Good day, ladies and gentlemen, and welcome to the Tesla Second Quarter 2017 Financial Results Q&A conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Jeff Evanson. Mr. Evanson, you may now begin.
Thank you, Cherie. Good afternoon, everyone. Welcome to Tesla's second quarter 2017 Q&A webcast. I'm joined today by Elon Musk, J.B. Straubel, Deepak Ahuja and Jon McNeill. Our Q2 results were announced 80 minutes ago 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 yourselves to one question and one follow-up. Please press star now if you would like to join the question queue. Before we jump into the Q&A, Elon has some opening remarks. Elon?
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Yeah. Apparently, we're having trouble hearing Elon. Try a different micro-
Can you hear me?
Hey, Cherie [audio distortion]
Excuse me?
Yeah.
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We're getting messages from listeners that they cannot hear Elon.
I can hear you, Mr. Evanson. If he can speak from your microphone, you're coming in loud and clear.
All right, we'll try that.
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Restart the conference.
Jeff Evanson.
Jeff,
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On mute? Okay. Really close to the mic.
Can you hear Elon?
I cannot hear Elon.
Ladies and gentlemen, please stand by. Your conference will begin momentarily. Once again, ladies and gentlemen, please stand by.
Cherie, are we in the call now?
Yes, your line is open.
All right, thank you. All right, we apologize everyone. For those who wanted to get into the Q&A queue, please press star one now. Elon, over to you.
All right, thank you. My apologies. We actually tried a new audio system with a bunch of individual mics that seems to have malfunctioned. We're in fact standard conference call object. Anyway, I just wanna confirm people can hear what I'm saying. Okay, great. First of all, I wanna say that Friday night was an amazing time for Tesla. It's the one of those important days in the history of the company. It's something we've been striving for for 14 years. It's the Model 3, having over those 30 production Model 3s was just incredible milestone in the company's history. We've wanted to make a great affordable electric car, which is the fundamental thing that is missing.
We wanted to make that from day one, and if we, if we could only have done it sooner, we would have. I'm glad that this day has come. What we have ahead of us, of course, is an incredibly difficult production ramp. Nonetheless, I think we've got a great team, and I'm very confident that we will be able to reach a production rate of 10,000 vehicles per week towards the end of next year. We remain, we believe on track to achieve a 5,000 unit week by the end of this year. I would certainly urge people to not get too caught up in what exactly falls within the exact calendar boundaries of a quarter or one quarter with the next.
Because when you have an exponentially growing production ramp, slight changes of a few weeks here or there can appear to have dramatic changes, but that is simply because of the arbitrary nature of the when a quarter ends. What people should absolutely have zero concern about, I mean zero, is that Tesla will achieve a 10,000 unit production week by the end of next year. You know, if you can sort of say where we came from, the Roadster, we were making only 600 units a week, where the non-powertrain portion of the car was made by Lotus. We did the powertrain and final assembly of the car.
We went from that to 20,000 units a year of the Model S, a far more complex car, where we did the whole thing. With Model 3, we are more vertically integrated. I think people should really not have any concerns that we will reach that outcome from a production rate. We're also very confident about costs. We feel we gained a lot of experience. We've certainly aspire to learn from the mistakes of the past, and I think we largely have. Deepak will go into some of our margin expectations there.
You know, unlike, say, for example, the Model X, where a mistake that we made, and I obviously take a primary responsibility here, was having far too much advanced technology in version one of a product. Model X is an incredible car, but it was overreaching for the first generation of our product. In the case of the Model 3, we've strived hard to simplify and make sure that it has everything that's necessary to be a fantastic car. If you see the reviews, the reviews are, one could not ask for better reviews.
I'll just give you one little anecdote, which I found quite surprising, is that when the journalists were driving the car and doing test drives, about 80% of the journalists said that they would buy the car themselves. Most of the remaining 20% said probably. This is crazy. I've never seen anything like it. This is a very good sign. It should also be noted that one of our big concerns was that Model S particularly and Model X demand would suffer with the introduction of the three. In fact, this has turned out to be the opposite situation.
Model S and X demand increased with the release of the Model 3. Jon, would you like to just elaborate on that? That was, this was a, you know, we did express this as a concern.
Yes.
It was a big concern, but it has turned out to be a pleasant surprise.
Yeah, I think that's right. Not only, as Elon said, we expressed it as a concern. We had positive comps both year-over-year and quarter-over-quarter in orders in the second quarter. Since then, orders have accelerated in July, as we noted in our shareholder letter. They've accelerated further since the handover event on Friday for the Model 3. It clearly shows that S and X, as our flagship products, have a strong position in the market and strong demand. That's super encouraging that we've got those, a strong product lineup with three cars that are proving to be very popular in their individual segments.
Yeah. In fact, I don't know if I think we mentioned some of this in the earnings letter, but just some of the key stats.
Yeah.
You know, say July. July orders for S and X.
Yeah, July orders were 15% higher than our Q2 average weekly order rate. We've accelerated off of Q2.
Yeah.
Into July. As we noted in the shareholder letter, deliveries grew by 53% compared to the Q2 2016 in a flat luxury vehicle market.
Yeah.
Gaining share
Yeah.
In a flat to market down, to down market. The order rates accelerated.
July was one of our best months ever.
Yeah.
Again, contrary to our expectations
That's right.
I wanna emphasize. Of course, you know, who knows if this will continue, but all indications are that it will. That's very exciting.
Yeah.
