Earnings Call: Q3 2015

Nov 3, 2015

Good day, ladies and gentlemen, and welcome to the Tesla Motors, Inc. third quarter 2015 financial results Q&A conference call. At this time, all participants are in a listen-only mode. If you'd like to ask a question during today's question and answer session, you may do so by pressing the star then the one key on your touch-tone telephone. If anyone should require assistance during the call, please press star then zero to reach an operator. As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Mr. Jeff Evanson, Head of Investor Relations. Sir, please begin. Okay. Thank you, Liz, and good afternoon, everyone. Welcome to Tesla's third quarter Q&A webcast. I'm joined today by Elon Musk, Tesla's Chairman and CEO, JB Straubel, our CTO, and Deepak Ahuja, Tesla's CFO. Our Q3 results are announced in the shareholder letter at the same link as this webcast. As usual, this letter includes GAAP and non-GAAP financial information and reconciliations between the two. 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. Now, Liz, let's go to the first question, please. Sure. Oh, do you have something? I can start to make some comments. Yeah, actually, Liz, we'll have our CEO, Elon, make some initial comments. Go ahead, Elon. I just wanted to note that we've made two fairly significant hires. The first of which is Jason Wheeler. He will be our CFO starting next month. Deepak and Jason will be working closely together for the first few months to have a smooth transition. Once again, I'd like to thank Deepak for his awesome contribution to Tesla. Thank you, Elon. Jason comes to us from Google, where he was basically the number 2 finance guy at Google, responsible for their global finance function. Just thought he was a super smart guy, and really understood what we were doing, and was a great cultural fit with the company. I think that's going to be great. In addition, Jon McNeill has joined as head of global sales and service. Jon is the former CEO of Enservio. He's been named most admired CEO in the small- and mid-sized company category. In fact, I believe this is the first time in maybe a decade or more that Jon actually has not been head of the company that he was working at. Before Enservio, he co-founded Sterling Collision Centers, where he was able to reduce the industry repair times by 90%. The average repair time went from 18 days to less than two days, while growing the business at 40% a year. I think Jon's an awesome addition to the team as well. He's been doing great. He's been working now part-time at Tesla for a few months and just started full-time and has already done a lot of good. I'm pretty excited about those two people joining the team, and we expect to have some additional announcements in the months to come as we add bench strength to the Tesla management team. Okay. Thank you, Elon. All right, Liz, why don't we go to the first caller, please. Our first question comes from the line of Colin Langan with UBS. Your line is now open. Oh, great. Thanks for taking my question. In the press release, you seem to address this a little bit, there has been a lot of chatter about cancellations for orders for the Model X. I think the press release says Signature Series. Is that across the models, how should we think about the different versions of the Model X rolling out over the next couple quarters? Deepak, do you want that? I don't think there's been anything fundamentally different. Far on the Signature Series Model X, we've seen a much higher conversion rate than we had seen on the Model S when we launched Model S. Overall, the demand for the Model X after the launch of the Model X has been higher. We don't see any fundamental issues. Yeah. Okay. As we talked about before, really, the main thing with the Model X is just scaling up production. We're making steady progress with each passing week. Actually, seven days a week, every day, I get an update on manufacturing progress and what the issues are. We see no fundamental issues on the production ramp. It's just a question of how quickly we can solve each issue. They're really down to the little things, like the placement of the seal on the door and whether that results in the bright trim alignment being correct. This is quite nuanced. We feel very confident of being able to get to several hundred vehicles per week by the end of the year. Okay. Can you give an update on stationary storage? Is that still trending to your target of $2 billion-$5 billion by 2017? I think the release mentions that there are some institutional orders. Are there any noteworthy orders that you'd want to call out on the storage side that we should look as being big drivers? Are you still confident in your 15% gross margin for that business? That was a whole bunch of questions. Sorry. With respect to stationary storage, that has gained a production limited thing. We're trying to scale our production as much as possible. By almost any metric, if we imagine the most we could possibly make in 2016, we've already sold out of that. At least, if you were to take even a small fraction of the number of people that have placed orders, and assume that those orders are valid, even if a small portion of those are valid, we will be sold out of all of 2016 production and be well into 2017. It's really mostly about predicting our production rate. We expect very dramatic increases in the stationary storage production. The reason I feel a bit cautious about giving exact estimates is that when you have an exponential increase, the