Earnings Call: Q2 2016

Aug 3, 2016

Good day, ladies and gentlemen, and thank you for your patience. You've joined the Tesla Motors Second Quarter 20 16 Financial Results Q and A. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Mr. Jeff Evanston. Sir, you may begin. Thank you, Latif, and good afternoon, everyone. Welcome to Tesla's Q2 2016 Q and A webcast. I'm joined today by Elon Musk, JB Straubel, Jason Wheeler and John McNeil. Our Q2 results are in the updated in the update letter at the same link as this webcast. And today during our call, we'll discuss our business outlook and make forward looking statements. These 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 SEC filings. We're going to kick it off today with Jason making some quick comments followed by Q and A. And during the Q and A, please try and limit yourselves to 1 question, one follow-up. Let's keep it tight because we've already talked once this week. So, Jason, over to you. Sure. Thanks, Jeff, and thanks everybody for joining. I just want to make a few brief comments to add a little bit more color to the shareholder letter. We're clearly disappointed with our delivery numbers, but there's some underlying stories that we feel really good about. And I want to walk you through those. Promotive gross margin expanded this quarter. Automotive gross margin excluding ZEV credits grew from 20.1% in Q1 to 21.2% in Q2. Couple of different factors here. One was the Model S refresh. There was a modest price increase on the refresh, but more importantly, we had baked the number of cost downs into that vehicle before the launch. And then the second big factor is obviously ex production. We've talked a lot about how we have come through the struggles on that and how we've managed to climb that production ramp. So that's looking great. On a go forward basis, the way we're thinking about margins is we certainly see opportunities for continued cost downs, both on the engineering front as well. We've got a supplier base that is very excited about the Model 3 and it's giving us the ability to leverage that on commercial cost downs, Also continued manufacturing efficiencies. As we mentioned in the shareholder letter, labor hours per car is trending quite positively right now and we're laser focused on continued improvement in that key metric. Next, talk about the cash position for a second. Here's one way to think about it. We ended up with $3,250,000,000 on the balance sheet at the end of the quarter. We started off the year in December 31, 2015, we had $1,200,000,000 We raised $1,700,000,000 in our secondary offering and we collected on our Model 3 reservations. Therefore, we are in a very healthy position from a cash perspective. Couple of different factors here to talk about. 1, we've got $678,000,000 drawn on our asset backed line. This is something that we've talked about in the past. That is definitely backed up by our operations. 2 things there. One, approximately 5,000 cars in transit to customers at quarter end. So we're financing our FGI and we're monetizing our direct lease portfolio. 2nd factor on the cash position that we'd like to highlight is our continued CapEx discipline. As we talked about in Q1, we had $217,000,000 of CapEx in that quarter. In this quarter, dollars 295,000,000 of CapEx. We compare that to averaging nearly $400,000,000 a quarter throughout 2015. We're actually very pleased with these results and we're comfortable that we aren't doing anything to adversely impact our future. On a go forward basis, thinking about CapEx efficiency, you've heard Elon talk a lot about the machine that makes the machine. A big part of that is focusing on volumetric efficiency. In our call on Monday, I talked about how when we started to review a lot of the Model 3 CapEx plans across the company, there were a bunch of new buildings everywhere. And the reaction to that was, wait a second, we've actually got a nice facilities footprint already. And how can we just densify those facilities and not have to invest further in this area. And we're starting to see a lot of that take hold now. 2nd, I think we're making an attempt to crush the conventional wisdom that capacity increases only happen in step change increments and the capital that follows that in step change increments as well. And to put a little bit more color on that, there are many ways to optimize our current operations. The way to think about this is we can just drive greater throughput through the same investments. So that's our cash position. Finally, I'd just like to talk for a minute about expense management. In addition to our efforts on CapEx efficiency, we're also very focused on OpEx discipline. This quarter, SG and A would have been flat quarter over quarter in spite of our continued expansion in service and sales were not for the payroll taxes we paid on our CEO's options exercises. SG and A was up $19,000,000 quarter over quarter on a non GAAP basis, dollars 17,000,000 of that was the payroll expense associated with those option exercises. R and D now does continue to increase as we continue to march towards the Model 3 launch and continue to invest in our future. This is as predicted and as we've signaled in the past. So to wrap it all up, we're very happy with the gross margin expansion in the quarter and we have increased our emphasis on OpEx discipline and CapEx efficiency. We believe our Q2 results reflect that and we're not backing down as we move forward. Great. Thank you, Jason. Latif, let's go to the first question, please. Thank you, sir. Our first question comes from Adam Jonas of Morgan Stanley. Your line is open. Mr. Jonas, please make sure your line is unmuted. If the speakerphone left your handset. Sorry, I was muted. I'm going to ask this question on behalf of Adam Jonas. He had to drop off the call. This is Neil Mehta. This is coming directly from him. You have explained Elon, you have explained the strategic rationale for having SolarCity and Tesla Motors join in a combined company. When we think of SpaceX, is there any conceivable strategic rationale for Tesla Motors and Tesla Energy or Tesla Solar to work closely with the efforts of space exploration. And when we're