and logistic operations to the peak, and we expect significant cost savings to come from this. On the P and L side, we incurred $188,000,000 of one time adjustments that flowed through to net income, $120,000,000 of this was related to S and X pricing adjustments that we announced on February 28. This included a reserve for a potential increased return rate for our residual value guarantee and buyback guarantee of vehicles and also an adjustment for the inventory value of our used Tesla inventory and service loaners. There's an additional $67,000,000 related to Q1 restructuring and other charges that flowed through. Within the automotive business, one thing that I want to note here is that automotive revenue was negatively impacted by $501,000,000 attributed to the reserve increase for S and X that I just noted. If you adjust for this, the decline from Q4 to Q1 in revenue is roughly in line with the decline in deliveries. Within automotive gross margin, Model 3 gross margin declined slightly to approximately 20% to 20%. This is due to 2 factors. 1 is the pricing adjustments that we made on February 28 as well as a mix shift towards the standard range lineup which we launched. We also successfully executed on a number of cost reductions which offset this impact. Labor content, warehousing, and scrap as examples all had double digit improvements from Q4 to Q1. In spite of launching the standard range variance, we want to note that North America ASPs are close to $50,000 with the majority of our orders being for long range variance of Model 3. In S and X, the impact on margin was more significant. 2 major pieces here: the volume reduction led to a reduction in fixed cost absorption, so that impacted our margin as well as the pricing actions that we took on February 28. Even though S and X have been in production for a while, we still continue to make operational improvements there, the labor content as an example, which improved quarter over quarter. As we look to the future here, I agree with Elon's sentiments excitement of our product lineup. From a financial standpoint, what we've effectively done here is build an incredible base of knowledge and assets that we can quickly scale and replicate into different products around the world. So Gigafactory Shanghai is a terrific example of this. As we noted in the letter, CapEx per unit of capacity is 50% for Giga Shanghai as compared to Model 3 in the U. S. And the 50%, our internal forecast that we're executing against is actually better than that. And Model Y, as we've noted, is built on the Model 3 platform, so we're able to leverage the knowledge there for capital efficient expansion. In energy as well, as we've noted previously, 2019 is a big year for storage, so a lot of exciting improvements coming there. And the expansion will help improve margin as we can better utilize some of the fixed assets that we've made investments in there. So just to conclude the opening remarks here, I personally never felt more excited about the future of the company, so looking forward to the discussion. Thank you very much, Zachary. Let's take some first questions from retail shareholders who have been submitting their questions on say.com. The first question is, will Tesla be able to complete their purchase of Maxwell Technologies? What is holding that back? Jonathan, do you want to? Yes, hi, it's Jonathan Chang, the general counsel here. Right now we're just going through approvals with the SEC. There's not a whole lot of things holding it back. We're on schedule. We're on track. Right now, we're looking to close in mid May. Great. Thanks. Thank you. The second question is, is Tesla considering creating an insurance program in order to further simplify the ownership experience and to more accurately take into account safety of driving an autopilot? The insurance market is very unreliable for Tesla owners right now. The answer is yes, we are creating a Tesla insurance product, and we hope to launch that in about a month. I think it will be much more compelling than anything else out there. Great, thank you very much. The next question is, Elon, most people when they think of Tesla only see it as an automotive company. Can you speak to the energy side of the company, specifically the roadmap for when you see the energy side of things really taking off and generating major revenue for the company? Sure. The challenge really is battery cell scarcity. As far as the stationary storage is concerned, we basically need an upsell to support the vehicle production as well as to full Powerwall and Powerpack. Last year in order to have enough sales for Model 3, we actually had to convert all of the lines of the Gigafactory to produce cells just for the Model 3 as opposed to Powerwall or Powerpack, And so we're essentially scrounging cells from all around the world to at least continue some level of production on the Powerwall and Powerpack. This year we think we'll be able to allocate at least maybe 5% to 10% of cell output. Like current JV, like what do you guys think? Yeah. Yeah, something like that. Between 5% 10%, exactly right. Yeah, so there are far fewer cells in a Powerwall than in a car, so that translates to, look, you have quite a decent number of Powerwalls, and then we will continue to use cells from a variety of suppliers around the world. The Powerwall and Powerpack, because they don't have to go through vehicle homologation, are much more adaptable to using a variety of cells from other cell providers. So I would expect that Powerwall and Powerpack to see a very significant percentage growth this year, maybe on the order of 300 percent, or is it some quite high number? Sorry? Sorry? 