Earnings Call: Q1 2017

May 3, 2017

Good day, ladies and gentlemen, and welcome to the Tesla First Quarter 20 17 Financial Results Q and 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. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Jeff Evenson. Mr. Evenson, you may begin. Thank you, Sherry, and good afternoon, everyone. I'm joined today by Elon Musk, JB Straubel, Deepak Kahujah, John McNeil and Lyndon Rife. Today on our webcast, we'll discuss our Q1 results that are announced in the update letter at the same link as this webcast. And during our call, we will discuss our business outlook, make some forward looking statements, and these are all 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. We'll start today's call with some brief remarks from Elon and then we'll jump right into Q and A. Please do try to limit your questions to yourself to one question and one follow-up. And if you haven't entered the queue already, please press star 1 now. And with that, I'll turn it over to you, Elon. Thanks. So, yes, welcome to the call. And I'd like to welcome Deepak Igujeb back to Teva as CFO. And yes, welcome back. Thank you, Usain. Appreciate that and I'm really excited to be back. Cool. All right. So yes, we'll just move right into Q and A. Overall, I'm very proud of Tableau for our accomplishments in the Q1. And I think Q2 is going to be great too. And yes, so overall, I think we're executing well and I'm feeling quite optimistic about the future. All right, Sherry, let's have the first question, please. Thank you. Our first question comes from Alex Potter with Piper Jaffray. Hi, thanks. A fair amount of debate recently both amongst investors, I think, but also within the supply chain about the segments within the transportation ecosystem that will sort of forever be off limits to Tesla because of physical limitations of electric drivetrain, specifically as it relates to weight and energy density and things of that nature. Presumably, you disagree, but I'd be interested in hearing maybe why you disagree, why you think Tesla can compete in those segments, whereas other people think diesel or fuel cells or other options would be better? You're thinking of things like heavy trucking? For instance, yes, that's I mean, I guess, different people draw the line in different areas. But as an example, yes. Yes. I mean, I'm not sure what's happening. I'm absolutely confident that electric car trains will electric vehicles will occupy every segment without exception. And I don't want to jump the gun on the Tesla Semi truck unveiling later this year. But it's I think it's going to be an incredible product and will defy people's expectations on what an electric truck can do. So I really do not see any segment of transport that will not be electric. In fact, I'm highly confident that all transport will go fully electric with the ironic exception of rockets. Okay. Very good. Easy way around even the 3rd law. Right. Okay. And then I guess maybe one Model 3 question here. I know it's maybe early days. Is there any way to gauge sort of what you think the trim and option uptake is going to look like on the Model 3, just to give folks an idea of what the pricing and margin profile might look like? Thanks. I mean, it's really guesswork at this point. But if it were to be comparable to what we see with, say, Model S or with other what other vehicles in market experience. It's something like a 20% to 20% increment over the range price would be the typical average. John, do you have any? Yes, I think that's right. And that's we experienced a little bit higher than that in Model S. And Model S in comparison to Model 3 has more range, has more power, has more cargo, etcetera. And we'll be introducing at the start of production. I think we'll be announcing our vehicle as we get closer to the start of production with that what those vehicle specs will be that I think 20% is a fair number to use. Yes. And actually just to reemphasize that, I might repeat that a few times on the call. We want to be super clear that Model 3 is not version 3 of our car. The Model 3 is essentially a smaller, more affordable version of the Model S with fewer features. But the Model S and the Model 3 will be at the same level of technology. And if you were to put a version on, say, what I'd say we're probably on version 4 of Model S. And Model 3 will also be Version 4. If you think of like the essentially the first when Model S first came out, it was just rear wheel drive and then we had dual motor all wheel drive. We had initial hardware 1 autopilot and then hardware 2 autopilot, and there was a facial refresh. There have been roughly 4 versions of Model S and we're on the 4th version Model 3, also version 4. It's a little confusing because one's a letter and the other is a number. And that Model 3 was supposed to be called the Model E. But then Ford came to sue us. And then I thought we were being all clever by calling it the Model 3. But actually the joke's on me because it caused confusion in the marketplace. So we're doing our best to clear up that confusion so people do not think that Model 3 is somehow superior to Model S. Actually Model S will be better than Model 3 as it should be because it's a more expensive car. Okay. Good. That's very clear. Thanks very much. We're going to be kind of a broken record on this front, and the messaging might get a little annoying, but we really have to be emphatic to clear up an error, which for which I took full responsibility in naming something that inherently would cause confusion in marketing. Okay, understood. Thank you. Our next question comes from Toni Sacconaghi with Bernstein. Yes, thank you. I was wondering if you could maybe give us an update qualitatively or quantitatively on how investors should think about battery costs? I think your last public statement was that Tesla's battery cost early last year was under $190 per kilowatt hour. If we look at Powerwall 2, there's been significant improvement in cost per kilowatt and in density. But I think if we try and do the math on Powerwall 2, we still come up with a number that's reasonably high. So maybe you can help us. I think in the past, Elon, you've said that you hope to get to $100 per kilowatt hour by 2020. And I recognize that's aspirational. But maybe you can help us a little bit frame how we should think about battery costs today, what kind of improvement you're seeing from or expect to see with 2,170 batteries in vehicles going forward? I mean, the class numbers for cost of COVID are obviously closely held competitive information. It's just that we do expect to see significant improvements year over year as a function of improving the core chemistry of the cell, reducing the percentage of the cell mass that is inactive and of course, mass economies of scale and vertical integration at the Gigafactory. These will all take time to bear fruit, but there will be significant overtime. Now with the Powerwall, there are a bunch of other costs in the Powerwall that are more than just the batteries. So you've got the the cell cost, then you've got integrated cell into a module. You've got all the cooling systems, the control