thinking about this, we're thinking proprietary low earth orbit satellite network to enhance the connected autonomous car ecosystem. And so, yes, just wanted to get your thoughts on that first of all, and I have a follow-up as well. Yes. I don't think there's a strong product rationale to combine SpaceX and Tesla, whereas there is for Tesla and SolarCity. It's really quite tenuous for SpaceX and Tesla. So with it, I mean, there's a little cooperation that happens between the companies, but it's not enough that would justify merging them into one entity. Got it. And can you also give us an update on your Entezlaz proprietary mapping initiatives? No, I think we would prefer to be confidential in that regard. All right. Leticia, what do you think is the question? What we said thus far is just that we're there's need to have much higher definition maps than currently exist anywhere in the world in order to have full autonomy and we're in the process of building those and I think making good progress. Got it. Thank you. Thank you. Our next question comes from the line of Brian Johnson of Barclays. Your line is open. Yes. Thank you for taking my question. A couple of questions very much tied to cash flow and the borrowing capacity. First is just around customer deposits, which were a source of cash in the quarter, but look to be about 288,000,000 dollars As of May, you had $373 ish Model S Model 3 preorders, which would imply about a $375,000,000 inflow or $370,000,000 Could you can maybe walk us between that number and what the actual change in deposits were? And in particular, where did Model 3 preorders end the quarter at? Sure. So in terms of thinking about the cash flow, yes, you're doing your math correctly, but we also release deposits when we deliver cars. So there's an inflow and there is an outflow there. And we had the deposits on the early Model X cars were larger than the later Model X cars as well. So that's one of the impacts there as well. In terms of the Model 3 reservations, the 373,000 number that you referenced is what we talked about when we did our secondary offering. And we're sticking to that number in terms of disclosure. Okay. Second question around the shift from increased on balance sheet captive lending. My quick calculations, if you go up 8% in the back half off of your $50,000 guide, that seems to be at $100,000 about a $350,000,000 cash need. Now, Mila, you're paying actually, it would be less when the cost of goods sold, call $250,000,000 $280,000,000 Are you going to finance that out of your ABL? How quickly can you get another lease partner? And what do the amendments to the credit agreement for SolarCity kind of do to your ability to borrow against that for this captive financing? Sure. So in terms of the ABL is definitely available for some of that, for sure. And then the overall liquidity position gives us confidence that we'll be able to do this. At the same time, we do have a lot many active discussions going on with other lease partners and we're looking at other ways to do this well. And I don't want to talk a lot about SolarCity on this call. That's not what it is, but they've got some pretty advanced capability and thinking through how to walk through this as well. Okay. Thank you. Sure. Great questions. Thank you. Our next question comes from the line of Charlie Anderson of Dougherty and Company. Your question please. Yes. Thanks for taking my questions. My first question is around the sharing of vehicles described in the updated master plan. So if we're moving from 5% to 10% utilization of the vehicle to some larger number, I wonder what you think the ramifications that might be on the number of cars that need to be produced every year? And then maybe the ramifications as it relates to the supercharger if the cars are supercharger network if the cars are always driving around? And then I have a follow-up. Well, I think the demand for autonomous cars will pass that way the production capability. So it's more to bear in mind that the global fleet of vehicles is about $2,500,000,000 roughly, and total new vehicle production every year is only about $100,000,000 the fleet space will be turning over every roughly 20, 25 years. So if we would have to make some truly enormous number of autonomous vehicles for there to be any demand saturation, because it will basically be the only car anyone who wants to buy. Thanks. And then for my second question, I wonder if you could clarify comments made on the last call about inverter technology. You mentioned having some of the best in the world for power electronics. So I wonder if you could just comment, indeed, that's the case that you will be making your own inverter. And if so, what would be the benefit to the overall system with your inverter technology versus what's used today? Yes, I think there's no question Tesla is going to do integrated inverter. It's the logic link to I think we've got the most advanced inverter engineering team in the world. And so it makes sense to just as we do the inverters on vehicles to do it with solar as well and have it in a very tight package at a cents per watt level that is, I think, probably twice as good as anyone else. I think maybe better than that. So that's like the obvious move there. And as part of what I was referring to is kind of an integrated product. I mean, if you're it's very soft in the consumer shoes, you just want it to work. You don't want to know how it works. You don't care about the details. It's just got to work reliably, look good, not take up a ton of space. The buying process has got to be easy. There's a you can check up on it with the app on your phones. There's only one phone app. You want it to be easy. You want it to just work. You want it to be affordable, you want it to look good. So that's what we're going to do. Yes. And I think just to add to that, I mean, when power electronics work well, you really don't even notice them. I mean, no one thinks about buying an inverter for your electric car. Don't even know it has 1. Most people don't even know what an inverter is. What is an inverter? They've never heard of this thing. Yes. Our goal is to basically make them seamless and make