exact calendar window over which you place that exponential has quite a big impact on the numbers. In fact, in general at Tesla, I want to be a little more cautious about giving quarterly numbers, particularly when we have very dramatic ramps. Like the example is with the Model X. You can imagine if you have strict calendar windows and you place them over the beginning of an exponential or slightly to the right, or slightly more to the right, the actual differences are quite dramatic. You know where it's going to end up, but not what it looks like in that rapidly changing S-curve situation. Yeah. On the margin side, is it still on target? Thank you very much for taking my question. Sorry, you're breaking up a little bit. On the margin side? The gross margin, is it still trending to the 15% target I think you mentioned on the last call? Oh, 15, yeah. I don't think there's going to be any problem meeting a 15% margin target. Obviously, the margin improves as the production ramps up. Yeah. Yeah, I don't know if we want to discuss the specific margin targets, but it should be in excess of 15%. That is our internal target. Yeah. Once you get away from the very early stage of production, I think long-term margin, 15% is no problem. Okay. Thank you for taking my question. Liz, next call, please. Our next question comes from the line of James Albertine with Stifel. Your line is now open. Great. Thanks for taking my question, and good afternoon. Just a point of clarification first. On the announcement of the 40,000 vehicles that you've rolled the Autopilot feature out to over the air, can you just clarify, once it's rolled out over the air, is there then a point at which the consumer has to determine to spend, I think it's $2,500 to activate it? Is there any detail you can provide us on those that are paying to activate the Autopilot feature at this time? Most people who ordered the car actually ordered it with the Autopilot convenience features. The Autopilot safety features are default on in all vehicles. This is automatic emergency braking, side collision avoidance, forward collision warning, that kind of thing. The convenience features like auto steer, auto park are $2,500. Most people had actually already ordered that. Those that haven't ordered it can actually turn it on for, it's actually slightly more if you get it after the fact, but turn it on for $3,000. That's something that we'll be allowing people to do at some point in the coming months. Sort of like an in-app purchase, I guess. Yeah. Okay, great. I wanted to ask a question as it relates to now that we're past the, as I understood it, the peak spending period in advance of the Model X launch, how should we think about capital expenditures and our cash flow models for the fourth quarter? It sounds like you've reiterated the positive free cash flow guide you had originally stated earlier this year, just some thoughts as it relates to the cash flows in the fourth quarter would be great. Yeah. Q4, we are still in the peak of our Model X investments. A lot of our equipment and tooling is being paid off in Q4 as our suppliers are proving out their production tooling, as well as the equipment is getting installed and getting signed off in our factory. Q4 is going to be a peak for Model X. Clearly, 2016, our CapEx should be less than 2015, we'll provide you further guidance on that in the next earnings call. Much appreciated. Oh, sorry, go ahead. Sorry, I was going to say, we do have a very strong push towards free cash flow. Our aspiration is to be positive. I do want to emphasize this is an aspiration, not a promise, our aspiration is to be positive cash flow in Q1. Understood. Thank you for that color. Deepak, best of luck, and we look forward to meeting Jason when he's fully ramped and on board. Thank you, James. Take care. Our next question comes from the line of Adam Jonas with Morgan Stanley. Your line is now open. Thanks, everybody. Elon, just thinking longer term here, assuming Tesla establishes itself as a leader in autonomous transport, do you see a business case for selling autonomous cars to ride-sharing firms or can Tesla cut out the middleman and offer on-demand electric mobility services directly from the company's own platform? I think we'd have to say no comment. Elon, it's kind of unusual for you to punt on strategic questions of a long-term nature. Is this a dumb question? Or a funny question? I think it's quite a smart question, actually. Why? All right. Still no comment. Okay. I won't antagonize. Let's move on. It's just odd because I've never heard you punt like that. That's all. In any case. You know Is it because of a competitive sensitivity or is it because the concept itself is just too in flux? I think there's a right time to make announcements. This is not that time. Fair play. All right. Can I ask one on Autopilot? Nor is our strategy fully baked here. For us to state what it would be, it's not fully baked, so we'd prefer to announce something when we think we've got the full story understood. Saying it's not fully baked implies there's something in the oven. Okay, cool. We kind of need to move on. Let's move on. All right, let's go to JB real quick then. Autopilot, can you share any early data you might have collected with us post the automated driving software update? How many miles have been driven with Autopilot engaged, how many accidents prevented? Things like that would be really interesting and I think illuminating. Thanks, guys. I don't think we want to share any particular details on