systems, the safety stuff for it to prevent cell runaway, the enclosure, the modem to communicate to Dannon. And then of course, it would be the power electronics to take the power from the cells and convert that to AC or DC power that the house can use. JV, is there anything you'd like to add to that? No, that's a great description. It's a fully integrated product. It's a system, not just a bunch of cells. So, when you if you maybe try and calculate dollar per kilowatt hour cost for the Powerball, I think you'd find it extremely competitive against other home energy storage systems, we believe the best. But there is a lot of other hardware in there. It's all included, all wrapped together in the Powerwall price. So you don't have to piecemeal the system in your house. Right. We are confident that the Powerwall is the highest quality product and actually at the lowest cost of anything on the market. So that is a good product. And Google Group is pretty happy with it. And some of the improvement trajectory that you saw from Powerwall 1 to Powerwall 2, part of that was made possible by the migration to 2,170 cells made at Gigafactory, not all of it, but a large part of it. So that is something we're pleased with and feel is going on. Okay. Thank you. I was wondering also your customer deposits and I recognize there's a lot in that decline for the 2nd straight quarter. And at least by my math, it appears as though Tesla's new car inventory has increased substantially over the last couple of quarters, maybe 3,500 units or about 50%, even though sort of production and deliveries have been relatively constant. I'm wondering if you are seeing incremental demand pressure on Model X and particularly Model S? Elon, you underscored that there was confusion in the marketplace. And are these the metrics that are suggesting to you that there's some confusion in the marketplace? Are you seeing cancellations? At least optically, it looks like the book to bill is less than 1 on S and X. Yes. Deepak here. A couple of questions that you had. Firstly, just to clarify, our finished vehicle inventory only increased very slightly from end of Q4 to end of Q1. And we are using some of that in different ways, and John can explain that further. And also to your other question on customer deposits, what I'm seeing is that we had an artificial backlog in our customer deposits of Model Xs. And as our production of Model Xs has stabilized and as our mix of Model Xs increased relative to S, we have cleared that. So it's nothing unusual from what I'm seeing there. And John, do you want to add on the That's right. The increase in inventory is about split in 2. One is we increased Model X test drive vehicles by about 1,000 over the past quarter. We had prioritized deliveries as we ramped up complex production and prioritized getting cars to customers first and to our stores second. Our stores have finally gotten their test drive fleets and that's what you see in terms of the half of the unit volume increase. The second half is in our service loaners. So as our installed fleet has gone up, we need we wanted to make sure that our owners were getting a service loaner. And so we will continually increase that and you'll see that over time. That's not a one time event. You'll see as we continue to deliver this level of cars per quarter, that we will increase the service owner fleet proportionally so that we've got the ability to offer a Tesla to our customers. Yes. In fact, this will take us a few months to fully deploy, but our policy for service learners is that the service owner fleet will be the very best version of a Tesla that is available. So if you have a Model X that comes in for service, the service loaner you will get will be the absolute fully loaded state of the art P100D Ludicrous, best Model X that we have, same for the Model S. So it will be something where you hope that service takes a long time because you have the absolute top of the line Tesla as a service liner. So, Elon, just to clarify, the confusion that you believe exists potentially between Model 3 and Model S, that's not being inferred from order patterns, that's being inferred more qualitatively from what you're learning in showrooms or how do you make that assessment of the problem? No, no, we have seen some impact of Model S orders as a function of people being confused that Model 3 is the upgrade to Model S. Now we took action to correct that about a month ago, but that message is not filtered down to all of our customers. So there's a lot of people who are under the impression that Model 3 is the upgrade from Model S. But in fact, if they want to upgrade, it's just buy the latest Model S. That's the actual upgrade path, not if you're like, say, thinking that the upgrade path from an Audi A6 is an Audi A4. It's not. So, yes, it's just a question of correcting that misperception, which I'm confident we'll be able to do in the next several weeks. Thank you. Thank you. Our next question comes from Colin Langan with UBS. Great. Thanks for taking my questions. You've talked about in the past reinventing the machine that makes the machine. And now that we're getting a little bit closer to the Model 3 launch, any additional color on what steps in automation you're doing for the Model 3 and any rough order of magnitude of how much more automated the Model 3 would be versus the traditional production line? Yes. So with Model 3, I think we'll be roughly comparable with the best high volume vehicle production lines in the world, better in some respects, a little worse than others, but roughly comparable. And then with some further iteration, I think it will probably be a little bit better than the next best automotive production line. Then where things will really be a step change, I think beyond any other auto manufacturer will be the Model Y factory. This is about the function of designing the product to be easy to manufacture and easy to automate as well as designing the factory itself. So Model Y is, I think we're really the constant step change. Model 3 is going to be at or probably slightly better than I think the next best one that I'm talking more. That's pretty GACM. And then Model Y will be there'll be nothing close to it, I think. Got it. And just to add, as a relative benchmark against the S and the Model 3 is vastly more automated. And perhaps it's not the best benchmark to use looking forward, but it's perhaps 3 to 4 times more automated than an S or an X and much, much simpler to build. Is that one 5th of the hours per car? Yes. So it's 5 times the volume, but the same hours per car. Got it. Yes. And just a follow-up, any color on you've announced the doubling of the supercharger network and increasing your dealers. I mean, how should we think about that over the next few years? Is that doubling going to be enough? Or how do you see the network needing to expand going forward? We're expanding the 2 charge network substantially. We made that number just recently, and that will give you growth plan on our website. That's going to continue to increase dramatically. Do you want to speak to service? Yes. So service locations are one that you see increasing