it, as Elon said, easy for people to use. They don't have to worry about what an inverter is, how it works. It's just all integrated into one simple system, just like it is in the car. Most people don't know what AC or DC is. If you ask what's DC current or what's direct current, what's alternate current, they would not be able to tell you. A lot of people don't even know the difference between power and energy. That one's in kilowatts and another one's in kilowatt hours. So and they don't need to know. Like there's not a good reason for them to know. Stuff should just work and take care of itself. Deep, next question? Our next question comes from the line of Colin Langan of UBS. Your line is open. Great. Thanks for taking my question. You just give an update of the Model S demand? In the press release, you indicate S and X orders are up about 65% year over year. But if we look at deliveries and production of the S, it hasn't changed that much since Q4 and you're rolling out the lower priced 60 version. So if demand is up so much, why offer a lower price model and why hasn't production really been up that much more? So it's John. I'll give you a little bit of color on the demand, which has been healthy for Model S in the Q2 and into the Q3 as well. As we mentioned in the shareholder letter, we didn't have cars in the European market with the new refresh until the last month of the quarter. But despite that, we had year over year growth in Model S demand. And we also we had some very healthy growth in the markets where we had cars in stores. So we had double digit growth in both North America and China, really healthy growth in both of those markets. That growth has continued into the Q3. But one of the things that one of the reasons we introduced the 60 was we saw more Model 3 demand than we anticipated. We talked about that last quarter. And a number of those reservation holders said to us, we'd love to be in a Tesla today, if you could provide a more affordable version of the Model S. Our battery technology allows us to do that. And so we introduced the 60 and that's generated demand out of a new market segment that is reaching down into that Model 3 reservation holder territory and pretends really good things for future Model 3 demand. But it's opened up a very nice segment for us, for Model S. Yes. I should point out that, like the people are not buying the base models. They're like they buy the $60,000,000 and then they option it up quite a bit. So it ends up having like an average sale price in like over $80,000 And then essentially, all the 60s actually have the 75 capacities, the software limited. There's potential for them to upgrade over time and certainly for the resale value of the car to be enhanced when it's returned to Tesla by unlocking the additional 15 kilowatt hours of battery capability. But I mean, I think in sort of a nutshell, the way to think about Tesla right now is that we're right around 2,000 cars a week and we're trying to balance the mix to be roughly half X and S. There are some variations depending upon regionality. Some possibly will prefer more SUVs, some prefer more sedans. And we do tend to batch up our cars. This is why occasionally you see nonsensical articles about Tesla's demand suddenly rising in some country or suddenly falling. It's got nothing to do with that. It just happened to be when the ship arrived. But a high level overview is just we see demand being fairly strong at an average of 2,000 cars a week, and we are able to maintain production at that level, notwithstanding occasional supplier hiccups. And then hopefully we can grow that a little bit towards the end of the quarter and then a little more in Q4. And our aspiration, this is unvarnished here. This is just what we're aiming to do internally is to do a little better than 2,000 a week in sales and deliveries in Q4 combined S and X. I feel fairly optimistic about achieving that goal. Yes, I think our core business is actually doing quite well right now. Just as a follow-up, any update on the stationary storage? I think your original target for $400,000,000 to $500,000,000 for this year and $500,000,000 for next year. Any just color on how that's trending? Heavily engineering and production constraints. So we're we've got some next generation technology and we've got to school up that production line. So it's going to be heavily concentrated in Q4 and probably even heavily in November December. But it's I think it's going to be really exciting when people see it. So that's why I expect kind of exponential growth from there. I think it's really going to go ballistic. And we have been making quite a few background investments in the markets where we're growing, setting up the teams and setting up to get ready for expanded product installation and distribution, especially in places like Australia and Germany. So some of that takes a bit of time, but it's laying the infrastructure for faster growth. Okay. Thanks very much. All right. Latif, let's go to the next question, please. The next question comes from the line of Colin Rusch of Oppenheimer. Your question, please. As you look forward and without the residual value guarantee, can you talk about what's going to happen with the warranty expense on the vehicles? Sure. So I think the way to think about warranty, let me put this in the shareholder letter, ongoing reserves is roughly consistent with what it's been with what it was last quarter. And the RVG really doesn't have an impact on warranty expense. Really warranty expense is all about reliability. And reliability is something that we are constantly monitoring. And as we see positive things happen or things that go in the other direction with reliability, that's how we think about the ongoing reserves for warranty. So I don't think the Yes. I mean, I can Sorry, go. Go. I can say like, I mean, the quality, I think, has improved quite dramatically, particularly with respect to X. We had a lot of challenges in the production ramp. That's always the most difficult time when you're going from 0 to 1,000 cars a week. It's just you've got to pull this huge baggage train of suppliers along with you and you've got to solve a lot