specifics around user feedback on that. Certainly, people are using it in a variety of situations. This has gone out to the whole fleet of Autopilot-enabled cars, and those are racking up miles extremely quickly. At this point, I don't have the exact number to my tongue, but it's, I believe, several hundred thousand miles of driving. It's 1 million a day, I think. It's almost 1 million a day of cars that have Autopilot hardware. The early data, this is early data, I want to emphasize, is that it's very positive. We're aware of many accidents that were prevented from Autopilot, and we're not aware of any that were caused by Autopilot. This is still early, but it's a good indication. It appears to be quite beneficial from a safety standpoint, and I believe some of our customers have posted videos to this effect. Excellent. Thanks, everybody. Our next question comes from- I do want to emphasize, we discourage There's been some fairly crazy videos on YouTube. This is not good. We will be putting some additional constraints on when Autopilot can be activated to minimize the possibility of people doing crazy things with it. Our next question comes to the line of Joseph Spak with RBC Capital Markets. Your line is now open. Thanks. Good afternoon. I guess it's been a while since we heard anything about this, but I just wanted to get a better sense of how you feel you're set up to deal with potential issues on the cars on the hardware side, where a fix can't be OTA'd to the vehicle. Because when you look at the coverage, at least in the U.S., the ratio of service centers to stores and galleries is still trailing a little bit. How does that build out look going forward, and how would you potentially handle a hardware situation at this point? I'm not sure I fully understand your question. You mean, can you give me an example? If you had a hardware recall for- Just like Sure. We've handled recalls in the past with our service team. It's gone quite well. In general, we try to be proactive. Well before we're sort of forced to do a recall, we proactively try to fix things in the cars that we think might, in the future, be an issue. The customer happiness, as measured by really the key question that I think people should be concerned about, which is "Will your next car be a Tesla?" That's the key question on Consumer Reports. 97% of respondents said that their next car would be a Tesla. Frankly, this is the only question people should care about. Okay. Thanks for that. One more, I guess, sort of hardware question as it relates to Autopilot, where this is clearly stage 1 and you could add sensors over time and maybe some new features as well. How do you think about managing the brand and the vehicles when that happens? Because as the sensor suite changes, it can create two potentially different experiences when. The reason I think it's a little bit more of an issue for Tesla is just you don't have the strict sort of model year nomenclature. I guess I just wondering how you think about that and maybe some thoughts on your current sensor suite and how you see that evolving as well. Okay. I think these are pretty open-ended questions. Plus we have just continuous improvements. Every week there are approximately 20 engineering changes made to the car. It's not nearly as discreet as you're alluding to. With other manufacturers, they tend to sort of bundle everything together in a model year. In our case, it's a series of rolling changes. Model year doesn't mean as much. There are cases where that step change may be a little higher than normal, as, for example, with having the Autopilot camera, radar, and ultrasonics. We try to actually keep those step changes as small as possible. Essentially, a common question that I get from friends is, "Hey, when should I buy a Model S?" My answer is always, "Right now." They say, "Well, aren't you going to make a better one in six months?" I'm like, "Yep. Of course." If their goal is to only buy a Model S when there aren't significant improvements happening, then they will never buy one. Okay, Liz, why don't we go to the next caller? Our next question comes from the line of Patrick Archambault with Goldman Sachs. Your line is now open. Okay. Yeah, great. Thank you. Good evening. A couple questions. Just one on the battery side. I think a lot of us were surprised at the GM Analyst Day. They put a slide up which said that they were working on a battery that was $145 a kilowatt hour. That probably didn't include the pack cost, but even adjusting for that seemed like a pretty low number. I don't know, maybe JB, how did you guys react to that presentation? Is it realistic? Are you worried about the threat of a large form factor battery being the same cost as yours within kind of a one-to-two-year timeframe, would be my first question. Well, we definitely read the report. We're not terribly concerned about it. I think also there was a lot of confusion in that particular report and some of the comments following about cell price versus pack cost. In general, we're quite comfortable in our position with the type of cells and the form factors we're using, and we think that's going to be the best cost position and cost roadmap in the future. And so- Yeah. Sorry. Go ahead. really high probability. We're constantly agonizing about the cell cost and pack cost. We don't think anyone is on a path to be even close to us. If they are, I would be the first to congratulate them. Got it. Well, that's very helpful and quite reassuring to know. My second question just was on, in