in the shareholder letter. But you should probably think about service capacity in 2 ways now. One of the things we've discovered is we've deployed more advanced service techniques into our centers is that a super majority of the cars we repair don't require a lift. That frees us from brick and mortar service and we've added substantially now to our mobile service capabilities starting first, experimenting in the Bay Area and sort of our major markets and we'll be rolling that out throughout the year. So we're creating service capacity in 2 ways, mobile service and fixed service operations. But fixed service operations are becoming much, much more efficient. Much higher throughput. Absolutely. Much higher throughput through worker or per square foot across really every metric. Okay. All right. Thank you for the color. Yeah. Thank you. Our next question comes from Adam Jonas with Morgan Stanley. Hi, everyone. Elon, first question is on CFIUS and Tencent. So after acquiring this 5% passive stake in the company, I'm thinking given the highly sensitive nature of your proprietary tech and computer vision, AI, robotics, etcetera, and all the related infrastructure, I would imagine that the commission for foreign investment in the United States and the Pentagon might be concerned with the idea of a Chinese or potentially Chinese state backed company going any further than a small passive stake? Am I watching too many Cold War movies here? Or is there potential for some sensitivity on the grounds of national security? But I think that 5% is not that big of a deal. I mean they're not present at board meetings. They don't have any insight into Tesla that's not public. Yes. As Elon said, this is a passive investment and it doesn't require sufficient clearance from that point of view. Okay. They don't have any access to confidential information or board materials. So it's just a belief and a support of what they think Tesla can achieve. Okay. And just as a follow-up, Apple has enough net cash, I think, to buy Tesla like more than 3 times over. Is there anything that Apple does or has besides having more money than they know what to do with that could be helpful in Tesla's mission to accelerate transition to shared autonomy and sustainable transport? Could they be the type of firm you could partner with? And could you is this something you could talk to Tim about? Yes. I don't think they want to have that conversation, Adam. We've not heard any indication that they do. Obviously, Apple is a company that makes some great products. And yes, I mean, I use the phone and the laptop, it's cool. Many of which now work here. I mean, you think they're more competitor or more competitor than potential partner? Is that unfair? I mean, I don't know what they're going to do on the car front. Yes, it's not clear. Thanks, Alan. Thank you. Our next question comes from Tyler Frank with Robert Baird. Can you walk me through what your capital needs are for the Model 3 just to get to production and then to ramp production throughout this year and next year? And then how confident are you that you might be able to hit that 100,000 unit production target for the Model 3 in this year? And then I have a follow-up after that. No, I don't think we have indicated the we've just said in the letter we'd achieve 5 1,000 per week at some point this year and 10,000 at some point next year. So we haven't clarified on that. So yes. Yes. The trick with the when you've got a whole new product in a whole new factory is trying to predict exactly what that initial S curve looks initial portion of the S curve looks like is extremely difficult. Inevitably, the production starts off slowly and then you gradually eliminate the constraints and eventually it starts ticking off exponentially. But because of that sort of initial slower ramp that then grows exponentially, a small change in where that lands in the quarter can have quite a big impact on total volume. It's a lot easier to predict where the upper flat portion of the S curve is likely to be, but predicting the rapidly changing portions of the S curve is just, I think, not with any ability of anyone to predict with accuracy. Got it. And then can you just run us through what the capital needs are, sort of hit that 10,000 unit per week goal as well as where the battery factory stands in terms of its current capacity versus its expected total capacity and what the timeline is to get to that total capacity March? Well, we feel pretty good overall about the capital needs and our ability to fund that to achieve that $10,000 per week capacity. With internal. Yes, with internal, right, exactly. Our own resources and the cash that we generate in our business as we ramp up Model 3 volumes. And overall, and JV can speak up more to that in terms of the cell capacity, that's all lined up to come online just ahead of our needs on the vehicle side as well as on the energy storage side. And we initially forecast about 35 gigawatt hours of cell capacity and 50 gigawatt hours of pack capacity and we anticipate to surpass that cell capacity in 2018. So that's going well and with the increasing improvements in the production density and speed at the Gigafactory, we actually ultimately believe, and I think we've said this before, that we can fit substantially more capacity than 35 gigawatt hours at Gigafactory 1. Yes. We said publicly that we think sell out for capacity at Gigafactory 1 is likely to exceed 100 gigawatt hours over time. So the end state of 35, it's really sort of a passing point stage and we'll continue on from there. Yes. Right. Okay. And then, Elon, you had previously pulled out a target of 1,000,000 cars per year by 2020. Do you still think that's achievable? And what needs to take place in order to get there? Yes, I do. I think we need to come out with the Model Y sometime in 2020 or aspirationally late 2019. And then I think that a 1000000 units is quite likely combined here, maybe more. Thank you. Thank you. Our next question comes from David Tamberrino with Goldman Sachs. Great. Thank you. Good afternoon. I wanted to first just ask about the order rate for the S and the X in the quarter and get some color around your deliveries from a regional perspective? I believe there was an expiration of electric vehicle tax credit in Hong Kong. Just wondering if that created any pull forward or incremental demand in the quarter and if there's any air pocket to orders and deliveries for the Q2 seeing that you maintained your 47,000 to 57 or 50,000 1H delivery guidance? Yes. There was some purported demand in Hong Kong. That's one city on earth. So it's which is something that's going to impact our ability to achieve our delivery target for Q2. And the order rate growth for the quarter? Well, I think we feel pretty good about achieving the sort of the 100 ks, roughly 100 ks total for the year for S and X combined. That's where we kind of want to be. The manufacturing system and supply chain is all sort of set up for that level. It sort of continue to be surprised by how sort of frankly, naive people are a lot of people are about production and supply chain. It's as though there's some like easy way