3 100. Yes, 300. The team was just confirming, yes, 300 percent. So this is a very big percentage growth rate. It's much faster than automotive, so over time we would expect that to that sort of growth rate would hopefully be able to continue and then battery storage will become a bigger and bigger percentage of Tesla's business over time. We're also planning a significant increase in retrofit solar this year because we've finally refined the product offering to be something that's extremely compelling and much more cost efficient to deliver and install. It's a radically streamlined process from what was being done before, and we'll have more to see on that possibly next week. And then the solar roof tile, we're on Version 3 of the design. That necessarily takes a while to scale up because we have to be confident that the solar roof is going to last for on the order of 30 years because of the warranties of 20, 25 years. So the rate at which you can iterate on Solar Roof is necessarily slowed down by according to the rate at which you can do accelerated aging on the roof, and we want the installation process to be simple and easy. So I was just actually at the Tesla Buffalo factory a few weeks ago. I was pretty impressed with the team, and we're looking forward to scaling that up significantly through the balance of this year and next. Thank you very much. The next question comes from Jeffrey. When and where will the Tesla Semi production begin? With, I think, so far quite amazing success. The prototypes are working amazingly well. Yes, very well. We just use them all the time. We load them maximum weight and continue to make improvements. We even use them to deliver some Model 3s. Yes, that was fun. So we'll start production next year. The location is not yet set, but it's pretty clear that we make all the batteries and drive units in Reno. Great. Thank you very much. It was Sparks technically. Yes, Sparks, yes, Northern Nevada. Yes, Northern Nevada. Perhaps the last question from retail. How soon should current owners that purchase FSD get the new FSD computer? I think from a features and functionality standpoint, I think there's no point in getting the FSD upgrade if you don't already have it in the car for probably about 2 or 3 months, that's when we'll start releasing features that are materially different from the features that are available on the Version 2 hardware. So no need to rush to get your computer replaced. It's like 2 to 3 months before it becomes relevant, and then it will obviously increase rapidly from then. One other comment I'll make in case since nobody asked this explicitly, for Model Y production we are right now trying to decide whether Model Y vehicle production should be in California or Nevada, and we expect to make a final decision on that very soon. But in the meantime, we have ordered all of the tooling and equipment required for Model Y, so we do not expect this to in any way delay production of Model Y, but it's currently a very close call between Nevada and California as to whether we do the Model Y at GECO or at Fremont. But those are the two options, and we'll hopefully be able to make a decision in the next few weeks. Thank you very much. Sherry, we can go to analyst questions in the question queue. Thank you. Our first question comes from Ryan Brinkman with JPMorgan. Hi, thanks for taking my question. Your guidance for 90,000 to 100,000 2Q deliveries when combined with the full year outlook, it suggests somewhere between 35% 45% sequential growth from the first half to the second. Can you talk about what has given you the confidence to project that growth and in particular what the order book or reservation list may be telling you? Yes. We do see strong demand for vehicles, both SX and 3. The Standard Range Plus Model 3 with Autopilot included at 39,500 is just an incredibly compelling vehicle and affordable to probably something on the order of like the top 40% income earners in the U. S. And Europe. So I think we'll see a lot of interest and demand in that. We are. And then with the upgraded S and X, I think a lot of people were kind of anticipating that there would be an S and X upgrade, and this really is kind of a game changer of an upgrade. So I think we are seeing an uptick in demand and we expect to see that to be quite significant. And we're also out of the seasonality of Q1 where people just generally don't like buying cars in winter, and we're getting past the overhang of that tax credit cliff, which for us ended in the U. S. On December 31st. So these are all very positive factors. We also have just a lot of markets where we've not even tapped into demand, especially for Model 3, so we'll be releasing the right hand drive Model 3, and expect to see significant demand in right hand drive countries. Overall, I feel really good