Earnings Call: Q4 2015

Feb 10, 2016

Good day, ladies and gentlemen, and thank you for your patience. You've joined Tesla Motors Incorporated 4th Quarter 2015 Financial Results Q and A Conference Call. At this time, all participants are in a listen only mode. I would now like to turn the call over to your host, Mr. Jeffrey Evanson. Sir, you may begin. Thank you, Latif, and good afternoon, everyone. Welcome to Tesla's Q4 and full year 2015 Q and A webcast. I'm joined today by Elon Musk, Tesla Chairman and CEO JB Straubel, our CTO CFO, Jason Wheeler and John McNeil, President of Global Sales, Service and Delivery. Our Q4 results are announced in the update letter at the same link as this webcast. And as usual, this letter includes GAAP and non GAAP financial information and reconciliations between the 2. During our call, we will 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 Form 10 Q filed with the SEC. We're going to start today's call with some comments by Elon and then Jason, and then we'll go into the Q and A session. I would ask everyone that during the Q and A session, you try to constrain yourselves to one question and one follow-up, so we can give everyone their time on the call. So before we go to Elon, you might as well go ahead and press star 1 to get into the queue to ask your question. And with that, I'll turn it over to you, Elon. Thank you. So I think the newsletter partly speaks for itself, but I'll add some commentary on some of the lead points. So obviously, we had a huge increase in modelized deliveries year on year in Q4 last year, going up 76%. We had a huge change in our core operational cash flow, which you can really see in the chart. It's really quite dramatic. That's why I think it's interesting to look at in chart form. It goes from negative to significantly positive in Q4 last year. And then we made modest improvements in Model S gross margin, getting to about 25% excluding one time items. And I feel pretty good about where we're tracking to probably get close to 30% by the Q4 of this year. And then something I'm personally quite excited about is that we expect to be positive cash flow starting next month and then continuing on into Q2 and beyond. And that's there's one caveat there that's including the asset backed line. And the asset backed line is that that's just funding for cars that are on route to customers. So particularly as our sales to international markets increases, there's more finished goods inventory on its way to customers. And it's inclusive of the asset backed line, which I really, I think, is most accurately regarded as a slight decrease in the gross margin of the car by about roughly 0.1% or thereabouts. Apart from that, we're it implies of cash flow. And then we're expecting to be profitable for 2016 on a non GAAP basis. And I personally think is actually the correct way to think to look at it, because of the way that GAAP treats lease accounting. And but then nonetheless, despite the lease accounting stuff, we anticipate being profitable by GAAP standards in Q4 of this year. And then we're really looking forward to the unveiling of Model 3 on at the end of next month. I think this is going to be really well received and then getting into production and delivery at the end of next year. Touching on a few things that are in the bulk of the newsletter, I think the chart on vehicle demand is really interesting. And to a degree that this represents a microcosm of how Tesla vehicles will be received in other vehicle segments, it augurs extremely well for the future. So the Model S was the best selling premium sedan in the United States last year of any kind. And our sales actually increased by 51%, whereas everybody else's sales declined and the overall market segment declined by about 1%. So I think this is it's really rare to see situations like this. And I think this is despite us being really quite underpenetrated in the Northeast. I think there's a lot of room for growth in the Northeast particular, particularly of the U. S. And in international markets in general. But essentially, you're getting to 25% market share of all premium sedans in the U. S. Is, I think, a great achievement of the Tesla team. And I think it's also great for the world because it means I mean, it's 25,000 fewer gas guzzlers that are on the road. So I'd like to thank all the customers that went out and bought that car because I think they're making a difference for the environment. And of course, they're helping pay for the future development of the Model 3, which is the more affordable mass market car. That's where we put all of the revenue we receive from the Model S and X. So it's always important to bear that in mind that S and X will pay for the Model 3. And one additional note is that Tesla, we don't pay for any endorsements. We do not discount our cars for anyone, including me, I pay full retail price. Whereas those actions are all of our competitors take those actions. So that's, I think, quite interesting. We also have far fewer sales outlets than our competitors. So essentially, there's a lot of degrees of freedom that we are not exercising that we could, in theory, exercise. I think and if you look at the text, it's worth noting that this is not just uniquely true in the United States. But in Switzerland, we outsold the Model S outsold the Mercedes S Class, the BMW 7 Series, Porsche Panamera and the Audi 8 combined and also outsold the Mercedes E Class. And in Germany, we outsold the Porsche Panamera. So I think these are pretty good situations. I mean, this is even in places that have no incentives. Obviously, incentives are certainly helpful. They're a catalyst for sales. They're they're they're they're totally tend to always appreciate the incentives and I think they make a difference in accelerating the advent of electric vehicles. But sometimes incentives are characterized as it's sort of all about incentives or not at all about incentives. And it's really important to appreciate that incentives are an accelerant. So that's the reality. Jason, do you want to add anything? Sure. Absolutely. Thanks, Elon. First of all, look forward to working with everybody. I'm super excited to be here as excited I was on the first day I walked through the door. Just three quick things I want to touch on real quick. Number 1, gross margin. Lots of moving parts this quarter. Let me walk you guys through it a little bit. We had over $67,000,000 in Model X ramp up costs and non recurring items in the quarter as Elon mentioned. Correcting for these items automotive gross margin excluding ZEV credits would have been 25 percent. First thing, the major component here is labor and overhead and depreciation related to the Model X launch. The way for you all to think about this is towards the end of Q3 and into Q4, we had to bring the workforce into the factory to build these wonderful vehicles. Also as soon as started production starts, the clock starts hitting on depreciation as well. So that's what's going on there. We also had some asset impairments, one with our old paint shop, and we've now got a state of the art paint shop in place, which is