the press release you talked about orders having increased 50% year-on-year. Maybe just a little color on that. That's obviously impressive given a model that's been out there for a few years. Just any additional color on regional breakdown or what that's being driven by? We haven't provided that in the past, other than, I think, maybe the way to put it is that Europe and APAC were really strong. So was North America. North America. North America has always been strong. Yeah With Europe and APAC being strong too, we were at 50% year-over-year. Yeah. Maybe, quite frankly, look at it the other way around. I think we were actually relatively weak in APAC and. That's fundamental, okay. relatively weak in most countries in Europe. Yep. We're fixing those fundamental weaknesses. Yep by ensuring that we've got a good Supercharger infrastructure, a good service center infrastructure, that any perceptions about the company are addressed. In a lot of places, it takes time to build consumer confidence. They need to hear about Tesla a lot before they're comfortable making a significant asset purchase. Yeah, it's a matter of the execution by the team, brand awareness, and our expansion of our global network. Yeah. I wouldn't say, it's not like, really, all regions have improved- Absolutely quite significantly. Yeah. Got it. Helpful. If I can squeeze one last one in really quickly. On the topic of Autopilot, there were some reports of the car taking exits and stuff when it wasn't told to and things like that. I just didn't know if there was much validity in any of that stuff. Are any of these things true? Because you sound very confident about the technology, yet initially there were some reports of errors and things like that. Well, I don't think it should be a surprise that there were reports of errors. We described the Autopilot as a beta release, and that the system will learn over time and get better, and that's exactly what it's doing. I think it's exactly what we described is occurring, and the system is getting better with each passing week. I would expect that learning to accelerate. I think it'll start to feel quite refined within a few months. Got it. Understood. Okay, thanks a lot, guys. Okay. Our next question comes from the line of Rod Lache with Deutsche Bank. Your line is now open. Hi, everybody. Had a couple questions. Just first on Model X, I just wanted to confirm, did you say you thought you could get a few hundred produced and delivered by year-end? Just so that we understand what's been happening here, is it just the seat at this point, or are there other unique challenges that you think prospectively affect the ramp of the vehicle? No, to be precise, I said several hundred per week, that we expect to reach the production rate of several hundred per week, next month. Okay. It's difficult to predict the exact number that will be developed because of what I was mentioning earlier of we're on kind of an exponential ramp. Exactly one week this way or that can actually make a significant impact in the absolute number of vehicles delivered. We do feel comfortable at this point of reaching the several hundred per week production rate before the end of the year, i.e., next month. The issues are a bunch of little things. Door seals right now is a challenge, for example. The monopost seat in the second row is still a challenge, but less of a challenge. It's not the gating factor. There's basically going through a series of constraints, and those constraints can change from one day to the next. The important point is that we don't see any fundamental obstacle to achieving a production rate of several hundred per week sometime next month. Okay. It sounds like the target that you laid out, the 1,600-1,800 a week, it sounds like you might think that that's achievable in early 2016. Wanted to confirm that you didn't provide CapEx for next year. Also if you can just confirm, is that what you're sort of thinking you need to achieve that free cash flow breakeven? Yeah. I think it's likely that we could be in that 1,600-1,800 range per week range in Q1. I'm guessing we'll probably be towards the lower end of that range. Maybe exceed the high end of that range towards the end of next year if things go well. There are some caveats there. Depends on what macroeconomic conditions are like around the world next year. Right now, we do see that 16-1,800 per week on average as recurring in Q1. Great. Just lastly, if I can slip one last one in. You ramped up your CapEx, presumably in part to achieve some increased targets for Tesla Energy. Could you just give us some high-level thoughts on what you might be able to ramp up to for that business line, maybe in 2016? Well, the CapEx requirements for Tesla Energy are not that significant as a percentage of the total for Tesla. Yeah, I think just to sort of provide a broader perspective, Rod, the CapEx increase. Let's talk 2016. The CapEx in 2016 is primarily going to be for Model 3 and the Gigafactory as we're looking at towards 2016 and beyond. It's not necessarily for much of the capacity required in 2016. Clearly, there is a little bit of CapEx there for Tesla Energy, but that's not the driving factor. Much of that CapEx has been put in place by end of this year for our needs next year. Okay, great. Thank you. Our next question comes from the line of John Murphy with Bank of America. Your line is now open. Good afternoon. Just a first question on insourcing. Obviously, you guys are pulling the second-row seats in-house for the Model X, and there