As a side note, we're also making great progress on our internal Autopilot software. It's getting better and better. I'm really excited. I test drive the latest development release as soon as it comes out, and I'm like, "This is really getting to be something special." 'Cause I, yeah, it's really I think it's gonna accelerate from here. The talent that we're seeing join on the technical side for Autopilot is really world-class. I don't think it's unmatched anywhere, I would say. Let's see. Model 3 orders are net orders. There's not that many cancellations. There are about 1,800 a day. It's important to emphasize. You can't see the car, unless you wanna look at pictures online. You can't test drive the car. You have to put down a $1,000 deposit.
We're not promoting the car.
We're not promoting the car. The, you know, if you go to our stores, we don't even wanna talk about it really. Because we wanna talk about the thing that we can supply. You know, if somebody orders a Model 3 now, it's probably late next year before they get it. We, you know, we wanna get people to call it, you know, where it's just like maybe a one or two-month wait for an S or an X. I think the point that we were trying to make that the S is still a superior sedan.
Yeah
It seems to have come through. It is true. Things are a little confusing because of the nomenclature being Model 3 but Model S and X, you know, I guess sort of my fault being too clever for my own good there, because it's supposed to be the Model E. As you can tell, I have a wonderful sense of humor. Then people mistook that for generation 3. In fact, if you look at what we're really on right now, I would say is approximately generation 4, but we're on generation 4 of S, X, and 3. At the risk of really confusing matters, Model 3 is generation 4.
Are S and X. We evolved the technology all at the same time. Overall looking really good. And then, Solar Roof we have installed and working, the Solar Roof tiles. I have it on my house. J.B. has it on his house. We've I think included some pictures in the earnings letter. I wanna emphasize, The roof is There's no Photoshopping on the roof. That is actually how it looks.
It wasn't taken by some amazing. It was like, you know, 'Take some pics with your phone and then send them over.' That's what we're talking about here, not some special lighting conditions, you know, pro photographer situation. This is version one. I think this roof's gonna look really knockout.
Yeah
As we just keep iterating. Now it is a very challenging technical task to get this right, get the costs good, streamline the installation process, ramp up the production. Again, you know, this is sort of It follows a similar S-curve to vehicles, where it starts off very slow, but then it grows exponentially. Also our conventional solar is doing quite well and generating significant positive cash flow, just the, you know, standard flat panel stuff.
Well, which I think is still the right solution for any kind of flat roof situation, which is most commercial installations in a lot of houses, or some part of the roof which is really not visible, and therefore does not have any aesthetic, you know, so it doesn't really matter from a aesthetic standpoint. Batteries, you know, making great progress on the battery front. You know, I'm hoping to do something around the International Astronautical Congress, which is in Adelaide this year. Not promising anything, we're aspirationally going to have a very substantial portion of the battery pack already done in about eight weeks.
Which is hard, 'cause this You know, we have all the shipping and logistics challenges of, you know, getting things across the Pacific. Not promising anything. It's an aspirational goal. Team's working super hard to make it happen, but I'm excited by the prospect and I feel cautiously optimistic that that will take place. Yeah, really, I think, we're really proud of the Tesla team for getting to this point. We wanna thank, you know, the whole Tesla team, we're near 33,000 people at this point, for working hard to achieve some very difficult things. I couldn't be prouder to work with such a great team. It's Maybe go to Anything else we wanna add, guys? All right, let's go to questions.
All right, Cherie, let's open it up to Q&A, and everybody in Q&A, we have a lot of people in queue, so Cherie's gonna be real hardcore on the one question, one follow-up.
Yeah. Yeah, not the, where one question with eight nested questions.
Correct. No nesting.
Yeah. One question point A through H.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then one key on your touchtone telephone. We ask that you please limit yourself to one question and one follow-up. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from James Albertine with Consumer Edge Research.
Very good. Thank you, for taking my question. Good afternoon, and congratulations on the first 30 deliveries last week. It was a great event.
Thank you.
I wanted to ask, if I may, my one question on capital expenditures. I wanted to get an idea, you know, what comes next with respect to some of your spending on the Model 3? I guess if I can nest one in related to Gigafactory.
Oh, God. You know what? Fine, do it. You know? Fine.
It's one question on CapEx. Really want to understand what the big next steps are, in 3Q and 4Q as we start to kinda build out our models and figure it out from there. Thanks.
Certainly. I mean, I do want to emphasize, like a lot of this is actually very hard for us to know. You know, when we make mistakes, it's because we're stupid, not because we're trying to mislead anyone. I just want to emphasize, you know, we sort of aspire to be less dumb over time. So if I knew it, I would tell you. It's not like I've got this like secret hand of cards that I'm holding close to my vest and you, I'm not telling you. It's just fundamentally impossible to predict the exponential part of the manufacturing S-curve. It's crazy hard.
The S-curve is a simplification, because it's really running through a series of constraints. It's just like a really jagged sort of upward growth, and it'll plateau, and then it'll grow rapidly, and it'll plateau again, and then sometimes it'll go backwards because something's broke. Yeah, when I said manufacturing hell and supply chain hell on Friday, I meant it. I mean, you know, we know this. Signed up for it. Not blaming hell because we bought the ticket. You know, I think at a high level, I think, I don't think we should expect any significant negative surprises.
There will be You know, as is usually the case, there tends to be some cost growth in CapEx for unexpected things. You've got to expedite this, you've got to fix that, or this supplier doesn't work out, or this machinery we bought doesn't work out, and you've gotta be all hands on deck 24/7 to fix it or replace it. I don't expect any significant I think that it's relatively contained. Deepak, do you wanna?
Yeah, I think, maybe the other way, Jamie, to answer your question.
We may need to talk to folks for this.
Yeah. I think you're asking where we are spending the money. I think it's in the completion of the Model 3. We are paying off on the equipment.
Right in there.
Yeah. We're just continuing with the construction of Gigafactory to continue to scale that. That's where majority of our CapEx.