going to give us the capacity that we need all the way through Model 3. Yes, the 10,000 cars a week too. Yes, 10,000 cars a week. So this is a good story. And these are assets that we had purchased. I'll go all the way back to the new me days. We got every bit of life out of those assets as we possibly could. The other big piece here is we had an E and O write off, excess and obsolescence. This resulted better production control and inventory management systems that we put in place. The place is moving really fast and we took some time. Elon talked about this in Q2 on the earnings call during the shutdown, putting better systems in place to track this. We're moving to a place where we're tracking E and O on a real time basis and bringing those facts to the table when we're making decisions. So we shouldn't be in this position again. Next thing I wanted to talk about just real quickly was cash flow and Elon covered this and I think the chart on the face of the shareholder letter really gets there. But we were within striking distance of positive operating cash flow this quarter. And when you add back the leasing proceeds that we get of 209,000,000 dollars it's a great step change in the right direction to getting us to net cash flow positive. Also CapEx, we guided at $500,000,000 last quarter on the call and we closed out at $411,000,000 for the quarter. That all resulted in any cash balance being at $1,200,000,000 which I think showcases our strong improvement in cash management and discipline in the company. Finally, really quickly talk about capital structure. We closed the warehouse line than we previously had before and opened the ABL as Elon mentioned. Think of this as a shift to lower cost financing. We've got a better deal on this line. So I think it's a better way to think about that. Intended uses, 1, we'll continue to monetize our direct leases as we did with the warehouse line, but it also creates an option for us to finance our ramp in FGI as the Model X hits full production scale. I'll just close by saying, my mandate from Elon clear, cash is king. And there's some real steps that we're taking as a company to get ourselves to net cash flow positive for the year. And profitability. And profitability. Walmart, it's just capital efficiency and CapEx. CapEx in 2016, as we said in the past, will be less than it was in 2015. We started to see some of this in Q4, it will continue. We're also getting to a point where we have operating leverage in the business. We'll continue to aggressively manage our growth and expenses. And then finally, and I walk around and I'm on this every day, it's a relentless focus on automotive unit cost reductions. So that's my mandate. Again, I'm happy to be here. And Elon, if you've got nothing else, we go to Q and A. Yes. Actually, I guess one other point that's sort of interesting to note is that Tesla is approximately doubling its cumulative sales every year. So this is I'm not sure if this has happened in the car industry for maybe a century. But like we started beginning of last year with 50,000 cars on the road and we ended with 100,000 this year. We're maybe 6% to 80%. So if we're at the high end of that range, We're getting sort of potentially double the size of the fleet. And I just think that's pretty exciting and unusual. So thank you. Good Q and A. All right, Latif, let's take the first question please. Yes, sir. Our first question comes from the line of Brian Johnson of Barclays. Welcome, Jason. Just want to ask a couple of questions revolving around the cash flow. I'm sure other people will go into some of the ex ramp and delivery numbers. First, you produced about 14,000, you delivered 17,000 vehicles. That would imply $3,443 reduction in new finished goods, at least as inventory, which could generate $250,000,000 Yet your inventory is roughly flat quarter over quarter. What's what before we get K and the Q are the puts and takes there? I think you touched on it. We managed to do a really nice job selling inventory cars at the end of the year. But on the balance sheet, the inventory number in cash and inventory stayed about the same? So there's a couple of things going on in there. So one is the finished goods, but also doing a nice job on the finished goods inventory, but also just the ramp up of the parts that we need to get full production with Model X. Okay. So it's sort of the work in process on the X. Second, can you kind of just refresh, can you kind of update us given the change from the revolver to the ABL? What is currently drawn on the ABL? What's the available borrowing base? How much of that is, as you think about next year, going to be used to support increased on balance sheet leasing versus increases in finished goods inventory? And what's your remaining, if the banks were to come in, kind of borrowing base that would be left unpledged? Yes. Sure. So on where we closed Q4 at, I think, dollars 135,000,000 fully drawn on it. And then in terms of the borrowing base, there's a lot of detailed numbers behind that. I think the most important thing to point out here is the increase to $1,000,000,000 that we did with our banking partners. And then there's some restrictions there and we don't want to max that out. So we're going to monitor and just make sure we do the things to do. We don't want to live on this drug. Yes. I mean, we have a collection of lenders. So it's like hypothetically, 1 lender were to get would decide not to support the ABL then we would it's distributed. So it's not a single dependency. And we found that the appetite with lenders is very strong for the ABL because it's a finished product that's going to a known customer. So it's not there's no channel to stuff because there isn't a channel. So it's just up in transit to customers primarily overseas. Yes. It grows with the inventory balance against cars that have order placed against them. But it sounds like you could draw it even if inventory finished goods inventory was flat. Could you still draw on it or does it have to track to a direct increase in finished goods inventory? Yes. Yes. It is attractive finished goods. It's basically the finished goods loan. Our next question comes from the line of Colin Rusch of Oppenheimer. Is open. Thanks so much. So you're coming to in the next couple of quarters to the end of some of the initial leases on Model Ss, can you talk a little bit about your preparations for that and your expectations as we move throughout this year and what will happen with those cars and how many of them are actually returned? Sure. John, do you want to talk about that? Sure. So we actually started on that early and launched a campaign in the second half of twenty fifteen to reach out to folks who had cars coming off the lease. And one of the attractive things to those folks who are coming off the lease is to have a car that's equipped with Autopilot. And Autopilot is certainly one of the core stories of what's going on here at Tesla. It's really exciting. So we're finding that folks are willing to upgrade their Tesla as part of this campaign. And so we've got a formal program where we're really providing a smooth transition