Good day, ladies and gentlemen, and thank you for your patience. You've joined the Tesla Motors' Second Quarter 2016 Financial Results Q&A. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, at which point you will need to press star then one on your touchtone telephone to queue up for a question. As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Mr. Jeff Evanson. Sir, you may begin.
Thank you, Latif. Good afternoon, everyone. Welcome to Tesla's Second Quarter 2016 Q&A webcast. I'm joined today by Elon Musk, JB Straubel, Jason Wheeler, and Jon McNeill. Our Q2 results are in the updated in the update letter at the same link as this webcast. 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 gonna kick it off today with Jason making some quick comments, followed by Q&A. Please press star one now to get in the queue. During the Q&A, please try and limit yourselves to one question, one follow-up. Let's keep it tight because we've already talked once this week.
Jason, over to you.
Sure. Thanks, Jeff, and thanks everybody for joining. I just wanna 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 wanna walk you through those. Automotive gross margin expanded this quarter. Automotive gross margin, excluding ZEV credits, grew from 20.1% in Q1 to 21.2% in Q2. A couple of different factors here. 1 was the Model S refresh. There was a modest price increase on the refresh, but more importantly, we had baked a number of cost downs into that vehicle before the launch. The second big factor is obviously X 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, 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, also on the commercial 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. Talk about the cash position for a second. Here's one way to think about it.
We ended up with $3.25 billion on the balance sheet at the end of the quarter. We started off the year on December 31st, 2015, we had $1.2 billion. We raised $1.7 billion in our secondary offering, and we collected on our Model 3 reservations. Therefore, we are in a very healthy position from a cash perspective. A couple different factors here to talk about. One, we've got $678 million 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. Two things there. One, you know, approximately 5,000 cars in transit to customers at quarter end, so we're financing our FGI, and we are monetizing our direct lease portfolio.
Second 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 million of CapEx in that quarter. In this quarter, $295 million of CapEx. We compare that to averaging nearly $400 million 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.
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? We're starting to see a lot of that take hold now. Second, 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. 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 through the same investments. 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&A would've been flat quarter-over-quarter in spite of our continued expansion in service and sales, were it not for the payroll taxes we paid on our CEO's options exercises. SG&A was up $19 million quarter-over-quarter on a non-GAAP basis. $17 million of that was the payroll expense associated with those option exercises. R&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. 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. All right, 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 isn't muted. Lift the speakerphone off your handset.
Oh, sorry, I was muted. I'm gonna 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. Elon, you have explained the strategic rationale for having SolarCity and Tesla Motors join in a combined company. When you 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? When we're thinking about this, we're thinking proprietary low Earth orbit satellite network to enhance the connected autonomous car ecosystem. Yeah, just wanna get your thoughts on that, first of all, and I have a follow-up as well.
Yeah, 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 be really quite tenuous for SpaceX and Tesla. With it, I mean, there's a little cooperation that happens between the companies, but it's not enough that we're to justify merging them into one entity.
Got it. Can you also give us an update on your and Tesla's proprietary mapping initiatives?
no, I think we would, we prefer it to be confidential in that regard.
All right. Let's see if we can go to the next question.
At least, what we've said thus far is that there's a need to have much higher definition maps than currently exist anywhere in the world in order to have full autonomy. 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. No, thank you for taking my question. A couple of questions very much tied to cash flow and the borrowing capacity. You know, first is just around customer deposits, which were a source of cash in the quarter, but look to be about $288 million. As of May, you had 373-ish Model S, Model 3 pre-orders, which would imply about a $375 million inflow or $370. Could you maybe walk us between that number and what the actual change in deposits were? In particular, where did Model 3 pre-orders end the quarter at?