Oh, overwhelmingly. Let's be clear.
Yeah.
Overwhelmingly.
Overwhelmingly is-.
That's right.
Overwhelmingly is Model 3.
Right.
Obviously, there are expenditures associated with Solar Roof and with our Buffalo factory.
Right
keep those relatively light for the next few months.
The marketing and sales, we're growing our infrastructure there.
Yeah
Supercharger network, so those are the other smaller pieces.
Just on the Buffalo front, I wanna, I really wanna emphasize we expect the Buffalo Gigafactory to be a powerhouse of solar panel and solar glass tile output. It is gonna be a kickass facility. We've made that commitment to the State of New York. We are going to keep that commitment. We're also thinking hard about where do we put Gigafactories three, four, five, and six. We expect to keep the majority of our production in the U.S. It's obviously gonna make sense to establish a Gigafactory in China and Europe to serve the markets there, 'cause it's nuts to sell cars in California and truck them halfway around the world.
Particularly when you're trying to make things as affordable as possible, that really hurt. We really wanna make our cars as affordable as possible. That does require some amount of local market production, particularly for the mass market vehicles in order to make it as accessible as possible. We're thinking hard about that. I think we'll have some announcements on at least a few of those locations before the end of the year, but we don't expect to spend significant money on them. It, you know, just it's about identifying the location, doing the long lead time stuff, the permits, the planning. This doesn't cost a lot of money. It's only when you really start moving dirt and putting up, concrete and steel and buying equipment that the big money starts to be required. Yeah, anything you wanna add on that?
It's good.
Yeah. CapEx on Model S and X is pretty. It's like really not, it's minor.
Very minor.
Yeah, yeah. There's continued improvement, of course, to keep pace with the Model 3s so that all of our products aren't the same level of technology. It's more painless compared to the Model 3.
You're continuing to achieve cost reductions on S and X, so there's a bit of investment.
Yes. Exactly. Absolutely. You know, in cases where we see cost reductions in S and X, you know, there are cases where we wanna pass along some of those cost reductions to customers. Overall feeling really. This is, like, maybe the best I've ever felt about Tesla, to be frank. You know, it's, like, really, I mean, last week stressed the hell out of me. I really think that this is, you know, probably the best I've ever felt about the company. Oh, you know, one thing, you know, I wanted to correct.
You know, in I think in a prior call, publicly I'd said, you know, that Model Y or our compact SUV, if it's called Model Y, it may or may not be, would be a totally new architecture. I've gone, I've decided Well, upon the counsel of my executive team, thank you. Thank you. Thanks, guys, who reeled me back from the cliffs of insanity, much appreciated. The Model Y will in fact be using, substantial carryover from Model 3 in order to bring it to market faster.
Yeah, so that'll really accelerate our ability to get Model Y to market faster. Because it's fundamentally to, you know, if people prefer a sedan, people prefer an SUV, and in fact, the SUV market is larger. It's the biggest single product segment, I believe, in the world. I would like to thank my executive team for stopping me from being a fool. Yes, the Model Y or whatever the hell will be have relatively low technical and production risk as a result. I still think we wanna do the crazy thing in the future, but we'll punt that till after the model until after the compact SUV. Anything else that you think we should add or?
Yeah. Just wanna yeah. We'll try to leave as much time for questions as we can. We have a lot of operational issues to get back to, but, and, you know, like to make work on that manufacturing ramp and, you know, I'm always incredibly grateful for anyone who has who is an investor in Tesla, and you put your faith in us. We will do whatever is necessary to reward that faith.
All right, Cherie, why don't we go to the next question, please?
Thank you. Our next question comes from Rod Lache with Deutsche Bank.
Thanks. I was gonna ask you which is harder, AI or AV, but I think, at this point we may not know the answer.
Well, as you know, I'm terrified of AI.
I've read that.
Yeah. You may have read that a few places. it's just something. I don't Definitely don't wanna derail the conversation on that front.
Right.
It's just something that I think anything that represents potential risk to the public deserves at least insight from the government because one of the mandates of the government is the public well-being. That's Insight is different from oversight, so it's just at least the government can gain insight to understand what's going on and then decide what rules are appropriate to ensure public safety. That is what I'm advocating for. I'm not advocating for that we stop development of AI or any of the sort of straw man hyperbole things that have been written. I do think there are great benefits to AI. We just need to make sure that they are indeed benefits and we don't do something really dumb.
Okay. Well, I hope that doesn't count against my Tesla questions. The two things I was gonna ask you were, you mentioned in the letter this confidence in getting the 25% margin on Model 3. Could you just mention what the level of production is that you feel you need to get to in order to get there? What run rate? Secondly, there've been a fair number of battery announcements, solid state battery technology, Toyota and a few others.
Oh, man.
What's your general assessment? Are we getting close to some kind of breakthroughs here?
Oh, God.
You know, what's your thought?
Okay. You know, here's my opinion of the, you know, battery breakthrough of the week of, you know, battery breakthrough du jour. When somebody has, like, some great claim that they've got this awesome battery, you know what? Send us a sample. If you don't trust us, send it to an independent lab where the parameters can be verified. Otherwise, STF.
Yeah. Everything works on PowerPoint. You know, you could, like, I give you a PowerPoint presentation about teleportation to the Andromeda galaxy, that doesn't mean it works. Tesla is the biggest buyer of lithium-ion batteries on Earth. You know who people come to first when they've got a lithium-ion battery? Us, 'cause we're their biggest customer. I would love it if we could have some breakthrough. It'd be awesome. I think there are some interesting things on the horizon, but then the time it takes from something working in the lab, to working at moderate production levels, to working at higher production levels, to optimizing the cost is several years. It suddenly pops out of nowhere. Yeah, J.B., do you wanna add to that?