period for these cars. In addition to that, we're finding there's a very healthy aftermarket for these cars and the trading values or the trading values in the market are significantly above our residual reserves on the cars, which is giving us some flexibility in terms of our financing partners offering very attractive monthly payments and loan terms because the cars are holding the Teslas are holding value at a much higher rate than we thought. So, I think the short answer is we're out ahead of it and we're getting really good reception and conversion from customers. We're excited about the next generation of Tesla, which is an autopilot equipped car. Okay, great. And then just the follow-up, there's some pretty significant legislation updating the Toxic Substances Control Act that passed through Congress in December. As you guys look at a lot of the details in terms of ramping the Gigafactory, can you talk a little bit about what you're seeing as the impact so far with the updated substances and how they might be treated as we go forward here? This is JB. I can jump in there. We haven't seen any immediate impacts from those results or changes. The materials we're using at the Gigafactory are not particularly toxic substances. They're Yes. The Gigafactory has 0 toxic output. Yes. It's so in terms of large industrial factories, it's an incredibly clean one. There's really no emission, no air emissions and the raw materials are largely base metals and things like that. Okay, great. I'll follow-up offline. Thanks guys. Thank you. Our next question comes from Adam Jonas of Morgan Stanley. Your question please. Hey everybody. 2 quick ones. First, can you confirm reports that Jim Keller kind of a legend in the micro processor world, has joined the company to head some hardware engineering at Tesla and Autopilot. And if that's correct, does that signal that Tesla might be moving to design some of their own silicon? Well, I mean, I think it's public knowledge that Jim Keller has joined. We have a lot of talented people that join Tesla all the time. Jim is indicative of that. And just so some people get a bit more press than others, but it's I think there's the talent level that's joining Tesla is really incredible. With regards to the latter part of your question, we just no comment. Okay. Okay. And then just a follow-up on test drives. Outside of company sponsored events, kind of surprised we haven't seen any full comprehensive independent test drives from the major magazines. Is there anything kind of preventing and I think people on the call can understand if there would be of the earlier produced units that maybe you wouldn't want released quite yet. But is there anything preventing the magazines from gaining access to the early vehicles, the Model Xs and conducting a full road test of the vehicle? And if there is, when can we expect kind of some of the first reviews you think? Well, I mean, I guess, we've not provided cars to the media, because largely because we to the degree that we could suppress demand for the X, we did. So we took basically every action we could to suppress demand for the X, because production wasn't we need to get production up. There's no point in amplifying demand if production cannot meet that demand. So we did our best to really suppress demand or certainly not encourage demand. That will obviously change in the balance of this year as we get cars to stores because there have been no Model Xs at stores, no Model Xs available for test drives. And but in the coming months, I think probably next month, you'll start seeing some reviews in magazines and whatnot. The feedback from customers we've gotten has been very positive. Thanks, Elon. Thank you. Our next question comes from Emmanuel Rosner of CLSA. Your line is open. Hi, good afternoon. Wanted to ask you first, can you give us a little more color on what exactly happened with the Q4 launch? I mean, in the letter, you sort of like implied that it sort of like took maybe a little bit longer than expected. So what sort of like issues have you encountered? And what have you learned that sort of like gives you confidence that in your next launch maybe the Model 3, you can actually ramp that up significantly quicker? Yes. I think that's a great question. I think the mistake we made with the Model X, which I really think we've taken to heart at Tesla, is that we put too many new features and technologies, too many great things all at once into product. In retrospect, it would have been a better decision to do fewer things with the first version of Model X and then roll in the capabilities and features on new technologies over time in subsequent years. So I do think that there was some hubris there with the X. So the net result, however, is that I think the Model X is an amazing car. Honestly, I think it's probably the best I mean, I think it's the best car ever. I'm not sure anyone's going to make a car like this again. I'm not sure Tesla would make a car like this again. So yes, I mean, it's I mean, I'd be surprised if somebody buys the X, particularly as the software gets refined, if it's not the product they love more than any product they've ever bought, I would be surprised. Yes. I mean, maybe it's worth also just commenting that even some of the most innovative features on X that caused some challenges in Q4 have really been largely overcome today. Yes, that's true. The operation of the Falcon door, the sourcing and supply of the large glass windscreen. I mean these things are working very well and are not a bottleneck at this point. Exactly. Some of the things that cause those issues are somewhat counterintuitive. They're not the obvious things. I mean for at least a few weeks, I mean maybe 3 or 4 weeks actually, the constraint was the chrome finish on the bright work around the window, the front window. Okay. And you think that counter could that be the constraint? But it was. Or seals. Or seals. Yes, the seals and yes, the Seals have been a huge fan. Essentially, the Seals had to be redesigned. And then the Seals that we did have had to be reworked by hand in order to sort of fit correctly. Yes, deals are a pain. We had a lot of issues with obviously the segment receipt. We've now in sourced that capability. Yes, we really don't see any fundamental issues. Okay. So it sounds like it's basically mostly behind you. So as we move forward into the year, so you're talking about this Model X production rate of 1,000 vehicles a week in Q2. Is that an exit rate or is that an average for Q2? And can you just more generally give us how you see the overall mix for the year of S versus X play out in terms of deliveries? I mean, some of the stuff is you have as good a crystal ball as we do. But let's see, the 1,000 a week would probably be a peak production week in Q2. So like average, I don't know what the average is going to be exactly, but maybe 700 or 800 something like that. So that's good. But I think we feel confident of hitting 1,000 week certainly towards the mid to end of Q2. And then for the exact mix, I mean, I think we need to see how customers react when both cars are in the showrooms and