Sure. In terms of thinking about the cash flow, yeah, you're doing your math correctly, but we also release deposits when we deliver cars. There's an inflow, and there is an outflow there. 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. 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 calculation is if you go up 8% in the back half off of your 50K guide, that seems to be at a 100K, about a $350 million cash need. actually, it would be less with the cost of goods sold call, $250-$280. Are you gonna finance that out of your ABL? How quickly can you get another lease partner? You know, what do the amendments to the credit agreement for SolarCity kinda do to your ability to borrow against that for this captive financing?
Sure. In terms of the ABL is definitely available for some of that, for sure. The overall liquidity position gives us confidence that we'll be able to do this. At the same time, we do have many active discussions going on with other lease partners, and we're looking at other ways to do this as well. I don't wanna talk a lot about SolarCity on this call. That's not what it is. They've got some pretty advanced capability in 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 & Company. Your question please.
Yeah, thanks for taking my questions. My first question's around the sharing of vehicles described in the updated master plan. If we're moving from 5% to 10% utilization of the vehicle to some larger number, I wonder what you think the ramifications of that might be on the number of cars that need to be produced every year. Maybe the ramifications as it relates to the Supercharger network if the cars are always driving around. I have a follow-up.
Well, I think the demand for autonomous cars will pass that way the production capability. I think it's worth bearing in mind that the global fleet of vehicles is about $2.5 billion, roughly. Total new vehicle production every year is only about $100 million. The fleet's basically turning over every roughly 20-25 years. If we would have to make some truly enormous number of autonomous vehicles for there to be any demand saturation, because it'll basically be the only car anyone who wants to buy.
Thanks. 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. I wonder if you could just comment, indeed, it's the case that you will be making your own inverter, and if so, you know, what would be the benefit to the overall system with your inverter technology versus what's used today?
Yeah, I think there's no question, Tesla's gonna do integrated inverter. It's the logical thing to do. I think we've got the most advanced inverter engineering team in the world. It, it makes sense to, just as we do the inverters on the vehicles, to do it with the solar as well. Have it in a very tight package, at a, at a cents per watt level that is, I think, probably quite twice as good as anyone else. I think maybe better than that. That's like the obvious move there.
As part of what I was referring to as kind of an integrated product, you know, I mean, if you're yourself in the consumer's shoes, you just want it to work. You don't wanna know how it works. You don't care about the details. It's just gotta work reliably, look good, not take up a ton of space. The buying process has gotta be easy. You know, it's you can check up on it with your with the app on your phone, so 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. That's what we're gonna do.
Yeah. I think just to add to that, I mean, when power electronics work well, you really don't even notice them.
Exactly
buying the inverter for your electric car. You don't even know it has one.
Most people don't even know what an inverter is. They've never heard of this thing.
Yeah.
Um.
I mean, our goal is.
Most people don't always Yeah, yeah.
Yeah, our goal is to.
There you go.
make them, you know, seamless and make it, you know, as Elon said, easy for people to use, so 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.
Great. Thanks so much.
Yeah, most people don't know what most people don't even know what AC or DC is. If you ask, so what's DC current or what, you know, what's direct current, what's alternating current, they would not be able to tell you. A lot of people don't even know the difference between power and energy. You know, that one's in kilowatts, another one in kilowatt hours. 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.
Latif, next question.
Our next question comes from the line of Colin Langan of UBS. Your line is open.
Oh, great. Thanks. Take my question. Can 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. 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. If demand is up so much, why offer a lower priced model, and why hasn't production really been, you know, up that much more?
It's Jon. I'll give you a little bit of color on the demand, which has been healthy for Model S in the second quarter and into the third quarter 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. 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. 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 third quarter.
One of the things One of the reasons we introduced the 60 was we saw more Model 3 demand than we anticipated. We talked about that last quarter. 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. We introduced the 60, and that is that's generated demand out of a new market segment that is it is reaching down into that Model 3 reservation holder territory and portends really good things for future Model 3 demand. It's opened up a very nice segment for us for Model S.