to increase production. It's really not. Any given production system, you design it for an optimal output. You aim to improve efficiency, reliability, quality and so forth at that output. So the S and X system, as we said last year, was designed for 100,000 units. And initially, to get to that rate, we had to use a lot of overtime, a lot of expediting, and that affected our gross margin on the car. Now we're sort of at steady state. We're kind of the top part of that S curve that we were targeting. And so now our focus for S and X is improving production efficiency, continuing to improve quality and Material costs. Yes, and material costs and so forth to sort of and to get the automotive gross margin for S and X to the 30% level that we've been aspiring to for a while. Understood. And that's on the production side. My question was just on what the order rates and demand was looking like from what you're seeing on your customer base. Historically, you've given or provided very helpful color on what the year over year or quarter over quarter order growth rate has been on the S and the X. And I think it's a meaningful metric for what demand looks like for those vehicles and for your products. But that's okay to understand. I don't think it's meaningful. We're going to produce 100,000 units approximately. So all that matters is, does demand is there going to be demand for 100,000 units? I believe there will be. Well, there is. And there's certainly sufficient demand for the guidance we've given for the first half. Yes. Understood. And just on the SolarCity side, it looked like a pretty good gross margin quarter. Wanted to understand how much of that was from the shift further into the cash loan versus the PPA lease and how much was that or was it more associated with the ramping of the Gigafactory and production of the cells? Well, it was primarily seasonality. We had home production happening in the Northern Hemisphere and some of the PPA leases and how we recognized revenue. And also it was we had some $14,000,000 sale of energy credits that helped us. And the credit sale happen every quarter, but we had the full quarter of it, which we didn't have in our half quarter of SolarCity sales financials in our Tesla income statement. And we also see an increase in cash NOI, which does improve the margin as well. Yes, that does help the margin as well. Yes. I'm sorry to ask one more, but that was a bit inaudible. Could you repeat that, Linda? Yes, we have seen an increase in the cash and loan business. So the loan should get to the majority cash and loan by the end of the year? Correct. So just to be clear, for select activity, the objective is to get to majority cash and loan by the end of the year. And we expect the solar margins to stay very healthy for the rest of the year and grow at the time. Understood. Thank you very much. Thank you. Our next question comes from Martin Viecha with Redburn. Hi, this is Martin from Redburn. I wanted to ask about the TED talk that you've had a few days ago, where you talked about level 5 maybe in the next 2 years. And I was wondering that it's probably going to change radically the design of the car inside and whether you foresee this in the next 2 years that the interior design would change quite dramatically? I don't think we're going to see dramatic change in the interior design. There may be an option where the club seating instead of everyone facing forward, but I wouldn't call that radical. Just turn the seats around. Okay. And I'm not sure how much people actually want to do that. Yes. The sensor hardware and compute power required for at least level 4, to level 5 autonomy has been in every Tesla produced since October last year approximately. So it's a matter of upgrading the software and we can achieve level 5. And if it does seem that we need to upgrade the compute power, it's designed to be easy to upgrade, access it through the glove box and a more powerful consumer. So we don't think it will be, but if it is, that's pretty easy to do. So the important thing to appreciate is that the sensor hardware and wiring harness is necessary for full autonomy, which essentially having the 8 cameras, the radar and ultrasonics, that's in place. So like it will be surpassing release, the car's autonomy level will improve. We had a bit of a dip obviously because of the unexpectedly rapid transition away from Mobileye where we'd expected to have the Mobileye chip on the board as a transition, but Mobile I refused to allow that, so then we had to basically recreate all the Mobile I functionality in about months, which we did. Okay. And then the other follow-up question that I had was on the Model Y. You mentioned that the Model 3 production line will be probably as fast or a bit faster than the fastest production line in the world and Model Y will be a genuine step change. Does that mean that the Model Y will be made on a different platform than the Model 3? It will be, yes, different platform. I think I could give this example before. The it's just one example, but the wiring harness on Model S is about 3 kilometers in length. The wiring harness on Model 3 is 1.5 kilometers in length. The wiring harness on Model Y will be 100 meters. And that's a redundant wiring harness. So really wiring harness is basically a flex harness with a high data rate bus, so you can put everything on a higher data rate bus that isn't a CAN bus where your data rate is massively constrained. And we'll also make changes to vestigial voltage, but not everything is 12 volts, which is a pretty absurd number, really. It's wrong for everything. Got it. Thank you very much. Thank you. Our next question comes from Brian Johnson with Barclays. Yes. I have a couple of questions. A housekeeping one and then sort of kind of where are you kind of question for Elon. On the housekeeping, your order delivery announcements at the end of the quarter, excuse me, delivery announcements, you used to talk about deliveries to end customers. This quarter, it was just deliveries to customers. Is there any change in distribution channels potentially using resellers in some markets that that's meant to communicate? No, it's the same thing. It's consistent. We are delivering to individual customers. Okay. 2nd, a couple of years ago when the stock was at 200, it answered one of my questions. Elon, you outlined a scenario where you could get to $700,000,000,000 in market cap. That's about where Apple was at the time. We're 2 years later. You're obviously close to the Model 3 launch. How are you looking at that? Well, I don't want to preface this by, of course, I could be completely delusional, but I think I see a clear path to that outcome. Okay. And anything else in terms of other businesses or volume or still pretty much on that track? The set of steps necessary to achieve that outcome seem pretty obvious and heavily involve Tesla getting incredibly good at the machine that builds the machine, which involves, by the way, a tremendous amount of software. This is it's not just a bunch of robots that are sitting there. It's the programming of the robots and how they interact. It's far more complex than the software in