we'll adjust accordingly. But we expect a combined delivery number average over the year of 1600 to 1800 per week. Perfect. Yes. Thank you very much. Thank you. Our next question comes from the line of Colin Langan of UBS. Your line is open. Great. Thanks for taking my questions. Can you just kind of walk through what are the key short term drivers? You're still of cash flow, sorry, kind of still burning $200,000,000 this quarter. Is it just really all volume to get back to get cash flow positive by Q2? You also touched on CapEx. You have it you're saying it's going to be flat to down, but there's seems like there's an awful lot of work going on in the company. I mean, how do you keep CapEx down as you have all these growth plans? Yes, sure. So the key drivers on perpetual positive. So as I said in my earlier comments, it was a great step and its operations, the business is selling cars and energy products. It is now producing enough cash for us to start to pay for our investments. And if you look at the Q4 dynamics, that cash flow from core operations, as we're calling it, produced 40% to 45% of the cash that we need for the CapEx in the quarter. So that is certainly a big piece of it too. Another piece of it, as I mentioned, is just going to be operating leverage. We need to be very diligent about how we grow operating costs, certainly. And then the other big element to it is certainly continuing to drive cost downs on the vehicles and there's lots of ways to do that. We're getting better at our manufacturing processes. We're reducing scrap. We're reducing excess and obsolescence. As we talk about in the letter, the car continues to be more and more reliable. So that reduces our warranty and that actually has a cash impact when the cars show up less at the service centers. Yes. In fact, I'd just like to reemphasize We are seeing dramatic improvements in reliability and reductions in servicing needs. This is important. Sorry, go ahead. Yes. No, absolutely. And then the other piece, you talk about CapEx and how can it be done. Well, we made a bulk of the investments that we need for Model X in 2015. So in 2016, we're going to continue to invest, but we're really towards the back half of the year start to see some initial investment in Model 3. We'll continue to invest in the Gigafactory to get to where we want to be with production there. And then we'll continue to expand the service center, the retail locations and the supercharger network as well. But there's a lot of the big pieces that we needed to spend in CapEx to get to where we are today, we spent in the past. Yes. I think it's just important to bear in mind that the overall market for SUVs and Sedans is roughly the same. So globally, it's almost fifty-fifty. And so the X is kind of like half of our volume. And so if you set a company up to produce X and let me use the variable X. If you set a company up to produce a certain amount of revenue and then it produces maybe just over half that amount of revenue, but has the cost base associated with it, but then obviously the things will not be pretty from a cash flow and profitability standpoint, Necessarily, it's going to be true. But then as ex production rises, then that changes and then we achieve the target revenue with the reasonable cost basis and the whole picture changes dramatically for profitability and cash flow. Absolutely. And the only other last thing I would add too is we've had a significant run up investment over the last couple of years. Now it's time to absorb that and look for just greater capital efficiency. Got it. And just one final question. Can you just remind us if we're are you still on track for storage of $400,000,000 to $500,000,000 this year and $200,000,000 to $5,000,000 next year? Or is that still on track? JB, do you want to comment on that? I mean, one thing I'd say with respect to energy, like we do see this being a very enormous market, but we're it's an exponential growth market. So exactly where the calendar falls on that sort of S curve exponential makes quite a big difference on revenue. So it will be heavily weighted to the Q4. But JB, do you want to add anything? Yes, that's exactly right. I mean, it's not a linear extrapolation throughout this year at all. So I think we're being fairly cautious in trying to make sure that we don't overpromise here and understand what's going to happen in Q4. It's a little bit tricky to know how that will grow. Production is on track. We feel really good about that. Production started off as planned in the Gigafactory in Q4. Deliveries are on track. We're starting shipments of power walls and power packs worldwide. And we're growing out the sales operations and sales teams around the world. So from an execution point of view, I think we feel really good with where we're at. It's just early days to predict how exactly that exponential growth is going to really integrate. Okay. All right. Thank you very much. Thank you. Our next question comes from the line of Patrick Archambault of Goldman Sachs. Your line is open. Okay. Yes, thanks. Good afternoon and I guess good evening from our end. I wanted to build just on Emmanuel's question. Can you just tell us what is the current run rate of ex production? Where we stand today towards the middle of February? And can we talk a little bit about how you get to that ramp? I mean, it sounds like 1,000 is the target that would obviously mathematically get you to think about half your production. So that's pretty much full ramp. But it seems like that's a pretty big distance from where you are now. And maybe we can walk through the pieces that get you there in terms of training employees, getting the supply base in order, getting some of the quality issues resolved? That would be my first question. I mean, I don't think we want to comment with that level of granularity, but because unless you actually understand how production works, they will reach incorrect conclusions. I mean, we're going to stick to what our projections are and leave it at that. Okay. I guess just in terms of another ramp oriented question, if I may. It does seem that given the forecast that you have for, I think, 16,000 deliveries this year, getting to This quarter. Assuming for this quarter, excuse me, getting to 80% to 90% would imply a run rate that's about 40% higher than where you are in Q1. But you also made a comment that inventories may that a lot of that's going to be international and there may be some in process inventory being built out to service that. So maybe we can talk a little bit about that ramp? Yes. The international stuff is mostly Q2. So that's really where the international ramp starts. There's still inventory in process for, of course, North America, because it takes longer to get a car to the East Coast, particularly for like a Blizzard or something. But so that's certainly a factor in finished goods, but finished goods necessarily ramps as we fill the pipeline for overseas sales, which is next quarter. Okay. Thank you. Thank you. Our next question comes from Dan Galves of Credit Suisse. Your line is open. Thanks for taking my questions. First one has to