have certainly been some acquisitions and work you've done on forging and casting. Just curious, as you look at production going forward for the Model X and even the Model 3, if there would be opportunity to insource more parts to really solve the issues you're facing with some of your suppliers. As you think about that, how you make that decision around cost and capital intensity, and if you get that right and can insource more, if you could potentially increase the cadence of your product introductions and the product launches themselves. Yeah. I totally agree with that. We've only, actually, in the whole history of Tesla, done one tiny acquisition, and that was for Riviera Tool in Michigan. We're planning to use that as a hub to recruit top tool and die manufacturers, basically tool and die engineers, to Tesla Michigan with that exact goal, which is how do we reduce our time to market for new products. We end up being constrained by basically tools and molds. Anything we can do to tighten that timeframe organically wise, an acquisition is a good thing. The crazy thing is that $10 million or so that we spent acquiring Riviera was less than what we spent on expediting our stamping dies. Yeah. It's like a no-brainer. We want to do that in general. We're looking at all of our critical path items and saying, "Okay, how do we execute faster and reduce the critical path for new product introductions?" Obviously, with an eye towards Model 3, and making sure that Model 3 happens as soon as humanly possible. Is this significantly just around tool and die, or are there other parts where you could actually be doing all the seating internally or start thinking about wiring harnesses or stuff that would be that intensive as far as insourcing? We have substantially insourced the seats at this point. Tesla is producing its own seats. Yeah. That is actually something we've already done. Okay. Just a second question on the fourth quarter. You're talking about 17,000-19,000 units being delivered. Is the low end and high end of the range really dependent on the ramp on Model X, and you sort of see 17,000 at the low end as sort of your base with your Model S? Just trying to understand the range and sort of how we should think about mix in the fourth quarter. Yeah. The big variables are exactly in which week are we able to really spool up Model X production? In a few weeks, movement one way or the other has quite a big impact on Model X production. Then, of course, we still have to get those cars delivered. At the end of the year, there can often be logistical challenges because it's Christmas and New Year's, and all the logistics channels are jammed, and people are not home. There can also be adverse weather events like blizzards and things. It's logistical challenges at the end of quarter and what exactly does the Model X production ramp exponential look like. That's what introduces the uncertainty. Okay, we shouldn't think of the 17,000 as sort of a base level for Model S. There's a lot of variables that are going in here in addition to the Model X ramp, right? Yeah. End of quarter logistical challenges around Christmas always is a bit of a wild card. Got you. Okay. Then just lastly real quick. With everything that's going on with Dieselgate, obviously your ZEV credits might be a lot more desired by a lot of folks out there. I know you guys are talking about no ZEV credits in the fourth quarter as far as the sales, or actually at all for sales or gross profit. Over time, is there an opportunity to maybe sell them at a much higher price as they become available? I know it's not a big part of the business, but it does seem like an opportunity maybe in the short run to make a lot of money on some increasing demand. It really depends on what happens with zero-emission vehicle regulations over time. You'd think given Dieselgate and all that there should be a tightening up of zero-emission requirements, but we're not seeing that yet. Frankly, we do not think that the California Air Resources Board is being sufficiently stringent in this regard. If we can't sell ZEV credits, obviously the regulation's not strong enough. Okay, great. Thank you very much. Our next question comes from the line of Dan Galves with Credit Suisse. Your line is now open. Hey, thanks for taking my questions. You made a lot of changes to the plant in Q3. Do you have any metrics to share with us in terms of improved production efficiency? How does it make you feel about the ability to hit production numbers and margin in 2016? Dan, I'm not sure what changes are you referring to in Q3. Well, what you guys did during the shutdown to final assembly and the body shop? Oh, well, that was essentially at that point to put in additional capacity for Model X, it sets us up for our production needs in 2016. Overall, clearly, we'll provide further guidance in the next call, our goal is to keep on working on manufacturing cost reductions on S and X. We see the opportunities, the team's going to be focused on that while also working on Model 3. We're truly a multi-product company and working on several directions. Okay, great. Then just one question on Autopilot. A lot of automakers talk about mapping as a key constraint to getting to higher levels of vehicle automation. Does the experience of the miles being driven by Model S Autopilot help you guys in that regard at all? Are you planning to come up with your own mapping? I think this call's not the time for future product announcements. In general, this is not meant to mean anything. In