about where things are headed. Okay, thanks. And then my follow-up sorry. I was just going to say on a previous call, you indicated that the Y would not be built in Fremont because it was, I think you said packed to the gills. I heard today that it is now a close call between California and Nevada. Is anticipated demand for Fremont built vehicles less than was previously thought or have you managed to maybe find more capacity in Fremont, for example, with the tent or some other production method? Well, first of all, obviously, on a kind of tense, like real hardcore tents, not like Cub Scout tents, which are fine. But this is actually credit goes to a number of people in the Tesla team because they actually looked at how could we do this in Fremont if we had to, and we feel like we can actually append building space to the west side of the building and use a lot of internal space that's currently used for warehousing in our Fremont factory, and so we believe it actually can be done with minimal disruption to add Model Y to Fremont. Thank you. Thank you. Our next question comes from Pierre Ferragu with New Street Research. Hey, thank you for calling. Hi, Christian. My first question is really on Model X and Model X and you don't you say you're comfortable with demand you see. Based on what you saw in April, do you think that the 25,000 units per quarter is the level of demand that is where you see the market coming back already? Or are we not there yet? And more specifically, in the U. S, the pull forward in Q4 probably hurt a lot demand for S and X. Is that something that you're still seeing the numbers today in recent weeks? Or is that behind us? And I'll have a follow-up on Q2. Yes, I think something like returning to the $100,000 a year annualized demand for S and X is what we anticipate. That's to the best of my knowledge. We don't have a crystal ball, but that's probably our best guess. I'm sorry, what was the other part? My question was about like the run rate of demand you see at the moment. Do you still feel like weak demand in the U. S. Because of the pull forward in Q4, or do you think demand returned to normal already? I think we expect demand to we are seeing demand returning to normal in Q2, and it might be a little better than normal. I don't have a crystal ball, so it's hard for me to say, but my impression right now is that the demand is quite solid, quite strong. And then my second question was briefly on Sorry, I see if I would like to Yes, but just one thing I wanted to add to that, just on the production side of S and X. We did reduce production in Q1, as was noted. That was part of the retooling that we put in place to get the longer range vehicle out with the improved suspension, and we're in the process of increasing production back up over the course of Q2. So just for the purpose of expectations, I mean, we will exit Q2 at a higher production rate than we did in Q1 on S and X and then return back to a more normal volume in Q3. It's already higher. Yes. It's already increasing. Yes, it's And my follow-up was really on Q2, like with 90,000 to 100,000 units, you're getting back to fairly nice volumes. And I'm surprised you don't you still expect a loss. So maybe if you could take us through where we will see in Q2 pain points compared to Q4 and Q3 where you had a profit for similar volumes? How much of the loss in Q2 would be one off cost? How much is price points coming down in the mix and how much is related to pricing and other things? Sure. So part of it, we think if we didn't unwind what pulled a wave where we made cars in the first half of the quarter almost exclusively for Asia and Europe, and in the second half almost exclusively for North America, and then actually even that is subdivided depending on whether it's West Coast or East Coast, then we could deliver more cars. But we think it is important to unwind this way because it ends up being sort of optimizing for 1 quarter but really adding a lot of cost and difficulty and not just being a good experience for customers and putting great stress on sales team. So if we're to fully optimize for profitability in Q2, I think we could do it, but then we would be unable to unwind this crazy wave of deliveries. It also helps our working capital within the quarter to not have the wave. And then, Zach, do you want to talk to some of the other items? Yeah, no, I think you summarized it well, Elon. Two other things that I would add. One is that we did make pricing adjustments to our products in Q1, which puts pressure on margin. And so that's part of what we will see in Q2. The teams are working extremely hard and making terrific progress on improving the cost efficiency of the business without sacrificing growth. That, in combination with the efficiencies from unwinding the wave, is where we feel we'll be comfortable returning to a place of profitability in Q3, once all of those pieces are in place. Thank you. Thank you very much. Let's go to the next question. Our next question is from Adam Jonas with Morgan Stanley. Thanks. First question, Elon, a couple of days ago, I asked you how safe is the autopilot technology and you said something like twice as safe as normal driving. But you seem to be in a really unique position