Yeah, I should point out that, People are not buying the base model. They're like, they buy the 60, then they option it up quite a bit. It ends up having like an average sale price in like over $80,000. Essentially, actually, all the 60s actually have the 75 capacity. It's just software limited. There's potential for them to upgrade over time, 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.
I mean, I think in sort of a nutshell, the way to think about, you know, Tesla right now is that, you know, we're right around 2,000 cars a week, and we're trying to balance the mix to be around roughly, you know, half X and S. There are some, there are some variations depending upon regionality. Some parts of the world prefer more SUVs, some prefer more sedans. 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 happens to be when the ship arrived.
A high-level overview is just, we see demand being, you know, fairly strong at an average of 2,000 cars a week, and we're able to maintain production at that level, notwithstanding occasional supplier hiccups. Hopefully we can grow that a little bit towards the end of the quarter and then a little more in Q4. Our aspiration, you know, this is the 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 Model S and Model X. Yeah, I feel fairly optimistic about achieving that goal. Yeah, I think our core business is actually doing quite well just right now.
Just as a follow-up, any update on the stationary storage? I think your original targets were $400 million-$500 million for this year and $3 billion-$5 billion for next year. Any just color on how that's trending?
Heavily engineering and production constraints. We've got some next-generation technology, and we've got to spool up that production line. It's gonna be heavily concentrated in Q4 and probably even heavily in November and December. But I think it's gonna be really exciting when people see it. That's why I expect kind of exponential growth from there. I think it's really gonna go ballistic.
Yeah.
Right. Next question.
We have been making quite a few, you know, background investments, in the markets where we're growing, setting up the teams and setting up to get ready for, you know, expanded product, you know, installation and distribution, especially in places like Australia and Germany. 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. I think the way to think about warranty, and we put this in the shareholder letter, our ongoing reserves is roughly consistent with what it was last quarter. The RVG really doesn't have an impact on warranty expense. Really, warranty expense is all about reliability is something that we are constantly monitoring. As we see positive things happen or things that go in the other direction with reliability, that's how we then think about the ongoing reserves for warranty.
Okay. Yeah.
Cont,
Yeah. I mean, I can Sorry, go ahead. I can say, like, I mean, the quality I think has improved quite dramatically, particularly with respect to Model X. We had a lot of challenges in the production ramp. That's always the most difficult time, you know, when you're going from 0 - 1,000 cars a week. 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. That production ramp is a lot of hurt. Now we're, you know, we're pretty stable at the 2,000 cars a week level. Every time we build a car at this point, it's getting better.
With each passing week, it's better and better. I actually feel pretty good about our warranty reserve actually declining over time as a result of that.
Okay, great. 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.
I think we'll have a more significant announcement on that later. The earnings call is not the right time for that, except that it will be in, you know, 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 J.P. Morgan. Your line is open.
Great. Thanks for taking my question, which I guess is really for Elon. You know, 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 SolarCity. 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. You know, things feel really quite stable with the S and X. We're kind of in the mode of continuous improvement, but no fundamental issues. I feel like the machine that's making Model X is actually functioning quite well right now. You know, whereas I definitely burnt out a few neurons and a lot of other people did solving the production ramp earlier this year. I feel we're in a good place at this point. The focus really is on Model 3, followed by full autonomy as for the top two priorities.
Okay. The follow-up is, as you're starting here in Q3 to ramp up the spending, on both the Gigafactory and the Model 3, you know, development capacity, et cetera, you know, are you seeing that one or the other, the Model 3 or the retrofitted Fremont 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 any one standout issue for July 1. I did wanna, you know, I did say this on the last earnings call, I know I think it probably bears reiterating 'cause it's, I mean, 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. Those that fall short, the suppliers that fall short will be cut out of the picture.
And if, and if people, if there are teams internally that fail to execute effectively, we will reorganize those teams. But if several thousand parts are not driven to a particular date, there is no chance of making any point even past that date. Now, in an ideal world, July 1 would be a confidential internal target. Given the amount of attention that Tesla receives and the fact that there are several, well, if you count two or three, you know, three and four suppliers, there's several thousand companies involved. It is obviously impossible to keep that confidential. It's just not. You can't.