general, we're going to plan on making product announcements in earnings calls. Maybe just to squeeze in one more. The newer drive unit, how is the quality level been on that versus, I think you had a bigger drive unit that you used initially for the first couple of years? Right now, we're actually very happy with the quality of the drive units. Internally, we changed the goal of the drive unit endurance from being approximately 200,000 miles to being 1 million miles. Just basically, we want drive units that just never wear out. That's our goal. I think we've made really good progress in that direction. The drive units going out now and for the last several months have been excellent. Cover that. We should probably note that we've also made improvements to the large drive unit. Those issues were really limited to early population large drive units. Today, we hold the same standard on both units that are being built. Exactly. There was this one period of time where we had, it was like the risk of getting into the weeds. Just before we transitioned to automatic grease injection into the spline of the large drive unit, we had variation in how much grease was put into the spline. If not enough grease was put into the spline, it would have premature wear. One example. Other than that, the large drive unit's been great. Our next question comes from the line of Andrea James with Dougherty & Company. Your line is now open. Thanks for taking my questions. A year ago, you guys had been targeting 20%-30% gross margins by around this time. Clearly, the world changed on you with the currencies and so forth. What's the right way to think about gross margin over the next 18 months? Well, our goal is to steadily improve gross margin, and hopefully exceed 30% on the S and X vehicles within 18 months, hopefully sooner than that. It does require quite an intense effort for every fraction of a point of gross margin. And that assumes there's not some radical shift in currencies that happens again. According to our plans, at least, we would exceed 30% gross margin within 18 months on the S and X line. Okay, that would be without a meaningful- Yeah, it's a combination- Go ahead. Yeah, it's a combination of various initiatives in the company, from material cost reductions to manufacturing production efficiencies and labor hours per unit reduction, combined with economies of scale that as our volume goes up, our- Yeah, exactly. Clearly, as we act on all of those directions and add volume, we see a path that we can achieve that. It's a lot of hard work, and we need to do it. Okay, maybe you'd prefer if the Street kept the model a little bit low and let you guys get there? Yeah, absolutely. Yeah. We're describing this is our goal, and we believe we've got a plan to get there. There could be unexpected issues along the way that prevent us from getting there. I think we'll certainly be better than where we are today. Yeah. That's quite certain. Assuming constant dollar, some of these external things. Yeah. Okay. Just two more. When can you give us- Andrea, we've really got a lot of people that want to ask questions here. Maybe just one more. I guess, I'll take a step back. It seems like in the Silicon Valley-centric worldview, Autopilot's where driving is going and all the cars are going to be driving themselves. I just really want to know, is that Tesla's view, and how central is Autopilot to your long-term revenue profit and vehicle electrification goals? Well, I'm actually on record as saying that I think that all cars will go fully autonomous in the long term. I think it'll be quite unusual to see cars that don't have full autonomy, let's say, for new car production in the 15-20-year timeframe. For Tesla, it'll be a lot sooner than that. I actually think at the point at which cars are being made that have full autonomy, any cars that are being made that don't have full autonomy will have negative value. It will be like owning a horse. You're really owning it for sentimental reasons. Thank you. Our next question comes from the line of Emmanuel Rosner with CLSA. Your line is now open. Hi, good afternoon. I wanted to first ask, just put a finer point on the fourth quarter. Deliveries of 17,000 to 19,000 units seems like not a huge contribution from Model X within this. How do you ramp up the Model S deliveries sequentially so fast? It doesn't look like in the Model S history, we've seen such a sequential increase in deliveries. What are you doing, I guess, better in this particular quarter? Well, it's not as big a leap as it might seem from Q4 to Q3 because there's a whole week missing from Q3. We continue to ramp the rate all the way from beginning of Q3 through end of year for Model S. It's actually not too much of a stretch or less of a stretch than it may seem. Certainly we've had much bigger sequential jumps before than this. It's worth noting that in 2010, Tesla was delivering 500 cars per year. We now deliver 500 cars in just over two days. Okay. That's helpful. Then just on, again, a finer point just on the Model X for this particular quarter. Have you actually started production? It sounds like you're still working out some issues there. What has essentially surprised you as you ramped this up, which is causing maybe the actual production in larger numbers to be maybe slightly later than it would have been? Yeah. The thing about a car is because there's several thousand unique components in a car the production can only move as fast as the slowest component. Even though 99% of the Model X is