of issues internally. So that production ramp is a lot of hurt. But now we're pretty stable at the 2,000 cars a week level. And the every time we build a car at this point, it's getting better. So this passing week, it's better and better. And so I actually feel I feel pretty good about our warranties actually declining over time as a result of that. Okay, great. And then my follow-up is around Mobileye and the ending of that partnership and how you guys are going to approach that functionality going forward with the driver assist and the autonomous driving push going forward? I think we'll have a more significant announcement on that later. So it's not really earnings call is not the right time for that, except that it will be a Tesla solution, internal solution. Okay, great. Thanks guys. Thank you. Our next question comes from the line of Ryan Brinkman of JPMorgan. Your line is open. Great. Thanks for taking my question, which I guess is really for Elon. As Tesla grows very quickly and becomes increasingly diversified going from just the Model S to recently include the X and now the 3 soon and you've added Tesla Energy to the mix, now Solar City. So I'm really curious how you think about management focus and attention and what you and your team are going to be doing to ensure strong execution and focus as you head into the very important and by your own admission, very challenging launch of the Model 3? Well, I mean, the Model 3 is overwhelmingly our focus. Things feel really quite stable with S and X. We're kind of in the mode of continuous improvement, but no fundamental issues. So it's I feel like the machine that's making ex mess is actually functioning quite well right now. And whereas I definitely burn out a few neurons and a lot of other people did solving the production app earlier this year. I feel we're in a good place at this point. So the focus really is on Model 3, followed by full autonomy, as for the top two priorities. Okay. And then the follow-up is, as you're starting here in 3Q to ramp up the spending on both the Gigafactory and the Model 3 development capacity, etcetera. Are you seeing that one or the other, the Model 3 or the retrofitted free bot is providing more or less potential bottlenecks than the other in terms of getting to that July 1 Model 3 launch? I don't actually know of any there's not one any one standout issue for July 1. Now I didn't want to I just said this on the last earnings call and I know I think it's probably best reiterating because it's and I think it makes sense if you think about it, but it does require a bit of thinking about it. I don't expect us to be at full production on July 1, But I have to drive all suppliers and internal efforts to that date, knowing that some will fall short. And if some fall and those that fall short, the slides that fall short will be cut out of the picture. And if there are teams internally that fail to execute effectively, we will reorganize those teams. But if several 1,000 parts are not driven to a particular date, there is no chance of making any point even past that date. So in an ideal world, this would be a confidential internal July 1 would be a confidential internal target. Given the amount of tension that Tesla receives and the fact that there are several or if you count 2 or 3 and 4 suppliers, there's several 1,000 companies involved. It is obviously impossible to keep that confidential. It's not you can't. So then in order to have a a consistent message internally knowing that that message will also leak externally, that's where the July 1 date comes from. There isn't any other way to do it. And if anybody's got better suggestions, I'd love to hear what they are. So I expect production to occur at some point after July 1. 1st, but I don't know what today would cause us to slip past that date. And if I did, I would take action to address it. Great. Thanks for the color. All right. Thank you. Our next question comes from John Murphy of Bank of America. Your line is open. Good afternoon. Just the first question is, as we think about the 60 kilowatt hour versions of the Yes and X, just curious if you could talk about the profitability of those right now versus the other models or sort of the corporate average as you see it? Yes, sure. So I was going to say, because people are optioning up to 60, it actually ends up being decent. I mean, it's not I mean, maybe it's sort of like 15% to 20% gross margin, whereas, say, something like if somebody orders a performance dual motor, that might actually be more like a 30%, 35% gross margin. But there's just a small number of people that want high performance cars and are willing to pay triple digits. So but it also remains to be seen how many who order the 60 then choose to do the upgrade to the 75 kilowatt hour, right? So there's going to be some number, it's too early to tell, people who buy it at 60 realize they want the extra range and then they can just order it kind of like an in app purchase on the car screen and unlock it. I suspect we'll see a pretty decent number of people do that, but we don't it's still very early. So it's hard to say what number that would be. And if they do, do that, then it would push gross margins up into the 20s, like in the mid-20s or something. Okay. That's helpful. And then just Jason, maybe just two quick sort of housekeeping questions. CapEx at $2,250,000,000 you're running a run rate that's less than half that through the first half of the year. So just curious how realistic that number is for the full year because you guys have committed to it in the shareholder letter again. Then also the auto gross margin going up 200 to 300 basis points off of what base. I'm just it's not clear what base that's coming off. I'm trying to understand the exit gross margin for the year you're expecting? Yes, sure. No problem. So I want to add just a little bit of color on to the 60 gross margin numbers too. We're aspirational on those, but the way to think about this is very important. Those cars are gross margin positive and they're producing cash. So if you think about from an overall operating leverage perspective, even if the gross margin profile and those is less than our