In order to have 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. I expect production to occur some point after July 1st, and I don't, but I don't know what today would cause us to slip past that date. If I did, I would take action to address it.
Great. Thanks for the color.
All right. Thanks.
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 S and X, I'm 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?
Yeah, sure.
Well.
Go ahead, Elon.
Yeah. Because people are optioning up to 60, it actually ends up being decent. I mean, it's not, I mean, you know, maybe it's sort of like 15%-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. There's just a small number of people that want high performance cars and are willing to pay triple digits. You know, or six digits, I should say. It also remains to be seen how many who order the 60 then choose to do the upgrade to the 75 kW hour rate.
There's going to be some number, which is too early to tell, of 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, you know, a pretty decent number of people do that. It's still very early, so it's hard to say what number that would be. If they do that, then it would push gross margins up into the 20%s, like in the mid-20%s or something.
Okay. That's helpful. Jason, maybe just two quick sort of housekeeping questions. CapEx at $2.25 billion, you're running a run rate that's less than half that through the first half of the year. Just curious how realistic that number is for the full year because you guys have committed to it in the shareholder letter again. Also the Automotive gross margin going up 200-300 basis points off of what base? It's not clear what base that's coming off of. Just trying to understand the exit gross margin for the year you're expecting.
Yeah, sure. No problem. When, I'm gonna add just a little bit of color onto the 60 gross margin numbers too. You know, 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. If you think about from an overall operating leverage perspective, even if the gross margin profile on those is less than our other variants, it's still producing contribution margin to pay for the fixed cost of the business. It's the right economic thing to do. Even more importantly, it's right for the customer to continue to broaden the market that way. On your two housekeeping questions, good questions.
On the CapEx front, you know, as you heard in my opening comments, we are, you know, deadly focused on CapEx efficiency. I think we can beat the $2.25 number, but we didn't see any need to update that guidance at this time. 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. It's expansion on both the Model X and the Model S variants.
The two to three points of expansion in Q3 and Q4 is off the 21.9 base in second quarter?
I see you're asking about the forward, the forward-looking.
Yeah.
yeah, we expect where we're at today, we'll see another two to three points of expansion between now and the end of the year.
Great. Thank you very much.
Yep, 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. You know, even two to three points on gross margin sequentially, that seems, you know, below the prior guidance, which I think called for, you know, 30% to exit the year on the Model S and you know, 25 on the Model X. 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?
Yeah, I know a couple things there. You know, our previous guidance had been approaching 25% on X and approaching 30% on S. I think we're maybe a quarter or two off on that. You're pointing to the right things. One is just the mix shift that we're seeing with more X's being produced. Those margins are healthy and headed in the right direction, but they are obviously less than S. Now that we're halfway through the year too, we've talked a lot about just the production issues we've had overall. 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 six months.
The impact, you talk about the 60s. The 60s may have somewhat of a impact on gross margin.
It's pretty small, though.
Pretty small. Yep.
Yeah, 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, executing Q4, I, my best guess is we're, you know, just under 30 for S and around 25 for X by, you know, by the end of this year. That's what it looks like to me.
Okay. Then, Elon, just as a philosophical question, I mean, you know, as you transition, you know, to in-house, Autopilot or autonomous solution, would you consider in order to help build public support and confidence about, you know, releasing regular reports similar to what Google does on what the technology is doing and open the data?
Well, you know, 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. You know what 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, you know, what are the views on sharing the data in that respect?
I mean, actually, with the 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, I don't know, certainly 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 a little puzzling as to why they, you know, there was no, we had already given them all the information, so there wasn't really anything more to learn.
Okay. Thanks.
Thank you. Our next question comes from James Albertine of Consumer Edge Research. Your line is open.