ready for high production less than 1% of the parts are not, but those are what drive the rate. That's the thing that makes vehicle production really, really challenging and the vehicle ramp really challenging. You don't know in advance what those issues are going to be, or you would do something about it. Yeah. You basically think of like the production will move as fast as the least lucky supplier that we have in our network. Yeah. There are sort of fires, floods, issues of various kinds around the world. Yeah. Several thousand parts and effectively, if you go down to tier 2 and tier 3, several thousand suppliers, it moves as fast as the thousandth worst supplier. Our next question comes from the line of Ryan Brinkman with JPMorgan. Your line is now open. Hi, good afternoon. Thanks for taking my question. Just maybe going back to the Dieselgate issue again, but from a bigger picture perspective. I'm curious what impact you see to the electric vehicle market from these revelations at VW. Could it increase the demand for electric vehicles to your benefit? Does it maybe make non-electric vehicles more expensive to produce to truly comply with the emission regulations? Does that help the Model 3 be more cost-competitive? I'm just curious what impact you see overall to the industry and then to Tesla specifically. Well, this has really shined a spotlight on the whole emissions testing process. It's now obvious to consumers that gasoline and, well, especially diesel, but also gasoline cars have real-world emissions that are substantially greater than what's experienced when they go through testing. I think what one would naturally expect from this is that regulators will no longer turn a blind eye to these things. The cost of producing gasoline diesel cars that actually meet the legal emissions requirements is going to be quite a bit higher. I would expect the car companies to accelerate their plans for electric vehicles, which is great. There might be some near-term benefit to Tesla, but thus far we haven't actually seen it, but there might be one. Okay, great. Just last question. I understand that deliveries for the Model X initially are clearly a function of how many you can build, given your large backlog of orders. In trying to estimate what demand might look like more medium to long-term, is there anything more that you can say now or that can be shared about the pricing of the vehicle beyond Signature Series? Well, just what I've mentioned publicly, which is that we expect the similarly equipped Model X to be no more than $5,000 greater than the price of Model S. Our next question comes from the line of Colin Rusch with Oppenheimer. Your line is now open. Thanks so much. Can you talk a little bit about the acceleration and the ramp of the Gigafactory? What are you seeing at this point in terms of your ability to fully accelerate in 2016? When do you think we might see cells coming out of the factory and into cars? In particular, as we've mentioned, we've accelerated the production of Tesla Energy products at the Gigafactory. That's what has started just recently there, and that was quite a bit ahead of plan. That's happening in a separate section of the factory from where the cells will be produced. Also as we discussed, we do expect that cell production will start up in the second half of next year, which is again, a little bit ahead of plan. Some of those cells would initially be allocated toward Tesla Energy products. We still are targeting around 2017 for the first cell production that would be going into vehicles and into the Model 3. That remains on target. Just in terms of the dynamics around leasing, are you seeing any real meaningful changes in terms of overall lease take rates, or a change in ownership kind of dynamics at this point? We are seeing a slight increase in the lease take rate in North America. As we indicated in the letter, that increase has been fully consumed or taken up by our bank leasing partners rather than Tesla direct leasing. Whether we do resale value guarantee or leasing from our perspective it's no different. It's a consumer preference, there's nothing deep or significant that we are seeing in that trend. Our next question comes to the line of Brian Johnson with Barclays. Your line is now open. Kind of 3 quick questions or 2 quick ones, one more philosophical. First, again, on the 4Q, you talked about building up finished goods inventory. We don't have the final numbers yet, but for last quarter production outpaced deliveries and you're guiding to that for 4Q. What's going to be different in terms of hitting that ramp-up on deliveries for Model S in 4Q vis-a-vis drawing down that inventory? You're referring for Model S? Yes, for Model S. Yeah. As we indicated in the letter, we were carrying higher finished goods inventory that was in transit at the end of Q3 to support those higher deliveries in Q4 and it's the drawdown of that extra inventory that allows us to do that. Our ending inventory at Q4 is going to be no different than what we have had a few quarters back. It's still a fairly good level to support all of our marketing and sales and service activities. Overall the increase is demand-based and it's fully doable. And- I think I've answered the question fully. Yeah, go ahead. Yeah. To clarify just the Model X pricing, is that based on range and features? Or is it just based on battery size, the 5,000 difference? For a comparably equipped car with range of features, yeah. Okay. Equipment means battery or range or With the same battery