I totally agree with the sort of, you know, cautious skepticism on all these announcements.
Yeah.
Just more specifically on the solid state batteries, Rod. I mean, we've talked to a number of different groups that are researching this. We actually have tested a number of those different prototype, you know, very early prototype, you know, single cells. It's, you know, we don't yet see anything that changes our strategy and, we don't see anything there.
By the way, we'd love it if it did. Please, please. Can someone please come up with a battery breakthrough? We'd love it.
We would be the first ones to want to implement it.
Yeah, totally. I mean, there are some breakthroughs that I think are achievable. They're confidential, so I can't talk about them on this call. There's one particular avenue that I'm confident could be made to work that would be no products, you know, fairly the most significant one breakthrough in a while. Again, you gotta make it work in the lab. It doesn't yet work in the lab. It's promising in the lab. You go from the lab to small production, you go to large production, you get to cost optimization. These are several years. Okay. I wish it were shorter, that's the way it goes. Sorry about that. Yeah.
was there-
The 25% Model 3 gross margin target, when would we get there?
Yeah. Deepak may wanna elaborate on this, but I feel like the point at which we are at steady state of 5,000 units a week for Model 3 is about when we reach the 25% gross margin level. It wouldn't be it right when we get to 5,000, because initially when you get to 5,000 a week, there's still a lot of overtime. You're still expediting parts from all around the world. You got a lot of expedite fees. You got a lot of overtime. It takes probably from the point at which you get to the 5,000 a week, it's probably another three or four months before you hit the 25% gross margin. Would you agree, Deepak?
I agree. Yeah, I was just gonna be more cautious, but I hear what you're saying.
It's something like that.
Yeah.
Essentially-
Yes. Yeah.
You need to reach a production level.
Yeah
Optimize at that production level.
Yeah. I mean, I think ultimately, it's a variety of factors, including material cost and cell and the efficiencies we achieve at the Gigafactory on our cells. I'm very confident we will achieve the 25% target firstly on Model 3.
For sure next year, 100%.
That's right. It's a question exactly when, how to predict the time.
Again, I'd say 100% probability of achieving that.
Yeah
At some point next year.
Yeah. I feel really good about it because the bill of material that we have is so well-defined and so clear in our-
Yeah
premiums that we have on prototypes is manageable.
Another way of saying we're significantly less dumb this time. We think.
Yeah. Yeah. The labor hours required are significantly lower, the way we have structured the manufacturing.
It's designed for manufacturing.
Exactly. All of those give me much more confidence in this target. Exactly when we'll achieve, I think we'll give you more clarity with time.
Yeah. I'd like to give some credit to our suppliers here.
Yeah.
You know, with Roadster, certainly with Model S and to a slight lesser degree with Model X, you know, we often could not get the top suppliers or. We certainly couldn't get the A team at the top suppliers.
Right.
What's great about the Model 3 is we have the A supplier and we have the A team at the A supplier.
Yeah.
I can't tell you how important this is. It makes a massive difference.
Right.
Just a thank you to all the suppliers that worked so hard to get us to this point. There's a lot of credit for any success that we have.
Yeah.
Next question, Cherie.
Thank you. Our next question comes from Ryan Brinkman with JP Morgan.
Great. Thanks for taking my question. You know, in just thinking about your liquidity position, while you're operating with more cash than you historically have, $3 billion, I see you're also guiding the $2 billion CapEx in the back half, and you previously said $1 billion of gross cash is as low as you're comfortable, you know, operating at. You guide the positive cash from operations the back half, presumably on, you know, Model 3 ramp in 4Q. If it's only a little positive, then I guess you would be close to your targeted cash level. The question is, can you help us size up, you know, how positive do you expect the cash from operations to be in the back half?
If that level of cash from operations plus whatever remains available to draw on your asset-backed line, if that's sufficient cushion for you relative to your billion-dollar target or whether it might make sense to do another equity raise.
Yeah. Deepak, do you want to-
Yeah, sure. Sure, Elon. We expect our operating cash flows to be significantly better in the second half compared to the first half.
Yeah.
At the highest level, scaling generates cash.
Yeah, absolutely does.
It's a better situation than S and X. Our cash conversion cycle, particularly for the next 4 quarter is gonna be really great while we're shipping Model 3s in North America.
Um, and, uh, in addition-
Oh, yeah, one thing, perhaps we were about to get to it.
Yeah
Is that, with Model 3, with our suppliers, we've been able to negotiate much better terms.
Exactly
Payment terms.
Yeah.
The payment terms are significantly longer. I think we're close to, is that sixty-
Close to 60, exactly.
Close to 60 days.
Right.
Payment terms with our suppliers. We also are able to make the car a lot faster.
Exactly.
The, the obviously the nirvana is that we can make the car and get paid for the car before we have to pay our suppliers, which then the faster you grow.
Correct
the faster your cash position grows.
Yeah.
Obviously, that's like, you know, the, that's the promised land right there. Certainly, that's how it's what we've aimed for. I think we will achieve that maybe not immediately, but pretty quickly. Now that said, we, you know, there may be some wisdom in having a cash cushion for unexpected events. You just never know if there's gonna be some significant force majeure event in the world. Could be an earthquake in California, for example. We're not at this point considering an equity raise. We are thinking about debt, we're not thinking about an equity raise.
Okay, that's very helpful. Just to follow up is about the $1 billion of desired minimum gross cash. Does that go up when the Model 3 launches because you're a bigger company, or does it go down because of what you just said about, you know, the ability to generate cash from working capital while production's ramping?