other variance, it's still producing contribution margin to pay for the fixed cost of the business. So it's the right economic thing to do. And even more importantly, it's right for the customer to continue to broaden the market that way. On your 2 housekeeping questions, good questions. On the CapEx front, as you heard in my opening comments, we are deadly focused on CapEx efficiency. So I think we can beat the 2.25 number, but we didn't see any need to update that guidance at this time. And then your question about gross margin on a basis, I was just looking at the quarter over quarter. In Q1, automotive gross margin excluding ZEV credits was 20.1% and we expanded that to 21.9% in Q2. And it's expansion on both the X and the S variance. But the 2 points to 3 points of expansion in Q3 and Q4 is off the 21.9% base in Q2? I see you're asking about the forward looking. Yes, so we expect where we're at today, we'll see another 2 to 3 points of expansion between now and the end of the year. Great. Thank you very much. Yes, sure. No problem. Thank you. Our next question comes from the line of Joseph Spak of RBC Capital Markets. Your line is open. Thanks. Good afternoon. Jason, just first question to follow-up on that last one. So even 2, 3 points on gross margin sequentially, that seems below the prior guidance, which I think called for 30% to exit the year on the Model S and 25% on the Model X. So is it related to the updated mixed view on the 60? Was there something else going on or what's the source of the change? Yes, I know a couple of things there. And our previous guidance had been approaching 25% on accident approaching 30% on air. So I think we're maybe a quarter or 2 off on that, but you're pointing to the right things. One is just the mix shift that we're seeing with more Xs being produced And those margins are healthy and heading in the right direction, but they are obviously less than ash. And now that we're halfway through the year or 2, we've talked a lot about just the production issues we've had overall. And those certainly had an impact on the first half of the year and it's just difficult to make up for all of that, in the next 6 months. And then the impact you talked about the 60s, the 60s may have somewhat of a impact on gross margin. Pretty small though. Pretty small. Yes, it's pretty small. I mean, I'm cautiously optimistic that we'll actually meet those numbers by the end of the year. Maybe not for Q4 as a whole, but exiting Q4, I my best guess is we're just under 30 for us and around 25 for X, by the end of this year. That's what it looks like to me. Okay. And then just as a philosophical question, I mean, as you transition to an in house autopilot or autonomous solution, would you consider in order to help build public support and confidence about releasing regular ports similar to what Google does on what the technology is doing and open the data? Well, unfortunately and fortunately, I mean, Tesla can't sneeze without there being a national headline. So I don't think you have to worry too much about whether we'll report it because the media will and then inflate it in size by 1,000. I mean like last year, there were 35,000 automotive deaths in the U. S. How many did you read about? Right. I guess maybe instead of public support, what about, regulator support? I mean, mean, what are the views on sharing the data in that respect? I mean, actually, with regulators, we share the data well in advance as soon as we know it. I mean, we shared the data regarding, say, the Florida fatality, like a month, so many weeks before NHTSA actually opened an investigation. In fact, I mean, we're not totally clear on why they opened an investigation because they actually had all the information before they made a formal investigation. Like so, it was not it was a little puzzling as to why they there was no we would have already given them all the information. So there isn't really anything more to learn. Thanks. Our next question comes from James Albertson of Consumer Edge Research. Great. Thank you. Good afternoon. Thanks for taking the questions. Real quick, a housekeeping item. I've heard and we saw obviously in the Q2, there was some lumpiness in the production and you ended up I think with 5,100 or so vehicles in transit at the end of the quarter. But I've heard Elon and Jason say stable or stabilization here few times on the call. Just wanted to get a sense for how we should be thinking about the back half deliveries and back half expenses. Should it be relatively linear from here as we work toward, for example, your 30% year over year expense guidance? Thanks. Yes, sure. Yes. So I'll just say a few words and Jason and address it. I mean, basically, we were in production hell for the 1st 6 months of this year. I mean, man, it was hell. And then we just managed to sort of climb out of hell in like basically partway through June. And now we're the production line is humming and our supply is mostly have those shut together. There's a few that don't. 1, I'm going to be visiting on Saturday personally to figure out what the hell is going on there. But we'll solve it. But I mean just like the thing that's crazy hard about cars is there's several 1,000 unique items and you move as fast as the slowest item in the whole car. So yes, but that said, like production is like it feels like we're like I'm not losing sleep at night literally because of production issues right now. 2,000 feels like a good number that was like slow, steady increase in that number. And then continued cost efficiencies, which help with gross margin, some features that are going to come out that will also help on the revenue side. And so I feel like actually really good about S and X right now. But I'll get some a whole lot of mental scar tissue from for 6 months this year. Jason? Yes. I think you covered it well. In terms of the modeling question, yes, I think it's kind of extrapolating from where we're at now. We're stable. We'll continue to get better on production throughout the course of the year. We've got a couple of more holiday weeks in Q4. I want to think about that when you're doing your modeling. But yes, I think you uncovered it well. Hey, Greg. I