the car. I think this is just going to be a very difficult thing for other manufacturers to copy. I would not know what to do if I were in that position. Okay. And just one quick question. Why pickup trucks, Why semis before pickup trucks? Well, they're not going to be that widely separated in time. And and part of it is we do want to show that electric transport can do even the most heavy duty things in the world. So I think it's pretty obvious that we do pick up truck, but it's not obvious to a lot of people that you do heavy duty semi. And so just being able to kind of hit the corner of the box of capability and it's a helpful thing to do. Yes. Maybe a floating point, but a disproportionate amount of petroleum is actually burned by a small number of trucks exactly. Because of the high utilization, the high miles per vehicle and they lend themselves I think well to electrification. Yes, exactly. Every semi I mean, it's probably 10 times as much how to compensate for a semi as for a pickup truck. Okay, thanks. Thank you. Our next question comes from Rod Lachey with Deutsche Bank. Hi, everybody. Couple of remaining questions. Just one is, since the Model 3 is maybe 2 or 3 months away, could you just give us a sense of what some of the most critical outstanding items are that are going to gate the commercial launch timing? And now that there are actual actually, it seems to be we're not really seeing any significant changes in each of our Model 3. It's coming in as expected. As the designs and simulations predicted, it's pretty close to the bull's eye. And I'm not aware of anything that would affect our price statements about volume target. So there's nothing outstanding, vis a vis tooling, deliveries or things like that that you're still viewing as a critical item with some uncertainty? There's plenty of things with uncertainty, but I don't know anything that would prevent us from selling production in July and exceeding 5,000 units a week by the end of the year. Okay, great. There may be some of your costs up, but I just don't know what that is today. Got it. Just switching gears to China, obviously domestic production is presumably very important to your success in that region. China recently suggested that they may relax the rules for foreign ownership or that they intend to relax the rules for foreign ownership. And I was wondering if you could just update us on where you stand visavis the growth plans there and are the rules for ownership, is that one of the gating factors? I don't think this is quite the right timing to make any announcements on that front, but I would expect us to define our plans more clearly by the end of this year with respect to China production. Okay, great. And just lastly I think it's good timing. I mean, the China rule changes are good timing. Got it. And just lastly, unless there's a pretty huge Q2 for CapEx, it appears that you're tracking at less than that $2,000,000,000 number that you had articulated, of capital spending pre launch of Model 3. Is that a function of savings, contractual timing or is that a capacity issue? Just some thoughts on how we should be thinking about the capital spending relative to your prior targets. Yes, it's not too far from it, Rod, sorry. And we are so we'll have significant CapEx in Q2 and it's all in a big lump sum or with a big peak given how much equipment is being installed and then tested. Often our CapEx payments happen and a big chunk of the final payments happen after the equipment is installed, it's tested and then we have fairly good customer payment terms. In many cases, it's 90 days. And so, it's just a matter of that process and time and pain, but we feel very comfortable in terms of how that is happening, the spend and the installation and overall readiness for Model 3. Yes. I mean, if anyone comes to a tour of the factory, it's really insane how much equipment is arriving and getting installed and being bought online. It's true. I mean, I'm used to seeing a lot of intense equipment that blows my mind. It's like, wow. And I think you can also get kind of a visual sense for the improvement in manufacturing technology between S and X and 3. So you can just go look at it and say, like, yes, that's obviously better. Okay. Thank you. Our next question comes from Colin Rusch with Oppenheimer. Thanks so much. Can you give us an update on the volume of cathode and anode that's being produced and shipped from the Gigafactory at this But it's a lot. Yes, vast amounts. Are you alluding to materials potential material supply constraints or I'm not sure what you're getting at? Yes, just trying to get a sense of the ramp at this point on the cathode and anode at the Gigafactory? Ramping very rapidly in 2,170's health production. We're not really seeing anything staying away with that. Yes. And yes, I completely agree. And we're basically tracking slightly ahead where we need to be on vehicles, but that's sort of as was planned. We don't want to be too far ahead or else we'd have a pretty massive inventory issue showing up. So we run it in batches and we run at high rates and then pause and validate the throughputs. But yes, it's where we expect it to be. Okay. That's super helpful. And then just shifting I'd like to express a note of appreciation to Panasonic partner on the cell phone. And that there will be I think the new posture is working really well and they're doing great stuff. Okay. And then shifting gears to the purchase accounting adjustments related to SolarCity. Can we just get a sense of the nature of that? It looked like you were going to go through a series of complex assessments over the course of the year with the SolarCity acquisition. Just want to understand what that $100,000,000 charge was and how we should think about those decisions getting made going forward? Yes, I'm not sure what the yes, the $100,000,000 is the change quarter over quarter that you're referring to. And in Q4 and this is Arkane, purchase accounting. There was a gain on our purchase of SolarCity and that was not there in Q1 and there was some revaluation of assets of SolarCity that was linked to that purchase. And ahead of that was a $100,000,000 walk. Okay. I'll take the rest of it offline. Thanks a lot, guys. Thank you. Our next question comes from Ryan Brinkman with JPMorgan. Great. Thanks for taking my question. What do you think are likely to prove the biggest challenges or bottlenecks and ramping production to 5,000 vehicles per week by some point in 2017? And how confident are you in your ability to overcome those challenges? And then the shareholder letter also mentions a run rate of, I think, 10,000 or approaching 10,000 per week in 2018, which would maybe seem to indicate some kind of an annual run rate of 500,000 or so Model 3s? And then given you're also tracking kind of 100,000 Ss and Xs, do you think that type of production can be handled out of the Fremont facility? Or does your plan assume production in another facility as well? Yes, all of that production is intended to be out of the Kake Factory 1 and Fremont. So yes, we believe that that will be handled here. As far as specific constraints on Model 3, I just don't know