In the long run, it will go up as our balance sheet grows. Just to finish off on your question, we also have liquidity through the lines of credit. Our ABL line-
Yeah
Is, you know, we've just grown it to $1.9 billion. We have untapped $800 million there. Of course, how much we can tap there depends on our borrowing base, but that's a source of liquidity. For our solar lease assets, we have $700 million of funding, which is untapped on our tax equity funds and aggregation debt. We have significant amounts of liquidity available from those lines, too.
Yeah. Very helpful. Thank you.
One side point that's perhaps worth noting is, as long as people look at our sort of finished goods inventory and compare that to other car companies, but they compare it in the wrong way. Because Tesla does direct distribution, we are the dealers. You really, to accurately compare Tesla to other car companies, you must include the finished goods inventory, not just at the car companies, but at the dealers. And typically, the combined time of finished goods from manufacturer all the way through to dealer to an end customer is, I believe, on the order of 90 days. Maybe 70 to 90 days.
For other OEMs.
For the other OEMs.
Yes. Yes.
Yes. For us, that same metric would be approximately 30. In other words, at a systemic level, we're substantially more efficient than other car makers when you consider the system as a whole.
Okay, Cherie, let's have the next question, please.
Thank you. Our next question comes from Adam Jonas with Morgan Stanley.
Hi, just a couple quick ones. First on safety. Elon, you're putting a liquid-cooled supercomputer in all of your cars. You're obviously ramping up more and more of those. Whether the system is being activated or not, it's collecting data, learning, you know, you're getting better every mile. I imagine you're in a position to kind of share that data with the public or the regulators or Congress, whoever, you know, that where it matters. I haven't seen an announcement since the 40% reduction in accidents from NHTSA back in January. When could we be in a position to hear some more on this?
It's true that there is an enormous amount of sort of visual data being gathered. It's actually quite a challenge to process that data and then, you know, train against that data and have the vehicle learn effectively from data 'cause it's just a vast quantity of data. I do wanna emphasize that this is disaggregated from the specific vehicle. We're always on the side of the owner of the car and do whatever is possible within the bounds of the law to protect privacy. But I don't have a good answer for you. I would-- if I-- a good answer right now.
I spend a lot of my week working on Autopilot with the Autopilot team, right down in the trenches of the individual details of how we can improve this or that, or enhance the neural net, enhance vision, improve control. I think the release that should go out soon is I think people will be really pleased with it. Like, it's gonna get drastically better from there. Obviously over time, an autonomous vehicle is going to be far safer than a person. It's just It's really hard for a person to compete.
I mean, the car has eight cameras, looking at 360 degrees all the time. It's got four radars. It's got 12 high-precision ultrasonic sonars. It's got inertial measurement units, high-accuracy GPS, and, you know, over 10 tera-ops of computing capability, that never sleeps.
Okay. Elon, just a follow-up then, on space, but not on Mars, but more Earth.
Oh, God.
Near Earth space.
it's actually, it's really relevant. I was just curious if is there anything that SpaceX is doing, that we're enabling that could be advantageous to Tesla's mission to accelerate sustainable transport?
There's a recent anecdote actually that Jon just shared with me. Jon, maybe you.
Yeah, there's some really great collaboration continuously between the SpaceX teams on materials and other challenges and, we had a challenge in service just over the past week.
Yeah.
Yeah.
In fact, just thought about this today.
Yeah. where we needed to determine the porosity of an object deep within our structure, and that's something that SpaceX-
Like a casting, an aluminum casting?
It was an aluminum casting.
Yeah.
That's something that SpaceX knows how to do. Our team reached out to the SpaceX team. The SpaceX team helped us to solve that with some ultrasound sensors that we could quickly isolate where the issue was and take corrective action.
It saved us eight hours of work per car.
Per car, that was that could potentially experience this issue. That's just one example of a lot of examples of how the SpaceX team and the Tesla team collaborate and we get help, we get help from them continually on material issues and other issues like that.
This cross-fertilization of knowledge from the rocket and spacecraft industry to auto back and forth is I think is really been quite valuable. Certainly been very valuable for me in thinking about how do we make mass-optimized vehicles, because, you know, space, you mass optimization is extremely important. On the space side, it's helpful because I understand what really goes into high-volume manufacturing of something that has to be extremely reliable. So it's been good. Of course, companies are competing anyway, so it's been quite helpful actually.
Yeah.
Cherie, next question, please.
Thank you. Our next question comes from Colin Langan with UBS.
Oh, great. Thanks for taking my question. How do you come up with your estimate for the number of Superchargers and dealers that you need? 'Cause you're, you know, doubling the number of the base Superchargers according to the release. The 3 is gonna have a multiple-
Triple
Higher in terms of demand. I mean, You know, how do you frame that and gauge that?
Yeah. First of all, actually I should clarify that the number of Superchargers will in fact triple between now and the end of next year. That's that we're, you know, we're confident that that will address the Supercharging needs of S, X, and 3. We're trying to stay ahead of it. There are occasional places where that are tricky to find a location, like Malibu's really difficult. There are a few places, We're staying ahead of that, I think it's gonna be good. We should see some immediate relief even for S and X customers on some of the key Supercharger locations.
We'll be experimenting with our first sort of I don't know what we call mega Supercharger location, like a really big Supercharger location with a bunch of amenities. We're gonna unveil the first of those relatively soon. I think people will get a sense for just sort of how cool it can be to, you know, have a great place to, you know, if you've been driving for three, four hours, stop, you know, have great restrooms, great food, amenities, hang out and, you know, for half an hour and then be on your way.
If I could just follow up. With a related question.