think I was thinking I was thinking I was thinking Sorry, just almost every week, we see an improvement in labor hours per car, which is great from a cost standpoint. Also, the Tesla production team has been working super hard and we don't want to burn people out. So it's good to see the hours per car come down almost every week as a sign of improved efficiency. Very good. I appreciate the additional color. If I may just sneak in a quick follow-up on the autonomy topic. Elon, I mean, as we think about the stages of autonomy, I believe Nitza's sort of outlined sort of 5 stages or 0 to 5. And we've seen some competitors of yours outline with some detail 2017 to 2020 to 2022 type targets. How should we think about sort of your target or can you help us sort of dimension a little bit more your targets in the path to level, I guess, 5? Let's assume for the moment that nothing's changed given the accident in May. And if it has incrementally, that'd be helpful. But just wanted to understand in more detail, I think how you plan to get to fully autonomous? Thanks. Well, again, major product announcements are not it's not you want to do those on an earnings call, obviously. So, I would say is that full autonomy is going to come a hell of a faster than anyone thinks it will. And I think what we've got under development is going to blow people's minds. Thank you. Thank you for taking the questions. I appreciate it. Thank you. Our next question comes from the line of Rod Lache of Deutsche Bank. Your line is open. Thanks. I had a couple of things. One is following up on Tesla Energy. Can you talk a little bit about the business pipeline, what the mix of customers you're selling the product to? And is there a significant contingent of solar? And I wasn't clear on there was an earlier question whether the business is still tracking to around $500,000,000 this year. Could you just elaborate on that business line? Yes. It's heavily dependent on the production ramp in the last few months of the year. So there's definitely nothing even remotely close to demand constraints on the Tesla Energy side. It's entirely getting the engineering done, getting it validated, getting your UL certification, scaling up all elements of the supply chain and being able to produce in volume. So the reason it's tricky to predict is because the volume ramp looks like an exponential. And so if you move the dates around even a little bit, it can quite significantly change what occurs in a quarter just because the production ramp is an exponential and shifts out a couple of weeks. It can make the quarter look low, but actually it's in vertical climb mode. So the following quarter will look amazing. So what I'm highly confident of is that the next generation of stationary storage is head and shoulders above anything else that I've even heard announced as future plans from other companies. Okay. So we just got to build those down things. Yes. The customers that you're anticipating, are there significant kind of renewables in there? Is it commercial, residential? What are you sort of swing? Yes. All of the above. Okay. Yes. Yes. We just got to scale up production. And production is a hard thing. It's real hard, particularly when it's new technology. If it's some standard technologies in there for a long time, it's fine. This cutting edge technology, it's really hard to scale up production because you got to design the machine that makes the machine, not just the machine itself. And but the results can be amazing. This is like I said, it's going to be head and shoulders above anything else that it's better than anything I've heard anyone even announce that they will do in the future and we will do it in the present. Thanks. And on the topic of production, you've said some really interesting things about step function changes in automotive manufacturing and improving the volumetric efficiency. Typically, as I'm sure you know, the bottlenecks in auto manufacturing, they're really not in the automated functions like the body shop, they're in things like final trim and assembly that are more labor intensive when you've got people crawling in and out of vehicles. Do you see a significant step function improvement there like inside out manufacturing or something like that? And is that something that we're going to see on the Model 3? The Model 3, I mean, the internal name for the designing machine that makes the machine is, the we call it the alien dreadnought. At the point at which the factory looks like an alien dreadnought, then you know you've won. It's like, what the hell is that? So we've got alien dreadnought version 0.5 is what we model 3. It will take us another year to get to version 1 and probably a major version every 2 years thereafter. By Version 3, it won't look like anything else. It might look like a giant chip pick and place machine or super high speed bottling or canning plant. And you really can't have people in the production line itself, otherwise you automatically drop to people's speed. There's still a lot of people at the factory, but what they're doing is maintaining the machines, upgrading them, dealing with anomalies. But there's but in the production process itself, there essentially would be no people. With version 1, not version 0.5. So but I don't want people to think, oh, Tesla is going to have a factory, no people. It's going to be a huge number of people, but they will be maintaining the machines and upgrading the machines and dealing with anomalies. And the output per person will be extraordinarily high. Sounds like a lot of innovation there. One last just housekeeping thing for Elon or Jason. You had previously talked about the objective of profitability in the Q4, but I know a lot is changing with the mix and also with the direct leasing. So is that also something that we should think is being pushed out of quarter? Well, if you exclude Model 3 CapEx ramp, then well, in fact, it really for Q3 and for Q4, Tesla would be profitable excluding the Model 3 CapEx ramp. Our next question comes from Pat Archambault of Goldman Sachs. Your line is open. Terrific. Thanks for taking my questions. I guess just an accounting question maybe for