of anything that really stands out. We've gone to great pains with the Model 3 to design it for manufacturing and to not have all sorts of bells and whistles and special features. Like for example, with X, X became kind of like a technology bandwagon of every cool thing you could imagine all at once, It's like everything all at once. That is a terrible strategy. You really want to start off simple and then add things over time. But that was some humorous and real low confidence there. So with Model 3, it's the opposite we're designed to be easy to make. We've got, I think a much better supply chain in place where we got the A team from the A suppliers. We didn't have that for the Model X or the S. And as far as we know, there are no issues. So that strategy appears to be paying off, there could be something that we've missed that we just don't know about right now. Okay. And you mentioned production in the Gigafactory. I know you're doing some component assembly there for the Model 3. But given that it is on track to be the world's largest factory or maybe even the world's largest building, is it such a stretch to think that you might be able to produce vehicles in that facility? Just in terms of making battery cells, modules, packs, motors and power electronics, just on that basis, and then of course the Powerwall, the Powerpack, on that basis alone, it was expected to be the largest building in the world of any kind. You prefer 3 Panagons, more than 3 Panagons. Any kind 4 pentagons, I don't know, a lot, just in the geographic factor. It's really difficult to appreciate magnitude of the structure unless you actually visit it. But that's room to expand. Okay. Thank you. Thank you. Our next question comes from John Murphy with Bank of America. Good afternoon. I just wanted to follow-up on the CapEx topic. I mean, you guys did kind of fade down your expectation for CapEx ahead of or in conjunction with the Model 3 launch from $2,000,000,000 to $2,500,000,000 to $2,000,000 And then the spend this quarter was relatively low, at least relative to what the run rate implied. I'm just curious, is there some level of capital efficiency that you're coming across? And I mean, and could you possibly be significantly below this $2,000,000,000 number ahead of the launch or into the launch? We're always trying to be capital efficient. That is the underlying theme of every step we take. And clearly, some of that is part of it. But I think overall, we'll be again because of this massive scale of payments, whether it's last week of June or 1st week of July, how many 1000000 we end up paying, it's hard to be precise. It's almost like an S curve of capital spend that we are going through here. So I don't think it's any indication of anything else except timing at the highest level beyond the capital efficiency that we are continually working on. Okay. And then a second question, I mean, residuals seem to keep performing better than you were expecting. Is there any opportunity to potentially lower monthly lease payments to drive higher unit volume demand going forward? Actually, I think one of the traps that the auto industry has gotten into the past is having unrealistic residuals and then finding that they're upside down, particularly when a recession came along. We want to be very cautious about pointing to that trap. So yes, we don't want to do that. Okay, great. Thank you. And an advantage that our cars have that cars in the past have not had, no other car has, is that the software keeps getting better. So functionality keep adding more and more functionality to the car even though the hardware stayed the same. The Model S if you bought a Model S 4 years ago, it's way better than when you bought it. And that really makes a difference for residuals. Thank you. Our next question comes from James Albertyne with Consumer Edge. Great. Thank you and good afternoon. On the semi truck, just very quickly, if I could ask, is the attractiveness of that sort of vertical that you could sell sort of in bulk to fewer customers, so more vehicles per customer? And given your partnerships in the past, would you envision partnering with a manufacturer on that side of the business? Or would this be more akin to your sort of go it alone strategy on the auto side? We've manufactured that ourselves and most of that semi is actually made out of Model 3 parts, by the way. It's Model 3 is actually using a bunch of Model 3 motors. I'm not revealing too much about the future of it, but So we're able to use a very high volume vehicle and then combine several motors to have something that I think is actually going to have a very good gross margin. That's just not something that any it's like you can't do that with a traditional truck. So effectively it allows us to have a very compelling product that has a low unit cost. Yes. The incremental complexity of building that is much less than it might seem. Yes, exactly. Because of all the reuse that you're talking about. Yes, exactly. And are we right to think about that though as a contractual sort of opportunity, right? I mean, you go to sort of a handful of fleet operators and you could sell sort of more vehicles per customer. Is that the right way to think about it? That is how it would occur, yes. It tends to be much more of a straightforward economic decision for the fleet operators. They just look at it and say cost per ton per mile equivalent. And it's like if it's better, they'll just buy a huge number. And if it's worse, they will buy Hovani. And we're confident it'll be better. Okay, great. And then if I just may, a follow-up on the demand questions that were sort of asked earlier. Wondering, as you're getting more used vehicles back into the pipeline, is there any data to support that you're using those vehicles to attract a potentially new customer to the brand? Or alternatively, is there data that would suggest that perhaps it could be cannibalizing some of the newer vehicles? But sorry to dwell on demand, but I just wanted to see if there was anything given now we're a few years on and you're getting a lot of vehicles back off lease presumably, if there's any indication there one way or the other? I think it's still early days. It's still relatively low numbers, but the indication is that we're introducing a new customer to Tesla at those lower price points. Yes, exactly. The demand actually increases really exponentially as price drops. At one point when we looked at it, I think we were looking at threat numbers, but the demand at the Model 3 price point it appears to be somewhere between 30x70x higher than at the Model S price point. Well, I mean, look at it, like I said, there's 100,000 premiums that are being sold in the U. S. Every year. I think we're about a third of that. And but there are 17,000,000 vehicles in total sold. So premium sedans are like nothing, less than 1% of the market. 