Great. Thank you. Good afternoon. Thanks for taking the questions. Real quick, a housekeeping item. You know, I've heard, and we saw obviously in the second quarter, 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. I've heard Elon or Jason say stable or stabilization here a 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, you know, for example, your 30% year-over-year expense guidance? Thanks.
Yeah, sure.
Yeah, I mean, I'll just say a few words, and Jason can add the rest of it. I mean, basically, we were in production hell for the first six months of this year. I mean, man, it was hell. Then we just managed to sort of climb out of hell, and like basically fought way through June. Now we're, you know, the production line is humming. Our suppliers mostly have their shit together. There's a few that don't. One I'm gonna be visiting on Saturday, personally to figure out what the hell's going on there. We'll solve it.
I mean, just like the thing that's crazy hard about cars is that there's several thousand unique items, and you move as fast as the slowest, the slowest item in the whole car. Yeah, but that said, like production is, like it feels like we're I'm like, I'm not losing sleep at night, literally, because of production issues right now. 2,000 feels like a good number with like, you know, a steady increase in that number. Then continued cost efficiencies, which help with the gross margin. Some features that are going to come out that will also help on the, on the revenue side. And so I feel like actually really good about Model S and Model X right now.
I'll get a whole lot of mental scar tissue from the first six months this year. Jason, yeah.
Yeah, I think Elon, I think you covered it well. In terms of the modeling question, yeah, 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 more holiday weeks in Q4. Might wanna think about that when you're doing your modeling. But yeah, I think Elon covered it well.
Okay. There's steady improvement in you know, almost every week we see an improvement in labor hours per car, which is great from a cost standpoint. Also, you know, 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 NHTSA's sort of outlined sort of five stages or zero to five.
You know, we've seen some competitors of yours, you know, outline with some detail, you know, 2017 to 2020 to 2022, you know, 2022 type targets. How should we think about sort of your target? Can you help us sort of dimension your targets in the path to level, I guess, five? Let's assume for the moment that nothing's changed and, you know, given the accident in May and if it has incrementally, you know, that'd be helpful. Just wanted to understand, I mean, in more detail, I think, how you plan to get to fully autonomous. Thanks. Well, you know, again, I major product announcements are not one shouldn't do those on an earnings call obviously.
I mean, all I would say is that full autonomy is gonna come a hell of a lot faster than anyone thinks it will. I think what we've got, under development is gonna blow people's minds. Blows my mind. Thank you, again. Thank you. Yeah. I get all excited. Thank you for taking my questions. I appreciate it. Sure.
Thank you. Our next question comes from the line of Rod Lache of Deutsche Bank. Your line is open.
Thanks. Had a couple things. One is just 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? I wasn't clear on, there was an earlier question on whether the business is still tracking to around $500 million this year. Could you just elaborate on that business line?
Yeah. It's heavily dependent on the production ramp in the last few months of the year. The, like, there's definitely nothing even remotely close to demand constraint on the Tesla Energy side. It's entirely getting the engineering done, getting it validated, getting, you know, UL certification, scaling up all elements of the supply chain, and being able to produce in volume. The reason it's tricky to predict is because the volume ramp looks like an exponential. 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 weeks.
It can make the quarter look low, but actually it's in vertical climb mode, so the following quarter will look amazing. 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 it.
It's,
Not
Mostly
You know, we just gotta build those damn things.
Yeah. The customers that you're anticipating, are there significant, kind of renewables in there? Is it commercial, residential?
Yeah.
What do you sort of see?
Everything.
All of the above. Okay.
Yeah. It's. We just gotta scale up production and production is a hard thing. It's real hard.
Yeah.
Particularly when it's new technology. If it's some standard technology that's been made for a long time, it's fine. If it's cutting-edge technology, it's really hard to scale up production because you gotta design the machine that makes the machine, not just the machine itself. The results are gonna be amazing. This is, like I said, it's gonna 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. On the topic of production, you've said some really interesting things about step function changes in automotive manufacturing and improving the volumetric efficiency.