to really collect exabytes of data that you can potentially be externally validated much more rigorously provided to a regulatory body or insurance institute to just show how much safer autopilot is? When could we expect to see Tesla do that, that type of validation that investors could also get a sense of? It seems really, really important for adoption. Thanks. And I have a follow-up. I think we're just going to continue to report the absolute numbers. I think reporting details just gives those who are opposed to Tesla that maybe sort of like data mine the situation and then try to turn a positive into a negative. We're just going to keep reporting what we report. We do give some more detailed information to insurance companies to help with rates, and obviously as we launch our own insurance product next month, we will certainly incorporate that information into the insurance rates. So we can we essentially have a substantial price sort of arbitrage or information arbitrage opportunity where we have direct knowledge of the risk profile of customers based on the car, and then if they want to buy Tesla insurance, they'd have to agree to not drive the car in a crazy way. Or if they can, but then the insurance rate's higher. So we're just going to keep reporting the numbers at a broad brushstroke level, which I think is really what matters, what a polytunnel reflects the safety. Okay. And just a follow-up, Elon, and you kind of alluded a little bit, there's just so much drama around Tesla's share price and quarterly results from the outside at least, it just looks like a huge distraction. And at the same time, there's so much alternative capital and large amounts of strategic capital that is incrementally deployed in domains where Tesla has real leadership. So how important is it for Tesla to be a publicly traded company, Elon? Well, Wes, mate, I don't want to surprise you, but I would prefer we were private. But unfortunately, I think the shed patch of the sale. But is it important? I mean, do you think the company's value is maximized being public? Or is it just only so much you can do and you just got to play the hand of your doubt? Well, it being public does feel like the sort of price of the stock is being set in kind of a manic depressive way. And Warren Buffett's analogy is just like being a publicly traded company is like having someone stand at the edge of your home and just randomly yell different prices for your house every day. Still the same house. So it's a bit of a distraction at times, but I'm not sure what to do about it. Okay, understand. Thanks. Thank you. Thank you. Our next question comes from Maynard with Macquarie. Hi, thanks. In your update letter, you talked about supplier limitations impacting production. Can you just talk about what that was and how long you think that might continue to impact you? And then I have a follow-up. In Q2 we think we went through supplier interruptions, at least there aren't any significant ones that we're aware of. Okay. And I guess there was some concern out there that Model 3 was cannibalizing S and X, despite them being all different vehicle classes, and it doesn't sound like you're seeing that at all, but I was just wondering if you had any evidence that proves or disproved this. Any thoughts there would be helpful. Thanks. There really do seem to be different market segments. And also about only 3.5% of our trade ins for Model 3 are coming from Model S. So it's from all the Model 3 trade ins, Model S accounts for a super, super tiny portion. Yeah, for sure. So people who have bought a Model S just want to trade it in for another Model or maybe an X. Okay, let's go to the next question, please. Thank you. Our next question comes from Dan Galves with Wolfe Research. Hey, thanks everybody. A couple of questions. One, you mentioned a $50,000 ASP for North America Model 3s. Can you give us a little bit more detail on kind of is that a number like since the February 28 price adjustments? Is that what you're kind of seeing as order flow? I mean, I'm sorry, ASPs in kind of the current order flow since those price adjustments? Yes, this is Zach. I mean, what we saw on February 28th when we launched the standard range plus variant is that there was pent up demand for those products that released very quickly after it was announced. And then as more time has passed and order rates have stabilized, it's starting the average ASP has actually been increasing each week ever since as the order rate stabilizes. And just under 50,000 ASP represents the most recent data, and we think it's starting to stabilize there. And we'll see where things trend in EMEA and China as well. But what we're seeing in North America is that over 50% of our orders are for long range variance and the ASPs are far number. That's really helpful. And the follow-up is, I know order questions have been asked before, but let me put it this way. So I imagine that S and X orders need to have a couple of days to pick up after the upgrades. But on Model 3, whatever your assumption is within the $90,000,000 to $100,000 Q2 deliveries, whatever that assumption is for Model 3, does your current order flow support that? Or do you need something kind of positive to happen over the course of