0.5 percent, I would say. So a 7 Series customer for your brand new and a 5 Series customer for your sort of used is maybe the right way to think about it. Is that fair? We're a 3 Series customer for the used as well, yes. Okay, understood. Well, thank you so much for the question. Taking the questions. Yes, but it is interesting to consider the magnitude of this is really maybe underappreciated, but consider 17,000,000 cars and trucks sold in the U. S. Per year, of which only 100,000 are premium sedans. And we have a 1 third market share. If we can replicate that in other segments, the results are obvious. Okay. Before we go on to the next question, I want to do just a time check here. We are at the hour mark. We have 5 more analysts that want to ask questions. Do you want to go on for a little bit longer, Yuan? I can go on a little bit longer. Okay. Sherry, let's take the next question, please. Thank you. Our next question comes from Brad Erickson with Pacific Crest Securities. Hi, thanks for taking my question. Elon, I think a couple of years ago, you'd said you could envision at some point stepping away from Tesla's CEO anyways towards the end of the decade as Model 3 kind of got up and running. As you were likely to be pursuing a lot of these adjacent opportunities, clearly a lot still there on the horizon. But now with some more of these opportunities being a part of Tesla's business, does that change your view of staying actively in place with Tesla longer into the future? Well, I want to be super clear, I intend to be actively involved with Tesla for the rest of my life, hopefully stopping before I get to now or too crazy, I don't know. But essentially, for as long as I can positively contribute to Tesla, I intend to be have a significant involvement with Tesla. But that doesn't mean I should be CEO of that. I think my main the most valuable thing I can contribute is kind of product design and technology, but that's my forte. That's what I like doing. And so that's what I would imagine doing in the very long term. Okay. Sherry, let's go to the next question please. Thank you. Our next question comes from Jeff Osborne with Cowen and Company. Good evening. Thanks for squeezing me in. I had just two questions. One, Elon at the TED Talks and I think a couple of tweets you had talked about adding 3 Gigafactories. Just following up to Tyler Frank's question on CapEx needs. Can you just talk about what's your ultimate vision of Tesla over the next few years, Model Y factory, truck factories, truck service centers, 3 Gigafactories, China Expansion. Is all of that going to be funded with internal cash? Or do you see partnerships funding despite the low margins that the battery has? I'm just trying to get a sense of what your ultimate vision will cost. Right. It's sort of an incremental dilution along the way. It's hard to say. I think there's and I'm sure there will be sort of funding rounds that happen in the future. It's kind of a trade off between how fast do we want to grow versus like we can grow slower with no dilution really. For sure, we could grow at a moderate pace with no dilution. We could grow at a fast pace with some dilution or we could grow at a very fast pace with a high level of dilution. 10x growth in 3 years sounds pretty fast to me, but maybe not to you. Well, yes, but you look at it going from we went from the Rode to the Model S. We went from making around 500 units a year to making 20,000 units a year. So that's a hell of a growth, up by a factor of 40. Got it. Maybe just out of the interest of time, the second question I had is just on, it would be helpful given that there's 100 of 1000 people that have put a deposit on the Model 3. Can you just update us on what the cumulative U. S. Vehicle sold that you have relative to the 200,000 dollars number to get that $7,500 tax credit. You mentioned elasticity of demand at certain price points and certainly there's a large contingent of people that put a deposit that unfortunately won't get that benefit. So it would be nice to just be able to track that metric. So as the 3 launches in the coming months, we can see which folks will get that and what the impact of demand is for those that don't. I think most people are going to be able to get it, credit rolls off. It's not like a quick quote, it rolls off over time. And we are prioritizing U. S. Production, which will also help us to keep things simple. So we're not making many versions of the car from many different countries. Yes, so I mean I think provided some of these I don't know, my guess is probably most people kind of deposit would be able to get the full tax credit. Is there a way you could just give us what the cumulative numbers thus far in the U. S. Quarter to date sorry, inception to date? No. If we do that, then people run off and make all sorts of conclusions based on that that really have that are not predictive of the future because there are no you can't test drive Model 3. If you come into our stores and want to buy a Model 3, we invite you to buy a Model S or X instead. We anti sell the Model 3. But on that reservations continues to climb week after week, no advertising, anti selling, nothing to test drive, store goes every week. Got it. Thanks so much. All right. Maybe worth highlighting that under the present regime, the federal income and the tax credits on the car continue even after we hit the $200,000 limit and they continue for several quarters, but at a slightly lower depleting scale. So it's going to be beneficial for customers even beyond the 200,000 mark. Yes, absolutely. And I should perhaps touch again on this whole notion of it was all like over the years, there's been all these sort of irritating articles, like Tesla survived because of like government subsidies tax credits driving crazy. Here's what those fools don't realize. Tesla is not alone in the car industry, all those things would be material if we were the only car company in existence. We are not. There are many car companies. What matters is whether we had a relative advantage in the market. And in fact, the incentives give us a relative disadvantage. This is it tells us that in spite of the incentives, not because of them. But these incentives have limited lifetime and limited scale, like for example, the federal tax credit. And then the that caps out at the $200,000 There's the carb credits, which the carb rules are relatively weak. We can sell there are some quarters where we can't even sell COB credits. And when we can, it's maybe $0.50 to $1 or something like that, whereas the other carb companies get to fully absorb the value of carb credits. So that, for example, gives GM roughly, from a light count, a $7,000 to $10,000 advantage over Tesla for the Chevy Bolt. That's why like, you see not like why we're like, well, Jim appears to be losing $10,000 a car on the Bolt. No, they're not. They're making it up in car credits. But they get the full retail value of the car credit whereas we get the wholesale value when we're lucky. But the car credits are only effective at an approximate rate of about 20000 to 300000 vehicles a year. So that's why you'll see, mark my words, it's not going to be any higher than that for the Chevy Volt. That's 25 on the order of 25,000 units a year or oneten of our initial production rate for the Model 3 or onetwenty of what Model 3 will be next year. So Tesla's competitive advantage improves as the incentives go away. This continues