Jason. With the residual value guarantee going away, what happens to the accounting for revenues? Do you kind of get to something more close to what we see in other OEM Financials and maybe just have the portion that's directly be accounted for as leases? And what would be the timing of changes assuming they do happen? Yes. No, absolutely. And the answer, the timing of changes is right away. So a car that is sold without an RV so with an RVG, that drops us into lease accounting. And what we've done historically and we'll continue to do for RVGs is, we recognize the full revenue on a non GAAP basis. What changes when there's not an RVG in the equation is you get full revenue recognition on a GAAP basis as well as a non GAAP basis. So, the good things happen on the accounting side. Okay. And then this is something that I mean within the next quarter or something you'll already see a significant reduction in that adjustment obviously? You'll see that. But the other thing I want to point you to is what we've already talked about in probably an uptake in direct leasing. When we have used a partner in the past for leasing, that gives us non GAAP revenue recognition on that. Our non GAAP revenue recognition is very simple, we follow the cash. If somebody pays us cash for a car, we recognize it in non GAAP revenue. When we do direct leasing, then that drops us into pure lease accounting. So there it will be that way on a GAAP and a non GAAP basis. And I mean is the 8% to 15% is that just kind of a temporary measure while you're who is setting up these new partner relationships? Or do you actually expect to stay at 15% for some time? So 15% is what we're talking about for Q3. And I think I mentioned earlier, we've got a bunch of active conversations with new partners. There's another factor too, which is I think important to point out. We've introduced some pretty compelling loan programs, particularly in North America, in the last 90 days and we're starting to see some shift from leasing towards loans. And to bring the answer to your question full circle, loan is full GAAP and full non GAAP revenue recognition. Got it. That's helpful. And I think it will be helpful for just the users of financial statements as well. The ZEV credits, you mentioned that they weren't material. I feel like it's been written that there was kind of a glut of supply on those. And I don't know, is that just the lumpiness of it or is that sort of a revenue Well, yes. Actually, if I could say something, I really want to emphasize this quite strongly and I hope it does get picked up in the media, is that the California Air Resources Board is being incredibly weak in its application of ZEV credits. The standards are pathetically low. They need to be increased. There's massive lobbying by the big car companies to prevent car from increasing the deserved credit mandate, which they absolutely damn well should. It's a crying shame that they haven't. And as a result, you can barely sell deserved credit for pennies on the dollar. Got it. Okay. So Carbs should damn well be ashamed of themselves. All right. No, well, I think that answers my question pretty directly then. The last one, just one housekeeping one. Any chance and sorry if I missed it, ex production for the quarter, are you able to share that? Okay. I think that was a no, but fair enough. Those were my questions. I'll let somebody else get in. Thank you. Thank you. Our next question comes from the line of Brad Erickson of Pacific Crest Securities. Your line is open. Hi, thanks for taking the question. Just had a quick follow-up, I guess, on something that's been asked a couple of times, take another run at it. I guess, given that you're obviously no longer working with this key supplier around full autonomy, what are the major hurdles that you see for Tesla here to overcome to get to full autonomy? It's just a case of software development, lots more miles driven and basically getting the right people in place. Any color on sort of some of the key challenges you're facing and where you're particularly focused for delivering full autonomy at some point? Thanks. Well, full autonomy is really a software limitation. The hardware is I mean, the hardware is just to create full autonomy. So it's really about developing advanced narrow AI for the car to operate on. I want to emphasize narrow AI, it's like not going to take over the world, but it needs to be really good at driving a car. So increasingly sophisticated neural nets that can operate in reasonably sized computers in the car. That's our focus. I'm very optimistic about this. Like I said, I think it's really going to it blows me away, the progress we're making. So I think if I'm this close to it and it's blowing me away, it's really going to pull other people away when they see it for the first time. All right, Latif, I guess we'll go to the next question. Our next question comes from the line of Ben Kallo of Robert W. Baird. Your line is open. Siccarlo, your line is open. Please make sure it is unmuted. All right. I think we'll just take a few more questions. So let's maybe do this and 1 or 2 more and pull it today. Okay. Our next question comes from the line of Emmanuel Rosner of CLSA. Your line is open. Hi, everybody. I wanted to ask just a couple of questions on the update to the master plan. The first one is on the sharing piece. So definitely very exciting goal. At the same time, so I feel like a lot of automakers as well as municipalities are working sort of back on their version of sort of ride sharing through autonomous, I guess, driverless cars. And to the extent that a lot of sort of what buyers are looking at in Tesla now is the driving experience and that it really doesn't matter as much when you're being driven. What do you view as sort of your future competitive advantage in a sort of like ride sharing type of environment? I think the quality of the ride is always going to matter. And yes, nobody wants to drive if you're sitting in stop and go traffic, that's boring. But if you're driving on a beautiful country road or along the seaside, then I think it feels wonderful to drive and you want to do that. So it's I don't think cars are going to just