Well, maybe just one other point on that and how this can scale pretty efficiently. You know, we have Superchargers that serve two major separate needs. There's long-distance route enabling between cities, and then there's also within cities. You know, while there are definitely some congestion issues, which we're expanding out of very quickly in the cities, for the most part, the Superchargers that are in between cities, you have a lot of extra capacity. We've put those stations in place, you know, to serve, you know, travel between the cities, but they can absorb a lot more cars. You know, even if we double fleet size, it doesn't mean that we need to double the entire Supercharger network.
We have to address the few urban sites that are currently, you know, in high use, but that can be done much more efficiently with less CapEx. That's kinda what you're seeing.
What about, just as a follow-up, the charge times? I know Porsche has said that they could charge in 15 minutes. Do you think that's possible in the future? Is the charge time on the 3 the same as the S? I wasn't sure from some of the release.
It's about the same. Yeah, it's comparable to the high-end S. like your recharge rate of how many miles per hour you recharge is sort of your function of the battery pack size. you know, like a 100 kWh pack, because charge rate is as a function of percentage of pack. if they think of 3 and a high-end S as being similar in charge rates. Over time, we wanna keep moving that rate up. They're similar.
One thing I wanna correct from on Friday is I don't think it's really has much materiality, but I did misspeak at the journalist review on Friday. I'd said that there were 500,000 net reservations. Well, I did also say that I wasn't sure because I don't follow this number and that this was just a guess. So we did check to get some precision on this. So to be more accurate, there have been 518,000 gross reservations for 3, and then we have 455,000 net reservations. Those cancellations occurred over the course of, you know, over more than a year. The net gain, over the last, you know, net gain since Friday, net of cancellations has been, over 1,800 per day.
Yeah.
But I just didn't want people with the wrong impression. I think this is like inconsequential, because with a small amount of effort, we could easily drive the Model 3 reservation number to something much higher, but there's no point. You know, it's like if you're a restaurant and you're serving hamburgers, and there's like an hour and a half wait for the hamburger, do you really wanna encourage more people to come order hamburgers? It doesn't make sense.
Yeah.
I think it's neither here nor there, but I wanted to just make sure that there was not a misunderstanding.
Maybe just one, you know, quick point on your very fast charge time comment or question. You know, we've actually tested, you know, cells and even full battery packs that can do, you know, something like a 15-minute recharge. You know, to date, the trade-offs, you know, to achieve that, we don't feel are the right ones for the customer overall.
Yeah.
You end up sacrificing on overall cost per kilowatt hour, and also sacrificing on energy density in the product.
Yeah.
You know, for something that's used not every single day, not every single charge, you know, we feel that we've kind of hit the sweet spot in terms of the value to the customer and the best product. That, that's kinda what's guided our philosophy. You know, obviously, you know, there's ongoing work to, you know, reduce those trade-offs and make it better still. Yeah, we're great.
Particularly if somebody buys like the 3 10-mile range Model 3, let me tell you, the amount of times you will have range anxiety is zero.
Yeah.
You don't even think about it.
All right. Cherie, next question.
Our next question comes from Toni Sacconaghi from Bernstein.
Yes. Thank you. I have one question and one follow-up as well, please. In terms of the Model 3, at the delivery event, 20 of the units were for engineering validation, and the first several thousand, it appears, are going to be going to employees prior to going to the general public. I guess the question is, what are you hoping to learn or what might you learn from these engineering validation units that have come out from your employees?
Yeah.
What can you do going forward?
They're not engineering validation units. They're fully certified, fully DOT-approved, EPA-approved production cars. These are not prototypes in any way. They're not validation anything. They're full production cars. The reason they are initially going to employees, and in some cases, investors, or anyone who's been a long-term investor, is that for the first several thousand vehicles, there are problems that crop up that are rare, you know, on a percentage basis. They might be like, you know, 0.1% likely to occur. There are a whole bunch of these things that only show up 1 in 1,000 cases.
It's good to iron out these things with a tight internal feedback loop than to do it with customers. It also to some degree is a reward for those who work on the design, development, and creation of the vehicle. Yeah. Yeah.
I mean, it's important to note too that all those people paid full price for the car.
Yeah, full price. There was no discount internally at all.
Exactly.
Right. No, no, I mean, the, you know, the root of the question is, if you realistically uncover something, and even if it's one in 1,000, what flexibility do you think you have to actually be able to rectify that concern in a way that won't impact your ramp? You know, if this is being done arguably later in the process than a traditional OEM, that's not, you know, trying to ramp necessarily as aggressively as you need to, I'm just, you know, again, just trying to understand realistically what can be done and what kinds of things, like perhaps you can give an example of what you might uncover and what the rectification might be.
Yeah. These are not showstoppers. These are what we're talking about here are inconsistencies in the production process or in the quality control from a supplier. They're relatively easy to correct. They tend to be quite, you know, there tend to be quite a large number of them, but again, only rarely occurring. It usually involves like a tolerance stack up or some combination of factors that we didn't anticipate. They're almost always very easy to correct, but there are just a bunch of them, it's a lot of work.
Yeah, these may be software issues as well.
Yeah.
Not necessarily supplier hardware issues. It could, you know.
Well, it's software-hardware interaction as well. Yeah.
I think the main benefit is that we can learn about them faster, and therefore we can fix them faster. That simply is the benefit.
Right. Exactly. The people driving them and the people are the same ones who have to fix the problem. That's a great feedback loop.
What we're doing is above and beyond others. We have done a lot of testing like the other OEMs, this is just helping us get above and beyond by selling it to our employees and getting feedback from them.
Mm-hmm.
Yep.
Yeah.
All right, Cherie, next question, please.
Our next question is from David Tamberrino with Goldman Sachs.
Hey, thank you. Thanks for updating with the net reservation number. I actually wanna follow along those lines on your order rates. You've given us additional color based off of 2Q trends and average weekly orders. Can you share a little bit more maybe what the 1Q and 2Q order rate trends look like for the Model S and the X?