to be something that is not well understood. And for that sake, I hope, I hope, as I mentioned, that Nevada tax credits, which for the Gigafactory, it makes it sound like we've got a $1,300,000,000 check from the state of Nevada. We did not. Those tax credits are made up vast majority of it is just sales and use tax abatement on equipment in the Gigafactory, taxes that otherwise wouldn't have been there because there was just a bunch of rocks there before. And you don't get a lot of taxes from rocks. So that's why it was essentially a no lose proposition for the state. And in order for us to actually earn $1,200,000,000 in tax credits for the Gigafactory, we have to generate over the course of 20 years about $100,000,000,000 in output from the Gigafactory. So it's worth about like 1%. And I don't want to look at gift cards in the mouth and we appreciate it and that's nice. But this is obviously 1% is not the difference between success and failure of the factory. And a lot of articles write it in the past tense. Tesla received $1,300,000,000 No, we haven't. We did not receive that. If somebody wants to send us that, great, we'll take it. But looking at the bank balance, don't see it there. That's because it's just sales and use tax payment over 20 years. But the key takeaway is that as Tesla's competitive advantage improves with scale, it doesn't get worse. Okay. Thanks, Elon. Let's go to the next question, please. Thank you. Our next question comes from Joseph Spak with RBC Capital Markets. Thanks. Just a quick one on service. By our math, if you look at the cumulative number of vehicles you've delivered and the amount of stores and service stations sold over are something around 700 per, I guess, station. I realize you're adding some more of these mobile units. But I just wanted to know, bigger picture, how you think about coverage in a more steady state or at least that 500,000 unit rate? Like what is the right level of coverage needed for the larger fleet? I think rather than thinking about store or service center locations, we think about it in terms of mobile units and lifts. And so we are building larger service centers over time that have more lifts. So our initial service centers, it might have had 2 or 3 lifts. And we're building now service centers with 40 to 60, sometimes 80 lifts. And so there's a density within the service centers, but the mobile capability expands that quite greatly. So I think a lot of people do incorrect analysis to take cars in service divided by locations, because the locations vary so widely. But that's essentially how we're thinking about capacity and planning capacity. And as Deepak mentioned earlier, our throughputs and efficiency are getting much better over time and we'll continue to improve those. So it's our goal to stay ahead of the installed base capacity, so we're providing great service. But really the Model 3 has been designed for high reliability. And as Elon has said many times, the best service is no service at all. Exactly. Our aspiration would be we make 0 service revenue because the car never breaks. Absolutely. Our service centers are sort of like the old Maytag repairman. Yes. Thank you. Thank you. Our next question comes from Rob Syrah with Guggenheim Partners. Hi, thank you very much. 2 quick ones, I guess, if I could. 1 just on energy, your megawatt hours declined sequentially, which just seemed surprising thinking demand is well above supply still at this stage. So when we could expect any more meaningful ramp there? And then separately on automotive, given that you seem to be in the mood to talk about future unveils, which is great, any chance I could push that by asking about the future urban transport bus, not sure what you want to refer to as. But the reason I ask is not is because that one seems a lot less about the product and more about just a completely different model for transportation and requiring autonomy and that sort of thing? I mean, is that the kind of thing you were thinking 3 years from now or 10 years from now or anything in between? Thank you very much. Sure. With respect to the battery stuff, it's a little lumpy right now because you had a big installation in Q4 with Southern California Edison, and then we had a bit of a gap between Powerwall 1 and Powerwall 2. So we should start to see that correcting Q2, Q3, and then particularly towards the end of this year, I would expect quite a dramatic ramp in storage deployment, really dramatic. Yes. And it's worth pointing out that we do still have a significant backlog in Powerwall demand, and then we're building capacity to address that and ramping it. We had a few challenges in parts of the supply chain as we've been ramping that throughout the quarter, the Q1. But those are freeing up and we're seeing the production rates improve week on week. But it's not indicative of demand. It's really our challenges of ramping the new products. Yes. I feel really good about quite dramatic quarter over quarter increases. I think with every quarter I can imagine in the future, it's going to be really dramatic increases in stationary storage output. It will grow faster than the car volume in the car volume has grown pretty fast. Okay, and the bus? On the bus, Having a bit more thought to it, I don't know if the bus thing, if that's actually going to be something that makes sense in a shared or fully autonomous environment because it may if you have a share if it costs very little, like it costs less than a bus ticket to have make use of a share economy fleet to go wherever you want, point to point, well, why don't you just use that? So I don't know. I don't know if the best thing It does help with density to some degree, but then you could basically have something like a higher density Model X or something like that that's got, say, 10 or 12 seats in it. Who would you want more than that? I don't know. And then when you factor huddles in, pick on tunnels as you might know, yes, then the density, urban density in traffic, I think, can be fully alleviated with tunnels. Yes, it's funny, like the title thing we talked a bit about that at TED and interesting to see like the commentary afterwards was in terms of the critics the critical commentary was there's a group that thinks that the whole sort of automated tunnel with electric scape thing, like, or basically like the tunnel thing, this group that says it's obvious and there's a group that says it's impossible. And I would like those 2 groups to meet. It's a bit like sort of like there's a group that is like a flatter society and the hollow globe society. I think they should meet too. Have a debate. All right. Sherry, why don't we take the last question, please? Thank you. Our final question comes from Charlie Anderson Co. Thanks for sneaking me in. I wonder, you mentioned anti selling before of the Model 3. Is there a level of production where you flip from anti selling to selling? Thanks. Well, I don't know, maybe later this year, probably not for the next 6 to 9 months. Thanks so much. All right. Thank you everyone for joining us today. Have a great day. All right. Thanks. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all