do with operating expenses. Hopefully, I'm not getting the numbers wrong, but it seems like 20% growth in 2016 versus 2015 implies flat versus the Q4 run rate. Is that achievable to essentially keep the operating expenses pretty consistent throughout 2016? Yes, certainly. This is Jason. Yes, we definitely believe that we can do that. There was a bit of a dog's breakfast in Q4. We had some things in there. I'll just give you a couple of examples. So we had some aged receivables from some service revenues in Europe that we ended up having to write off. That was one thing. We had some R and D tooling that had come to the end of its use for life and we had to write off as well. So there's some noise in the Q4 number for sure, but I'm very confident in the projection and the forecast that we've given for 2016 relative to 2015. Okay, great. Yes, no problem. One other if I could. There's been a lot of negative chatter about Gigafactory related to signing up of other partners, precursor partners, supply agreements for access to raw materials and just kind of the general size of the plan. I was wondering if you could give us an update on kind of where you stand and if you see any challenges to get up to the 35 gigawatt hours of self production by 2020, 50 of packs? Sure. I mean, on general relative to that initial forecast and timelines, we feel pretty comfortable on where we're at. I think there has been a lot of drama and a lot of negativity in the reporting on this and some around the headcount recently that I think a lot of people picked up on. And maybe just to talk about that one in particular, that recent sort of hiring headcount discussion queued off of numbers that we reported that were effective essentially in the middle of 2015. And then those were essentially compared against where we predicted to be at the end of 20 15. So they weren't even really apples to apples. In our very most recent report that we made with the Governor's Office of Economic Development, we had reported I think around 272 net hires for the year at the end of 2015 against what we had a target of 300. So I mean the general plan is executing actually quite closely to what we had laid out back in 2014. I think because it's a fast growth, we have to be really careful at what snapshot in time you actually look at and what you compare that against. But we still have the same confidence. We're still on track to produce 15 gigawatt hours of cells and I'm sorry, 35 gigawatt hours of cells and 50 gigawatt hours of packs, 15 of that going to Tesla Energy, the rest going to Model 3 and vehicles. That still is on track and we're on track to start to sell production at the toward the end of this year. Okay. Thanks very much. Basically, like to the best of our knowledge, you should not worry about the Gigafactory as a constraint of the Model 3. That is does not appear to be anywhere near the critical path for Model 3. So and if I can just sort of maybe say a few words about the Gig factory in like Nevada and the incentives and all that. Like one of the most positive things that I see in the media is sort of over representation of the Nevada incentives. The thing to bear in mind for the $1,300,000,000 in incentives for Nevada is that in order for us to achieve that, we have to develop about $100,000,000,000 in revenue from the Gigafactory. And those incentives occur over 20 years, representing approximately a 1% discount on the cost of the Gigafactory. The reason it's a big number, and I should say it disproportionately it is a big number in the absolute terms, but is disproportionately small relative to incentives that, say, Boeing would receive for keeping an aircraft factory in Washington. The reason it's this big is because the Gigafactory will be the largest footprint building in the world when it is done. Our Tesla Fremont factory is currently number 2. And if you're curious, number 1 is a flower auction house in the Netherlands. You can look at this one on Wikipedia. So it sort of makes sense that if something is kind of like the biggest thing on earth, it's probably going to have incentives that are maybe being the absolute, but small in relative terms. And the fundamental driver of the decision, not the exclusive driver, but the primary driver of the decision was pace of execution for the Gigafactory. That was the primary reason for Nevada over other options. And that I believe that this decision is bearing fruit because we are seeing it move at a very good pace. Okay. Thanks, guys. Welcome, Jason. Sorry. All of those incentives are also performance based. Yes, exactly. We don't receive them unless we execute along the path toward the milestones. Right. Even some of those we do receive, I have pullback provision. I mean, essentially, like I wrote a blog about this, there is no way for Nevada to lose. The way that Nevada set up the incentive structure is a no lose proposition for them. So they did an awesome job on behalf of the estate. You can read the blog that I wrote called The House Always Wins, which is true. And so it's really annoying to see this stuff misrepresented in the press. Got it. Thank you. All right. Latif, next question please. Yes, sir. Our next question comes from the line of John Murphy of Bank of America Merrill Lynch. Just a first question. I mean, Elon, you made a very interesting comment about the Model X being the best car ever produced and it sounds like you think it might be better than the Model S. I mean, as you may get unbiased. I mean, obviously Well, I mean, it's your newest car, so it makes sense or newest vehicle, I should say, so it makes sense. But I mean, as you look at getting that production ramped up and availability out there to consumers, what would the selling point be on the Model S then? Could you get this mix significantly above 50% crossovers or Model X because the price premium is really not that great? Why wouldn't you sell a whole lot more Model X than Model S and could you? Yes, I think this is a question of owner preference. I mean, I personally still prefer to drive the Model S over the X, because I'm kind of a I like the lower position of a sedan. And the S in terms of performance is about 10% better in acceleration through handling and whatnot than the X. So it really depends on owner optimization. If you like sort of a high seating position, like amazing amount of room and functionality and just sort of a feeling of high visibility like I mean, because the one of the best features, maybe the best feature of the X is the cockpit style front windshield, which gives you this amazing panoramic view as you're driving. And so if like which is like a lot of people like that in SUV and so that's what the reason that they buy that. So I think it really depends on personal preference and we'll see what the results are once we actually put the vehicle in stores and we'll take test drives. And when you think about all the content that you're putting in the X and the upgradeability of the S and the X over time, I mean, how do you think about planned obsolescence, which is sort of a real necessary part of the almost any business to generate incremental sales