I-
It's not relevant.
I don't think that those numbers would be helpful for predicting things in the future. Like, once you get into the granularity, people read things into numbers that really don't have a lot of relevance. There's for sure a seasonality in vehicle orders. Fewer people order cars in the dead of winter than order them in spring or summer. It was just like other retailers, really. Then we do batch cars so that we'll make, typically at the beginning of the quarter, we'll make cars for Europe and Asia, and then we'll make cars for the East Coast of North America, then the West Coast of North America, and that's generally the sequence within a quarter.
You'll see someone write something where they think they've uncovered some gotcha where there were very few Teslas registered in a given country in a particular month. It's like, yes, because none of them arrived. This is meaningless extrapolation.
Okay. I guess my follow-up question will just be on your Q3 gross margin guidance of a dip below 20%. How far below, to phrase it correctly, how dependent upon production and, you know, hitting an S-curve or ramping up, do you think that below 20% is? Could it be a couple hundred basis points below 20%, or is it just think you're gonna be around that area based on, you know, what the curve that you've laid out so far is gonna look like?
Yeah. This is just because of, you know, Model 3, it is fundamentally negative gross margin in the very beginning, cause you've got a gigantic machine producing that's meant for 5,000 vehicles a week, and it's producing a few hundred vehicles a week.
Exactly.
That's the sole explanation.
Yeah, it's a denominator problem. Yep.
Yes. Yeah.
Yep.
Nothing fundamentally wrong with the.
Yeah, it's a temporary situation, and it's a dip which corrects itself.
This is true for anything. If you had like a soap factory, let me tell you, your first bar of soap would be like millions of dollars. Okay. you know, get it to volume production, and then it's like $2. Okay. True for any manufacturing situation.
Yep.
Okay.
Next question, Cherie.
Our next question is from Brian Johnson with Barclays.
Brian, are you there?
Yeah. I had you on mute.
Maybe that my problem too.
Hello? Yes.
Yep, we can hear you. Go ahead.
You're a bit soft, but go ahead.
Yes. I just wanna ask about a couple questions around the pace of spend, second half-
Please, please speak up. You're a bit soft. Yeah.
Yeah, the pace of OpEx through second half, you guided through flat. You know, with the Model 3 going out, are you basically saying you have the operating infrastructure to handle that, but then does that ramp in 2018? Similarly for CapEx to go from 30 Model 3s up to the exit rate, you're talking $2 billion. You know, how do we think about, A, that run rate and given how do we tie it to your exponential ramp? B, what does that imply for CapEx going into 2018?
Yeah. Your first question was operating expenses?
Do we have enough infrastructure in place to service the Model 3? I think, yeah, we're finding actually leverage in our own infrastructure, and that's helping us. I'll give you an example of that. In service, as we've talked about, we discovered that 80% of the cars that we repair don't require a lift
We're deploying a mobile service strategy to take 80% of the cars and fix them where it's convenient to the customer, not at our location.
Yeah
At their location, and make it invisible to them.
Exactly. I mean, like our, the nice thing is like you, like the ideal service is it's invisible, you don't even notice it, and when it's done, you love it. What, you know, what we're trying to do here with the mobile service trucks, as Jon was saying, really most of the time we don't really need a lift, is that your car could be parked, it could be at your office parking lot or at your house. Let's say it's at work. The Tesla will come there, fix your car, and by the time you need to leave for work, it's done.
That's right. So what that does for us is it takes 80% of the volume out of our existing footprint, and allows us to leverage that footprint to grow with Model 3. We give you similar examples in stores. So that's why we've guided to the OpEx that we've guided for the second half. We feel like we've got leverage there and we've got plans in place to further lever that in 2018.
Well, I think this will be really great for customers. I mean, this is what you want.
Totally
you don't wanna bring your car into a service center. You just want your car to be magically fixed in the parking lot. That's what we're gonna do.
Yeah. We're gonna provide really great customer happiness at increasing OpEx levels of leverage.
Second question was similarly around CapEx leverage. You put in $2 billion second half to get to that exit rate. You know, one, is that affected by the timing of Elon's production ramp?
Oh, yeah.
Given the ramp from 5,000 to 10,000 in 2018, what's your preliminary view of CapEx for 2018?
I wanna put a pin on 2018. We'll talk about that when we get to that time. In 2017, the, our CapEx expense is a contin- it's a continuum. There are no, you know, there are long lead items of different kinds, like the Gigafactory. For the Model 3 and the, and the equipment we are buying, our CapEx spend is at historical highs. We, we're spending $100 million a week. A week or two here or there is $200 million. What we are spending now is the completion of all of our Model 3 equipment and tooling as that gets signed off. It's, it's taking us to 5,000 and beyond. I can't necessarily break it out for you, but it just allows us to hit our operating plan that we have at a high level.
Wanna do a quick time check here. Some of us have some other things scheduled in 20 minutes. We've gotten some good thorough answers here, so we'll probably take a few more questions.
Yeah. A few more questions and yeah.
Wrap it up.
Yeah.
Cherie, next question.
Thank you. Our next question is from Colin Rusch with Oppenheimer.
Thanks so much. Can you talk a little bit about the conversion rate of customers coming into stores, and actually ordering cars? Then similar question on what's happening with solar and energy storage in terms of how many customer impressions you've got and the conversion rate into actual sales.
The conversion rates have continued to improve. Quarter-over-quarter and month-after-month, our conversion rates get stronger. We don't, you know, we don't obviously publicize specifics on those, but they are improving with every week and every month. On the solar side, one of the interesting things that we're seeing is we put a solar display and an energy display into our stores in North America. We've got energy experts that are on staff. What we're finding is it's a really natural transition in conversation from somebody who's buying a car and talking about where they're gonna charge the car to then where their energy comes from.