and the same number of seats and that kind of thing. Final question, and maybe this is one for a Jason, Deepak, Elon conversation is, autos are a very capital-intensive business. As much as you're pursuing a different model on the battery side, it looks like there's a lot of capital going into tooling and all these complicated mechanical things, not to mention service. As you kind of think forward three years, is that more or less the way you're going to spend capital or is there anything you could do to kind of be more asset light in the process? I think stepping back, maybe the better way to look at it is that at Tesla, our CapEx spend for what we are achieving, in my mind, has been really efficient in the industry. It's worth noting that Deepak spent a huge part of his career at Ford, so you have a good basis for comparison. Right. As we look at every year, and as we add incremental capacity and the CapEx related to that, we are continuing to increase on that efficiency in terms of CapEx dollars per unit of production. Fully agree, this is an asset-intensive business. The key here in terms of return on investment is how efficient we are with that capital. That's what we are focused on. Yeah. Absolutely. We certainly believe in capital efficiency and getting better with that over time. We also believe that companies build value by doing hard things, not outsourcing those hard things to other people, because then they deserve the value. That's a key point. Our next question comes from the line of Brad Erickson with Pacific Crest. Your line is now open. Great. Thanks for taking my questions. I guess consistent with a lot of your commentary recently, you called out in the shareholder, just wanting to emphasize quality on the Model X, and it sounds like it's warranting a little bit slower ramp here in the near term. With what you've gone through over the past few years in bringing this car to market, does this change your thinking at all over the longer term when you think about the pace at which you'll bring Model 3 to market relative to longer-term targets that are out there? Well, I think we're still aiming to have Model 3 in about two years. I think the cadence of future products should improve as we have more resources to shorten the critical path on things, like I was mentioning earlier, like stamping tools and molding dies and things that tend to drive our schedule. Because from the point at which the car is designed, it can take almost two years to get fully tooled up. That seems like a crazy amount of time to us, and we want to try to reduce that significantly. Got it. Thanks. Our next question comes from the line of Ben Kallo with Robert W. Baird. Your line is now open. Thanks. Elon, could you talk a little bit, as you guys have increased your sophistication around the market, what you think the addressable market is for the Model S going forward? Could we talk a little bit about getting to 20% or above gross margin on the Model X, what kind of volumes we need? Third, can we touch on the energy storage industry? One thing that I hear a lot in the marketplace is it's a commodity business. JB, could you touch on that, and anything you're seeing there? Elon, last time on the call, you threw out some pretty big numbers for energy storage. Yeah. How many questions are we talking about here? I don't think that people really gave you a lot of credit there, could you just talk about what backs up those numbers? I think it's just basically as we mature in various markets around the world, it's always a question of how long does it take to mature in these markets? Some markets are a lot harder to solve than others. There's also macroeconomic conditions, will there be a recession? Not will there be, when will there be a recession? These will obviously make a difference. I think in the long term, there's probably close to 100,000 vehicles a year of Model S demand, and maybe something comparable to, for Model X, holding economic conditions constant and assuming full market maturation, which could take quite a long time in some markets. Maybe to your energy storage question, obviously energy is a commodity market, I don't think that in any way really changes the opportunity there. In some ways, that's sort of what creates it and creates Makes it bigger. Exactly. It's what creates the opportunity for us to ramp much faster. We still see a lot of technical differentiation amongst these different products. Just because energy itself is a commodity, doesn't mean that the ways that you create it are the same. The storage technologies and how well they're integrated and how plug-and-play they are for customers to just use them to solve problems and do that very quickly is quite different amongst all the different people trying to address this. Yeah. Basically, if you can provide a $1's worth of value for $0.80, compared to your competitors in a commodity business, that's amazing. That's like you want to be in a commodity business. Got it. Then on the margins on the X volume? Well, I think they're going to be comparable to the S over time. It is important to bear in mind that the S is a much more mature product. We've been in production with the S for three years. I would expect the margins to be within a few points of one another, over the long term. Great. Thank you very much. This is broadly indicated in the letter. Okay, everyone. Thank you very much for joining us today. We look forward to talking with you next quarter. Bye-bye. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.