from your existing customer base? I guess, I mean, are we a plan to we don't plan to obsolete things. We just relentlessly make things better. So for example, for the S, there's an average of 20 improvements per week. Most of these are little tiny nuance things that most people would notice, but it is a continuous improvement And that's why I say when people say, well, when should they buy Model S, like what model year? It's like we don't really have model years. We keep improving the car. If you want to wait until the car stops improving, you'll be waiting forever. Okay. And then just one follow-up just on the cash flow for 2016. Obviously, a lot of progress has been made more recently. Will that include I'm just trying to be clear, the potential draw on the ABL over time as that's needed to run the business? Or does that net cash increase not include whatever draw that happens on the ABL in 2016? That includes the draw on the ABL, to finance finished goods. Our next question comes from Jamie Albertine of Stifel. Your question please. Great. Thanks for taking the question. On the Model 3, if I just I think a lot of folks are trying to do work as it relates on the margin trajectory over time, and it's clearly going to be volume dependent and sort of timing around the launch. But I was wondering if you could help us understand just given that it's a third of the transaction price of roughly your initial Model X deliveries. What are some of the efficiencies you're hoping that you can sort of draw upon maybe beyond just sort of the battery reduction battery cost reductions, what are you leveraging in the Model 3 from investments you've already made and sort of the knowledge you have around sort of initial launch costs and the higher price of vehicles at this point? Yes. I think the way to think of the cost severance is really that the Model 3 being a sedan is about 20% lighter than and actually quite a bit less complex to manufacture than the Model S. Model S was really the first car we ever made ourselves. So it was we were designing to make it work as opposed to designing it from ease of manufacturing, whereas the 3 is really designed for ease of manufacturing. And then we expect through economies of scale and just general design improvements to get another 30% improvement. So that's where the 50% improvement comes relative to the S. So sort of 35 ks versus 70 ks, 3 versus S is the way to think about the difference. And our default plan, as we've done in the past, is that the initial sales are relatively highly optioned versions of the car, because obviously we've got to pay back the investment of all the tooling and everything. So that sort of makes sense to have the higher option versions first. That's what we did with the S and obviously again with the X. There was a sort of unfortunate that the way the X pricing got reported that they reported the sort of fully optioned signature series as though it was the base price volume number in some publications. So this is just a misunderstanding of how things work. I mean, I think it's also normal to do this in many other industries like for if Intel comes up with a new CPU or fast CPU or NVIDIA comes up with new graphics card, in the beginning, it's a lot more expensive and then over time that the price drops. Just a clarification, Elon, on the economies of scale. So should I think about that in sort of the running through the paint shop as an example, given you said the 10,000 unit per week sort of goal there? And then separately, what should we expect when should we expect to start hearing about the Model 3 production line? Where do you within the facility plan to build it? At what point? I mean, is it sort of going to be the same lead time as we saw with the Model X? Thanks. Yes. There will be a production ramp for the 3. It's always been tricky in the past to predict those production ramps. But, yes, anything you guys want to add? I think in the development plan that we have now, we have substantially more time and placeholder put into the schedule to really refine the product ahead of the production ramp. I mean to a question that came earlier, I think that's something we've really taken to heart in the launch of the X. As we look to higher volumes and what we hope will be a steeper ramp with Model 3, I think we've learned some important lessons on how to do that well and having a really robust pilot build in the plant and enforcing rigorous numbers there. Okay, great. Thank you guys so much. Thank you. Our next question comes from Andrea James of Dougherty and Company. Your line is open. Thanks for taking my Just a practical one about the factory. You have different choke points at different points in time. It's been general assembly, it's been the cells. At last count, it was body line 12. So I'm just asking about the status of body line 2 and when you hope to migrate maybe Model S production onto that body line? I think we're getting a bit too much into the internal decisions of Tesla. We don't want to if we say something that's related to an internal decision in Tesla, then it can over constrain our decisions. And we need to have some flexibility there. So we prefer not to comment on the details of when different production lines are moving around. Okay. And then maybe longer term then, what is your updated thinking on your cost per kilowatt hour by the end of the decade, especially as you source your raw materials at the Gigafactory? That's quite a sensitive number. But it's I mean, it's less than what we see most people estimating. So we see most people overestimating cost per kilowatt hour, but that is a proprietary number. And I think in the past you said you'd be disappointed if it was not below 100 dollars Yes, in the long term, yes. Our next question comes from Ryan Brinkman of JPMorgan. Your question please. Yes. Thanks for taking my call. A question for Jason probably. Other automakers sometimes talk about what they call minimum cash, the amount of cash that they need to end the quarter with in order to fund intra quarter working capital swings even in the event total change in working capital during the quarter were negligible. I'm curious what you think your minimum cash needs are and if that's something you can share with the investment community. And then just more broadly, what total amount of cash or gross liquidity do you prefer to run the business with? Thanks. Yes, sure. I mean, we don't go over the inner workings of how we do those calculations $1,000,000,000 is a nice comfort level. And you see we're starting to make the moves on the ABL and etcetera to give ourselves more flexibility there. And it's reiterated comment I made at the very beginning, cash is king and walking around collecting it. Okay, great. And then just last question on the Gigafactory. You've already given some updates, but maybe you could just talk about how much of the planned CapEx for 2016 relates to the Gigafactory? And then maybe an update on the relationship with your partners there, maybe Panasonic or any others, how those relationships are progressing relative to their expected future contributions? Sure. It's a