Yeah, absolutely.
Typically, as I'm sure you know, the bottlenecks in auto manufacturing are 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?
Yeah
or something like that? Is that something that we're gonna see on the Model 3?
The Model 3, I mean, the internal name for the designing the machine that makes the machine is, 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? We're at Alien Dreadnought version 0.5, will be Model 3.
It'll take us another year to get to version 1 and probably a major version every two years thereafter. By version 3, it won't look like anything else. It might look like a giant chip pick-and-place machine or a super high-speed bottling or canning plant. You really can't have people in the production line itself. Otherwise, you automatically drop to people 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. In the production process itself, there essentially would be no people.
Yeah.
You know, but not with version 1, not version 0.5. But I don't want people to think, "Tesla's going to have a factory with no people." There's going to be a huge number of people, but they will be maintaining the machines and upgrading the machines and dealing with anomalies. The output per person will be extraordinarily high.
Yeah. Sounds like a lot of innovation there. One last just housekeeping thing for Elon or Jason. You'd previously talked about the objective of profitability in the fourth quarter, but I know a lot's changing with the mix and also with the direct leasing. Is that also something that we should think is being pushed out a 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.
Okay. Okay, thank you.
Thank you. Our next question comes from Patrick Archambault of Goldman Sachs. Your line is open.
Terrific. Thanks for taking my questions. I guess just an accounting question maybe for Jason. You know, with the residual value guarantee going away, you know, 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 direct lease be accounted for as leases? You know, what would be the timing of changes, assuming they do happen?
Yeah, no, absolutely. The answer, the timing of change is right away. A car that is sold with an RVG, that drops us into lease accounting. 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. The good things happen on the accounting side.
Okay. This is something that, I mean, within the next quarter or something we'll already see a significant reduction in that adjustment, obviously.
You'll see that, but the other thing I wanna point you to is what we've already talked about and 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. There it'll be that way on a GAAP and a non-GAAP basis.
I mean, is the 8%-15%, is that just kind of a temporary measure while who's setting up these new partner relationships, or do you actually expect to, you know, stay at 15 for some time?
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. 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'll 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, you know, 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, yeah.
profit going away?
Actually, if I could say something, and 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 CARB from increasing the ZEV credit mandate, which they absolutely damn well should. It's a crying shame that they haven't. As a result, you can barely sell a ZEV credit for pennies on the dollar.
Got it. Okay.
CARB should damn well be ashamed of themselves.
All right. No, well, I think that answers my question pretty directly then. The, the last was just one housekeeping one. Any chance, and sorry if I missed it, you know, ex production for the quarter, are you able to share that?
Uh.
We haven't got to that. Yeah.
Oh, 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 know, 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? Is it 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, it's really a software limitation. The hardware is, I mean, the hardware exists to create full autonomy. It's, it's really about developing advanced narrow AI for the car to operate on. I want to emphasize narrow AI. It's, like, not gonna take over the world, but it needs to be really good at driving a car. 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 It blows me away, the progress we're making. I think if I'm this close to it and it's blowing me away, it's really gonna blow 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. Mr. Kallo, your line is open. Please make sure it is unmuted.
All right. I think we'll just take a few more questions. Let's maybe do this and one or two more.
Okay.
call it a day.
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, you know, very exciting goal. At the same time, sir, I feel like a lot of automakers as well as municipalities are all working sort of like on their version of sort of ridesharing through, you know, autonomous, you know, I guess, driverless cars. To the extent that a lot of sort of what buyers are looking at, you know, 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 ridesharing type of environment?
I think the quality of the ride is always gonna matter. Nobody wants to drive if you're sitting in stop-and-go traffic. That's boring. If you're driving on a beautiful country road or along the seaside, then I think it feels wonderful to drive, and you wanna do that. I don't think cars are gonna just become some boring utility.