become some boring utility. Got it. And I guess on the piece about expanding the product line up to other major segments, What do you view as your target timing for that? I know there was a mention of some of these cars being sort of like, I guess, at least sort of like available sort of like to be unveiled next year. So does that mean that we're looking at sort of like the following year or is that into the next decade? And what sort of, I guess, capital needs that we're looking at for that? I think we want to postpone anything that's a heavy capital impact until after the Model 3 production is ramped. We don't want to stack Model 3 CapEx on top of other program CapEx. So but there's a lot we can do because the development of a vehicle, there's a long sort of tail at the beginning of a development of a vehicle, which involves a lot of time, but doesn't involve a lot of cost. And suddenly when you begin tooling up for production that the cost really ramps dramatically. So there's a lot we can do before that before we have to dive into ramp CapEx. And we won't do that for any products until after Model 3s and high production. Yes, but I think there's going to be some pretty exciting unveils for the Tesla Semi and the Tesla Mini Bus or bus. We haven't actually don't actually have a name for it yet. That's just off of the Model X platform. So it doesn't involve a lot of CapEx actually. But we expect to probably unveil those, I think, for the middle of next year, maybe in the next 6 to 9 months type of thing. And then have a better a more fleshed out plan for when those would enter production. But it's not they would enter production within like low single digit years, not like I mean, I consider like anything past 5 years is infinity. All right. That's very helpful. Yes. I mean, also to be clear, like the priority vehicle development after the Model 3 would be the Model Y, I guess, the compact SUV because that's also a car that where we expect to see demand in the 500,000 to a 1,000,000 unit per year level. So it's the obvious priority after the Model 3. Great. Thanks. All right. With Tif, I think there's one more. Let's have that one and then wrap it up. Yes, sir. Final question comes from the line of Tyler Frank of Robert Baird. Your question please. Hi, guys. Thanks for taking the question. I guess, two short questions. One, can you discuss when you expect to be profitable on a non GAAP basis? And then number 2, you had mentioned on the last call that the Gigafactory may actually have the ability to produce about 3 times of your original estimate. Will that entail significant CapEx in the future or are you preparing that foundation right now to reach over 100 and 62 watt hours? Thank you. Yes, sure. On the profitability question, just reiterate what Elon said earlier. If we can execute on our production and our delivery goals in the second half of the year, we've got a great chance to be non GAAP profitable. Yes, including Model 3 CapEx. The real question on profitability is, where do we set the dial on growth? And obviously, if you set the dial on growth to be super high, then you face dilution because of that increased capital. If you set it too low, there's less dilution, but then you grow slower. So you want to set it at kind of the right level where you're the right mix of dilution and growth. I mean, as it is, it's just important to bear in mind, like as a manufacturing company, our percentage growth, I think it's unprecedented in the modern It's really nutty. I mean, in 2010, we were making 600 cars a year and Lotus was doing the chassis, body and chassis. And then 5 years later, we were making 50,000. Dollars And it was much more sophisticated, call it Model X, and we were doing the whole car without any partner. So when you have like insane percentage growth like that in a manufacturing company, it's not like you're shipping copies of software here. It's a real tricky strategic decision as to where do you set things from a dilution versus growth standpoint. So I mean the right way to look at the product line the companies look at say the product lines and value them as sort of doing it do an NPV of the product lines. And then for any given product line, you can say, okay, this is what that is likely to be worth, the ASV X, the 3. And then you can parse it out relative to the CapEx on new vehicles. And to the degree that the past predicts the future, then you can pretty much count on like the new vehicle program also being incredibly valuable and something where it would be mad not to spend the money to do it. But it can be when all of that's kind of lumped together, it can be confusing. And then I think Tesla is a money losing company. Like, well, not really not if you're growing at like 100% a year or in the case of next year, I mean, at unit volume, we'll probably exit next year's at unit volume, that's 200% or 300% what our current volume is, maybe 400%. So it's just real important to parse things out and to understand what the real health of the business is. Right now, I mean, in a nutshell, we're like we're shipping $10,000,000,000 a year of product on an annualized basis at somewhere around 23% to 25% gross margin. Right. And just quickly to your Gigafactory question, this is JB. A lot of the improvements that we've made are actually increasing the density of the Gigafactory and the density of how much equipment and the existing footprint. So in that case, there's a lot of investments we've already made preparing the site, some of the infrastructure for the site that we would get to continue leveraging as we grow capacity even higher than our original plan. There would be some other investments, of course, in equipment and things like that. There would be incremental tied to that much higher volume, but those would also be enabling vehicle volumes and energy product volumes way beyond what we'd initially predicted. All right guys, we're at the hour mark. Shall we call it a day? Yes, let's do it. All right. Thanks a lot everybody for joining us and we look forward to talking to you next quarter. Bye bye. Thanks, everyone. Bye. That does conclude your program. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.