great question. And like I said, we're really excited about the Gigafactory and things are on schedule. We're not at this time going to break out the detailed CapEx plans. I gave it to you thematically earlier, certainly Gigafactory. Towards the end of the year, we'll start to see some Model 3 investment. And then throughout the year, we'll see investments in sales, service and the Supercharger network. Great. Thanks. Maybe just quickly on the Panasonic piece. They continue to be an excellent partner in the project. And I think you've seen probably in the recent months some additional statements from them with ongoing capital commitments to the project as planned. Those are kind of happening in the right sequence. They've also started hiring for the project and training people. So things are going as well as we can hope there. Perfect. Thanks. Thank you. Our next question comes from Ben Kallo of Robert W. Baird. Your line is open. Hi, guys. It's Tyler Frank on for Ben. Can you comment on the overall expectations for deliveries throughout the year? If we back out the 15,000 to Q1, it looks like about 23,000 in Q1 for Q3 or Q2 through Q4, which seems like you should be there with production given the Model X expectations in the Model X production expectations as well? I know you'd love to have sort of more granularity, but it's difficult for us to give you granularity that we ourselves don't have that's excessive precision. I don't want to give false precision. So we feel good about the overall number, but it might be it might move around as to how it gets that overall number. And there's always unforeseen things that occur. So that's why we kind of need some flexibility. So we don't provide false precision and then people hold us to false precision. Okay. Thank you. And then can you comment on what you're seeing for overall demand in the China market? And then what markets do you expect to move into next, which will and how that ramp will go? Yes. China is a it's not a huge market for us and it hasn't been historically. It is something we expect in the long term will be a big market and ultimately probably our biggest market. So I think there's a lot of long term opportunity there. That's it's difficult to say what's going to happen with China in the short term except that it doesn't really have a big effect on Tesla yet. I mean, long term it will be. In terms of new markets, I'm really excited to launch in Mexico this year. I'll be heading out to Mexico City, and we're going to I think there's actually quite a bit of opportunity there. And some of our customers we actually do have customers in Mexico already, but having a significant presence there, I think, is going to be great. And so our most supportive customers are actually in Mexico. Thanks. A quick follow-up. There's been some rumors and commentary that the Model 3 launch may not be an actual full vehicle. Can you just talk about what we should expect at the launch event at the end of March? Yes. We're trying to decide whether we should show the cards or keep a few cards close to the vest. I haven't made the decision yet. Our next question comes from Rod Lache of Deutsche Bank. You commented earlier, Elon, on the Model S versus the Model X demand being personal preference on passenger car versus SUV. And I was just wondering if you have any thoughts on whether Model S demand would or could be affected once the Model 3 is revealed. Do you think that those vehicles ultimately go to different customers or is there a plan to avoid cannibalization there? Yes. I mean, I think there's there are different market segments. Much as, say, the BMW 7 Series and 5 Series and 6 are different market segments from the 3 Series. And you should think of the Model 3 as sort of really competing in kind of the BMW 3 Series or Audi A 4 market. And so if you want the sort of ultimate machine, you'd really want to get the Model S. But the Model 3 will be a great car. Yes. Maybe also just as an anecdote. There was a lot of concern when we launched the X about cannibalization of Model S demand. And we actually saw just the opposite, which was the increased interest and awareness and just customer engagement actually drove higher Model S sales, even as the X was launched. So and those are actually much closer in terms of vehicle capability as we just talked about. Yes, yes, it makes sense. And I was hoping just on the financial side, can you give us just a little bit of a sense of how Model X gross margin? And can you comment at all on how you're expecting for the overall company gross margins would look this year? Are you expecting them to be able to stay above 25% even with the Model X ramping? Sure. So as we said in the letter, 25% by the end of the year for Model X. I'm sorry, I'm a little under the weather and 30% for the Model X. So you can do the math on what the blended rate will look like. In terms of getting to 25% for Model X, the way you have to think about it is we've got many years history with the Model S right now and that is learning that can certainly be applied to what we're doing with Model X. So we're comfortable that we're going to be able to drive gross margin in the right direction with Model X significantly throughout the year. Yes. I mean, in the long run, we expect the gross margins of S and X to converge around the 30% number. So they should in the long run, both be around 30 percent. That's our target. It's just as Jason was saying, because the X is a newer vehicle, we're just earlier in the learning curve for the X than the S. Okay. It sounds like it's not you're benefiting from some learning curve. So, the margins even initially could be okay, north of the 20% range. Is that a reasonable expectation and kind of ramping up to that level? Or is it a more challenging kind of ramp? I mean, I really look at it where does it end up as opposed to where it what happens in the very near term. And it's hard for us to predict exactly where it is in the interim. Like just think of that sort of S curve and say like where are you in the S curve? And if you have a rapidly changing slope on a curve, it's really hard to say, okay, let's take a date because you could move that date by a week and have a huge difference. That's why it's hard for us to give you an exact number. But we kind of know where the ESCO will end up. And as it starts to asymptote, then it becomes much more predictable. Thank you. Our next question comes from Dana Hall of Bloomberg News. Your line is open. Yes. Hi. Thanks so much. So as you think out 4 to 5 years to 2020 when you want to produce 500,000 cars each year, can you get there without building another assembly plant or a second Gigafactory? Yes. Specifically, the Freon plant, in fact, historically has produced almost 500,000 cars a year. So when it was a GM so we can hear your keys quite loudly. The when it's when it was a Toyota GM plant, it produced almost 500,000 cars a year. We're comfortable that it can get back to that level. And then the Gigafactory is designed to support 500,000 cars a year worth of factories plus have 15 gigawatt hours left over for stationary storage. Okay. So no need for