Yeah, totally. It's just, I mean, you know, we talked about the importance of integrating energy production, storage, and electric vehicle transport. What we said is coming true. It's really working well together. We're actually then able to leverage our existing stores to generate even more sales per square foot.
Our sales per square foot is so high.
Are so high.
It actually moves the total.
You need a telescope to see who's in second place.
Yeah, exactly. Yeah. It actually moves the overall.
It's like stupidly high.
Square footage, sales per square foot numbers for some of the larger, [audio distortion] .
We really need to open more stores. Yeah, I mean, like there's no point in opening stores on Model 3 'cause it's like people's, you know, that's, there's no point there. I mean, like eventually, you know. You know, and I think that like the new integrated app with where you can see your the status of your car, your Powerwall and your solar, and see at any given time of the day, how much energy's coming from the sun, how much from, is coming from the Powerwall, what your house is consuming. You can also, it tells you when the Powerwall saved you from a utility interruption.
People don't realize that like there are many utility interruptions, you know, in a given month. You know, and that's why you see the blinking 12 on your microwave oven or whatever the case may be, or your computer suddenly, you know, went dark and, you know, or you can even get data corruption and that kind of thing. Or your food went bad mysteriously. The Powerwall saves you from all of that. I think it's particularly important in cases where there's like a natural disaster, which could be, You know, floods, hurricanes, ice storms, earthquakes, fires, anything that disrupts the utility system. Having an uninterruptible power supply in the form of a Powerwall gives you security in those situations.
It's kinda like, it's kinda like insurance that you only really want it when you really want it. I think that people are gonna you know, love that. I just saw the app for the first time today. I'm using it myself, and it's like, wow, this is great.
All right, Cherie, next question, please.
Thank you. Our next question comes from Martin Viecha with Redburn.
Hey, this is Martin. I have just two very quick questions. The first one is on the battery production for S and X. Is there any plan to move it to the Gigafactory?
For pack production.
Yeah. Production
In the short term, we will not be moving it. Sometime next year, we may move it sometime next year in order to make space for additional production volume of Model 3. That's one of the things under consideration, but in the short- term, we're keeping it here in Fremont. But it is gonna be tricky to squeeze in all the space for increased Model 3 production, particularly if that run rate goes above 10,000 units a week, then we're gonna have to move more stuff out.
It may just be worth, you know, a reminder also that the cells for S and X are actually still 18650, and those are coming from a different production pathway in Japan.
Very similar technology.
Yeah.
You know, all the same technologies.
Yeah, the internals are essentially, very close.
It's, yeah, but different supply chain, different, you know, set of geography.
Then the follow-up question is on the Model Y. I think, you know, you just mentioned an hour ago that it's gonna be made probably on the same platform or very similar platform to the Model 3.
Yeah, we agree. Yeah. Yeah.
So, so-
We're really gonna have-
-you're gonna have-
We're gonna aim for maximum carryover.
Okay. I mean, just one thing to clarify. Is it still gonna be the 100 meters of cables which you touched upon last time?
Yes.
It's gonna be the next generation of vehicles?
No, that's one of the things that we would include. We would aim to switch out the wiring harness for the 1.5 km of wiring harness for a redundant flex circuit that's on more in the order of 100 meters or so. Then we'd obviously we'd aim to do that both for the Y, if it's called Y, and the 3 as well.
All right. Next question, please.
Thank you. Our next question is from Alex Potter with Piper Jaffray.
Yeah. Hi. Thanks. Just one from me. I was wondering the degree to which Tesla would eventually consider maybe charging more for, I guess, what you would call non-traditional product offerings, things like software, over-the-air updates, but also shared mobility, Supercharging, aftermarket. I know in the past you've talked about running a lot of those businesses just to break even, but I guess, maybe just wondering the circumstances under which you would consider trying to earn a margin on some of these businesses versus situations where you prefer to just give them away.
Well, I think we have a major element to that, which is the Autopilot. That's a software, that's basically uploading software to the car. Every car made since October last year is capable of full autonomy, we believe. It's really just a question of uploading the software for autonomy. There will be some other things, I think, in the future. I, you know, our focus is on the Model 3 ramp, we don't wanna get too distracted. Okay, maybe one more question.
All right, Cherie, one last question, please.
Our final question comes from Rob Cihra from Guggenheim Partners.
Hi. Great. Thanks very much. Just going back to Autopilot development, obviously not talking personal details or anything, but you had some personnel changes in the quarter. I'm just wondering if those reflected any kind of change of strategy or scope, or if it was just kind of a personal thing. I guess just related, are you still hoping to be able to do the autonomous drive L.A. to New York by the end of this year? Thank you.
Yeah, I mean, I won't comment too much on, like, individual personnel changes, but, but, you know, Tesla's 33,000 person company. If, if you actually look at our executive tenure, at Tesla, it's extremely good. It's above average. I think we're at least, I mean, maybe a year or two above average in terms of, executive tenure here. You know, every now and again, something doesn't work out, for one reason or another. In the case of Autopilot, it's very centrally about vision and image recognition, neural nets, effectually narrow AI. That, that's the, that's the focus from a recruiting standpoint.
I think we've got the best team in the world by a long shot on that front, and we are growing it rapidly with world-class talent. The coast-to-coast drive, autonomous drive by the end of the year, I believe we are still on track for that. It is certainly possible that I may have egg on my face on that front. If it is not at the end of the year, it'll be very close.
Great. Thank you everybody for joining us today. Thank you for Cherie for your help, and wish everybody a great day. Bye-bye.
Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.