Got it. I guess on the piece about, you know, expanding the product line up to other, you know, major segments. What do you view as your, you know, 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. Does that mean that we're looking at sort of like the following year, or is that into the next decade? What sort of, I guess capital needs are we looking at for that?
I think we wanna postpone anything that's a heavy capital impact until after the Model 3 production is ramped. We don't wanna stack Model 3 CapEx at, on top of other program CapEx. But there's a lot we can do. 'Cause 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. Suddenly when you begin tooling up for production, that the cost really ramps dramatically. There's a lot we can do before that, before we have to sort of dive into ramp CapEx.
We won't do that for any products until after Model 3's in high production. I think there's gonna be some pretty exciting unveils for the Tesla Semi and the Tesla Minibus or Bus, or we haven't actually don't actually have a name for it yet. That's just off of the Model X platform. Just doesn't involve a lot of CapEx actually. We expect to probably unveil those I think for the middle of next year, maybe in the next, you know, six to nine months type of thing. Then have a better, you know, a more fleshed out plan for when those would enter production.
It's not. They would enter production within like low single-digit years, not like I mean, I consider like anything past 5 years as infinity.
All right. That's very helpful.
Yeah. I'd say, 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 1 million unit per year level. It's the obvious priority after the Model 3.
Great. Thanks.
All right. With Keith, 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? Number two, you had mentioned on the last call that the Gigafactory may actually have the ability to produce about 3x of your original estimate. Will that entail significant CapEx, you know, in the future, or are you preparing that foundation right now to reach over 100 GW-hours? Thank you.
Sure. On the profitability question, just to reiterate what Elon said earlier. If we can execute on our production and our delivery goals in the second half of the year, we got a great chance to be non-GAAP profitable.
Yeah, including Model 3 CapEx. The real question on profitability is where do we set the dial on growth? Obviously if, you know, if you set the dial on growth to be super high, then you face dilution because you gotta increase capital. If you set it too low, there's less dilution, you grow slower. You wanna 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 era. You know, it's really nutty.
I mean, in 2010, we were making 600 cars a year, and Lotus was doing most, was doing the chassis, body and chassis. five years later, we were making 50,000. And it was a much more sophisticated car with Model X, and we were doing the whole car, without any partner. When you have like insane percentage growth like that in a manufacturing company, it's not like you're shipping copies of software here. You, it's a real tricky strategic decision as to where do you set things from a dilution versus growth standpoint.
I mean, the right way to look at the product line, the company is to look at say the product lines and say, and value them as, do an NPV of the product lines. For any given product line, you can say, okay, this is what that is likely to be worth. You know, the S, the X, the 3. You can parse it out relative to the CapEx on new vehicles. To the degree that the past predicts the future. 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.
It can be, you know, when all of that kind of lumped together can be confusing and then people think Tesla's a money-losing company. Like, well, not really. Not if you're growing at like, you know, 100% a year or, you know, in the case of next year, I mean, our unit volume will probably exit next year's at unit volume that's 200% or 300% what our current volume is. Maybe 400%. It's just real important to parse things out and to understand what the real health of the business is.
I mean, right now, I mean, in a nutshell, we're like we're shipping $10 billion a year of product on an annualized basis at, you know, somewhere around 23%-25% gross margin.
Right.
Just quickly to your Gigafactory question, this is JB. You know, a lot of the improvements that we've made are actually increasing the density of the Gigafactory.
Yeah.
-and the density of how much equipment and in the existing footprint. In that case, you know, there's a lot of investments we've already made preparing the site, you know, 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, you know, equipment and things like that, you know, that would be incremental tied to that much higher volume, but those would also be enabling, you know, vehicle volumes and energy product volumes, you know, way beyond what we'd initially predicted.
Right. Thank you.
All right, guys, we're at the hour mark. Shall we call it a day? Yep. Let's do it. All right. Thanks a lot, everybody, for joining us. We look forward to talking to you next quarter. Bye-bye.
All right. 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.