the quarter to get there? I think I'll be fine. I don't think that there's any major thing required. Okay, thanks a lot guys. Thank you. Our next question comes from Toni Sacconaghi with Bernstein. Yes. Thank you. Elon, I was wondering if you could talk about this whole notion of raising capital. For about the last year, you sort of shoot it as almost an evil thing. And I think a lot of investors believe that the company might be better served in its growth aspirations if it did raise capital, had a stronger cash base. And given that you used up about $2,000,000,000 worth of cash in the quarter, aren't you potentially trying to go through a very thin space, while trying to grow quickly and be self funding, which quite frankly may be unrealistic. So why not raise capital and why do you view that as something that Tesla shouldn't do or wouldn't do? And I have a follow-up, please. Yes. I mean, I don't think raising capital should be a substitute for making the company operate more effectively. So in that sense, I think it's important to have strong financial discipline at the company and just to make sure we don't have extraneous expenses and that we're just being frugal with capital, if we just keep raising capital every time, then it just takes we don't have the forcing function for improving the fundamental operation of the business. So I think it is healthy to be on a Spartan diet for a while. At this point, I do think there is some merit to raising capital. This is sort of probably about the right timing, but yes. So does that mean that investors should expect the capital raise in the near to medium term? And I hear you on the forcing constraint, but I mean growth does eat cash, especially in the capital intensive business. And if you really do believe you have a first mover advantage, why wouldn't you want to push it as quickly as possible, even if it meant raising capital in the short term? Yes, first of all, I should say I don't think that capital has been a constraint on our growth thus far, and if I thought there was a fundamental constraint on we were to face capital before now. But it is very important as the company scales to make sure we are on a solid foundation and that we have the appropriate financial discipline throughout the company and are spending money very efficiently. At this point, I think we are doing that, not that there is more work to do, but Tesla today is a far more efficiently operating organization than it was a year ago. We've made dramatic improvements across the board, and so I think there's merit to the idea of raising capital at this point. Just to add to that, the journey we've been on for the last 12 to 18 months on being more efficient in how we spend money has really changed the culture inside the company. It's enabled us to accelerate a number of cost reductions on the COGS side of our products and then make improvements in operating expenses as well. And then as we look forward to capital investments for Giga Shanghai and Model Y and ultimately a European facility, our CapEx per unit of capacity has come down significantly through the work from the team here. So I think it has been a very productive journey for us. Technically we did raise some debt capital in China for the Shanghai Giga on the order of $500,000,000 so we wanted to make sure that we don't have to grow upon global capital to fund the Shanghai factory. Thank you. Let's go to the next question, please. Thank you. Our next question comes from Alex Potter with Piper Jaffray. Hi, guys. I was wondering when you say obviously the logistical challenges were a headwind in the quarter. Can you talk about trying to regionally balance your deliveries going forward? Is that basically saying that people in Europe and China are just going to need to wait longer to take their deliveries and you're going to try to emphasize more North America in order to, I guess, boost your working capital and your profitability in every quarter going forward? No, they would actually receive their cars sooner. It just means that instead of building cars in batches, where, say, the first half of the quarter is just dedicated to China, Europe cars, and the second half is dedicated to North American cars that we blend vehicle production for customers throughout the world throughout the quarter. And this puts a much less strain on the system. We don't want a situation again like we had in Q1, where essentially all the cars were arriving at customers worldwide at the same time. We literally delivered half of the entire quarter's deliveries were in the final 10 days of Q1. That's insane. So I think we need to unwind that. It's also just not a great customer experience because we're shorthanded, and then we have to redeploy people that are working in sales, HR, legal, engineering, everyone just to deliver cars, and then then they can't do the regular jobs. So it just makes sense to just blend the production according to demand throughout the quarter. Okay, that makes sense. Then second question, I guess, on go to market. There was some period of time there where the company was focused on closing storefronts, a fair amount of noise made around that. And then it looked like some of the commentary was hedging that strategy. I was