a second Gigafactory device before Correct. No need for a Gigafactory, correct. Okay. And then for Jason, the shareholder letter says you plan to open about 80 retail locations and service centers and energize about 300 new supercharger locations. Can you give us some commentary on where exactly those 2 service centers and retail locations might be? Is it mostly the Northeast of the U. S. Or also globally? Sure. So I think the general theme is 2 pronged. We're densifying in markets where we already exist. And where demand has increased significantly, we've got to put service centers. And we try to actually predict ahead of that where we're going to need those. But as Elon referenced, we are opening new markets this year. But I think in general, we're going deeper in markets where we are. And in addition, we're opening a significant number of stores in China and in the Northeast of the U. S. As we increase our awareness and our share in those markets. But you'll see service centers and retail locations opening across all of our markets, including Europe. All right. Why don't we go to the next questioner? Thank you. Our next question comes from Mike Ramsey of The Wall Street Journal. Your line is open. Hi. I guess I was hoping maybe you could kind of give me an encapsulating feeling on the quarter. It's sort of a mixed bag from an outsider's perspective. The losses were pretty high and maybe higher than what some people expected, but you're giving a very aggressive forecast. Do you feel like the company is on the right track and that you're past some of your hiccups? I guess I'm looking for a 40,000 foot analysis. Yes. I feel very good about things right now. I mean, it was the last several months have been quite excruciating, I'd say. I mean, many late nights and weekends, but I think we're through the worst of it at this point. Okay. And I had wanted to ask a little bit about, also your plans for consolidation. Dana asked about whether the Gigafactory factory could handle the Model 3. I'm curious, I haven't been there. There's so many folks working over there now that are even building cars. You have engineers and stuff there. Can you give me a little idea about whether and when you might have to think about consolidating your operations in the Bay Area? Excuse me, I'm a little under the weather as well. I'm not sure what you mean by consolidating. We are kind of spread out because in addition to Fremont, Fremont factory complex and headquarters in Palo Alto, we do have a number of other facilities in the Bay Area. But man, it's I'm not sure how we'd consolidate. We'd have to build a real big facility for that. So you might just keep taking over buildings all around. Okay. All right. Thanks a lot. Appreciate it. Yes. I think, Matt, 7,000,000 square feet of real estate at this point around the Bay Area. Something like that. Yes. And we've seen the Gigafactory actually being a kind of helpful pressure outlet for some things in the Bay Area. Plus expansion in the Lathrop Stockton area. Yes. Brett Latif, next question please. Yes, sir. Our next question comes from DeAnne Durbin of Associated Press. Your line is open. Hi, thanks for taking the call. Considering now that the Chevy Bolt is going to go on sale at the end of this year, so that'll be a full year that it's on sale before Model 3 arrives. Does that I mean, has it taken any wind out of your sales? And or do you think again that these are very different customers? If you're comparing to an Audi A 4, for example, are people still going to be attracted to the Model 3 even though they'll have that option on the market quite a while before the Model 3 arrives? Well, I mean, I would sort of point you to the market share of large luxury vehicles or large premium sedan sales in the U. S. That I've talked about earlier in the call, we currently outsell everyone in that category and had a 51% market growth last year where everyone else declined and the market as a whole declined. So I mean if Model 3 is at all similar in its market segment, it doesn't seem like we're going to be demand constrained. Okay. And I know you don't do any marketing, but I'm wondering if you would ever possibly reconsider that. It struck me when you were saying that you are where you could be on the East Coast and that may be because people need some more educating about how the car performs in the snow or whatever. Do you think there's ever a point at which you might reconsider and do some very targeted marketing in places where you think you could do better? Yes. I don't think it's in the near I think we'll do that in the near term. But in the long term, I think I could see us doing advertising where that advertising was interesting, entertaining and people don't regret seeing it, which unfortunately is not the case for most advertising. So I mean, if there's sort of something interesting and artistic or it's like you it's entertaining, it's like you're going to waste people's time if they saw it. And also, I think we need to have a more affordable high volume car before that makes sense like the Model 3. So is that it's more accessible. So if we do mass media, then it's more likely that somebody could buy the car. And that's kind of the point where it would be something we'd consider. Okay. Thank you very much. All right. Thank you. Our next question comes from the line of Phil Lebow of CNBC. Your line is open. Thank you. Elon, I'm curious if you are noticing any impact in terms of reservations, orders, in terms of the market volatility that we're seeing, the growing questions about instability in our economy elsewhere, fall off in the wealth effect, if you will. Are you guys noticing any slowdown in the pace of orders? John, do you want to? Yes, I think, Phil, it's a great question. And actually, the answer is no. The demand is very strong. We're up significantly over 2014 in the same period. And for both for S and X, we both the order rate on S and the conversion rate to orders on X has been very strong and we're not seeing that impact at this point in time across really all of our markets, both domestic and international. Yes. I mean, that said, we don't want to be complacent about demand generation. And we mentioned, there's a bunch of stores opening that in markets where we really haven't had a store or any kind of meaningful store. I mean, our store in Manhattan, you basically need Sherlock Holmes to find it. So unless you hunt us down, you won't find the store. I think we obviously need to change that and put stores where people are likely to encounter them. It's kind of like a fishing boat or something. It's like you just don't you want to be where the fish are. It's like not in some sort of random barren location. So that's kind of what we're doing. So we're not complacent about demand. And just in case we see things take a turn for the worst, we want to overshoot on demand generation by our stores. Thank you. All right, everyone. That concludes the Q and A session of the call. Thank you so much for joining us today and we look forward to seeing you all in the future. Thanks everyone. Ladies and gentlemen, you may disconnect your lines