just wondering if there's any update there. And if you have one, that'd be helpful. Thanks. Sure. I think Tesla, specifically I didn't handle messaging that well. And then that's amplified by, say, we're making a statement that's sort of taken to an extreme where there's a misunderstanding. We certainly will continue to have stores, and we will continue to add stores, provided they are in locations where there is high foot traffic and for people that are in our target market. So we actually will continue to add stores in locations that are no brainers, but we will close stores in locations where they're incredibly hard to find, and the foot traffic of potential buyers is very low such that it does not support the cost of the store and the people in it. So I think this is just common sense. And then all sales online just means that even if you go into a store, we guide you to order the car on your phone. So stores essentially, they're like information centers, a place you can get a test drive, and buy some Tesla merchandise, that kind of thing. But all sales online doesn't mean all stores are closed. It just means that when you buy a car, you always do it on your phone in the store or at home or anywhere. People took all orders online to mean all stores are closing. That's not what's meant. Okay, very good. Thanks. Thank you. Our next question comes from Philippe Houchois with Jefferies. Yes. Thank you for taking the question. I was just wondering if you can comment on the agreement you seem to have reached with FCA on the possibility of selling your CO2 credits to them in Europe and what that means to your potential cash inflow, when that might start occurring and if there is, by any chance, any of those things are in a Q1 cash position? It's a confidential deal with FCA, and we agreed with FCA not to comment on it publicly, so we must abide by that. Right. Can I ask you a question of going back to what Adam was saying about the drama that surrounds your stock, unfortunately? Why don't you reduce some of it by disclosing maybe on a monthly basis your deliveries and also maybe disclosing early your greenhouse revenues that are just reserved, so we get right away a better view on some of these details that kind of move the stock? I think that would actually be counterproductive because people read too much into what occurred in a month. I mean even a quarterly basis, things can be lumpy. So the more granularity that's provided, so let's say at a monthly level, the fuel would reach all sorts of conclusions that don't make sense. Literally, sales to a particular country, say overseas, are affected by when the ship arrives. And so if a ship arrives on the 31st of the month or the 1st of the next month, this will make it look like something dramatic has happened, but actually the ship was just a day late. So people would read, that would increase the drama, not decrease it. And we're filling the ship 100% now. All right, Ross, filling the ship to 100%, so it just ends up being lumpy. So Mike, if you calculate it like GDP of a country, obviously, of the U. S, GDP on Sunday is extremely low and GDP on Monday is extremely high. It does not mean nothing has really changed. Okay, thank you. Let's go to the next question. Thank you. Our next question comes from David Tamberrino with Goldman Sachs. Great. Thanks for taking our questions. First one on customer deposits, it looks like it was essentially flat to maybe slightly down. I understand there's probably some timing with deliveries that could have helped it towards the end of the quarter. But we would have thought that it would have increased given the Model Y unveil. So our question is, what was daily order rate are you seeing right now for the rest of your products? I think we don't want to comment on the granularity of deposits. Again, people just read too much into this. We're not playing up the Model Y because it's not in production, so you can't really read anything into Model Y orders at this point. Okay. Well then my second question will just be if you anticipate a further price adjustment with the next level of U. S. Credit phasing out July 1. We don't comment on future price changes unless you see it publicly. Okay. Let's go to the next question, please. Thank you. Our next question comes from Colin Rusch with Oppenheimer. Could you comment on whether you'll be battery constrained at 100,000 vehicles a quarter in 2Q? Self constrained, you mean? We don't anticipate being self constrained at 400,000. Okay. And then as you look at the Maxwell Technology integration, post close, how quickly do you think you'll be able to integrate that technology into the battery production? And could you comment on potential for chemistry and form factor changes as that gets integrated? I mean, you're really asking some secret sauce questions here. I think we'll probably have an Investor Day, like the Auto Economy Day maybe later this year or early next, just to go over the cell and battery technology and future strategy, and I think that will be very informative. But we do recognize the criticality of this. Okay, thanks so much guys. Thanks. Thank you. Our next question comes from Joseph Spak with RBC Capital Markets. Thanks. First question is really just a clarification on in the outlook of 25% non GAAP gross margin that you're targeting. Is that over the midterm or is that something you expect to hit by the end of this year? And if so, what gets S and X back higher given the price cuts? Yes, this is Zack here. That's guidance that we're targeting for the end of the year, although internally we're working towards S and X non GAAP gross margin achieving that sooner. The biggest lever there is kind of 2 components. 1 is as we increase volume back on our S and X production lines, there's just a natural benefit there from the fixed cost absorption, which will help us. But we also have a number of cost reduction projects in place that we're executing on over the course of the year. And then the 3rd piece, which applies to S and X but also Model 3, we're seeing an increased take rate on our full self driving offering. And there are revenue deferrals associated with that given that the full suite of functionality is not there. And as that option becomes approaches feature complete and we roll out more, we'll be able to collect more revenue on that. So all of those things together within our internal plans gives us confidence there. Yes, we should first mention that the upgraded powertrain for S and X was actually was lost in a significant cost down, because we essentially took the high volume rear drive units of the Model 3, which is extremely efficient, the semi permanent magnet motor and power electronics and everything, and we made a version of that for the front drive unit of S and X. And so we're actually able to get a cost reduction while improving range and performance of the car. That's just one example. Okay. The second question is just looking at the 10 ks, you've continually noticed $4,900,000,000 purchase obligation, which I think is primarily related to Panasonic and GigaONE. And then Elon, in some of your communication, you've indicated production constraints. So I guess the question is, does that $4,900,000,000 correlate to reaching that 35 gigawatt hour rate? And if you can't hit that because of production constraints, does that adjust? Go ahead, Amit. Yes. So this is Ebbhub. So the purchase obligation in the 10 ks is basically for the entire contract which we have for Panasonic. It's not something that we need to hit, I mean, make the purchases tomorrow. So this is going to take a couple of years. Okay. Thank you. Our next question comes from Colin Langan with UBS. Great. Thanks for taking my question. I mean, it sounds like from the tone of the call that you don't see that there's a demand issue for some of the products. But margins seem to be under pressure and typically automakers cut pricing when there is a demand issue. So what is the logic of the price cuts during the quarter? Our goal, as we've been very clear about from the beginning of the company, is to make our cars as affordable as possible, and we felt it was important to offer the $35,000 Model 3 and then to create a sort of bundled package for the Model 3 with the increased range because we think actually that difference between 220 and 240 is quite important and more important than people realize in range, and I think partial premium interior and then finally autopilot. We thought those, like we weren't afraid of that product that's really just nailed the sweet spot, which I think the $39,500 Model 3 has just really nailed the sweet spot, and we're seeing consumer response accordingly. If you all can still buy the $35,000 version of the Model 3 that still doesn't have autopilots and has a software range restriction and that kind of thing, it's slightly more inconvenient to buy. You just have to make a phone call or visit a store. So it's not like you have to complete the optical course or something. But we see very few people actually taking us up on that $35,000 offer, but it is there and will remain there. And as a follow-up, you're still targeting the China facility ramp by the end of the year. Are you still confident in the 3,000 per week, and do you have a battery supplier yet because it's getting pretty close to that point? The Shanghai Gigafactory progress is going incredibly well, testament to the outstanding execution of our team on the ground there. I get daily e mails with Delta Pictures from one day to the next from Tom Zuber, who leads the new factory program, and so we're literally discussing it. We're getting updates, so 7 days a week, so the midnight Gigafactory email. So in terms of execution, it's outstanding, but of course the production goes as fast as the slowest item. It's always very important to bear in mind. So we have 99% of things in good shape. If 1% is missing, you still can't make a car. So with respect to that said, it looks like we'll reach volume production at the end of this year with, let's say, more than 1,000 cars a week, maybe 2,000 from Shanghai Giga at the end of this year. That's what it looks like to be the case right now. If it's not then, it'll be shortly thereafter. Then we expect to have multiple sales flyers for Shanghai Giga. Great, thank you very much everyone. Unfortunately this is all the time we have for Q and A today. We look forward to talking to you in the next quarter. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all