Earnings Call: Q3 2015

Nov 3, 2015

Good day, ladies and gentlemen, and welcome to the Tesla Motors Incorporated Third Quarter 2015 Financial Results Q and A Conference Call. At this time, all participants are in a listen only mode. As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Mr. Jeff Evenson, Head of Investor Relations. Sir, please begin. Okay. Thank you, Liz, and good afternoon, everyone. Welcome to Tesla's Q3 Q and 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 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. And now, Liz, let's go to the first question, please. Sure. I can probably Do you have some I can say to make some comments. Yes. Actually, Liz, we'll have our CEO, Elon, make some initial comments. Go ahead, Elon. I just wanted to note that we've made 2 fairly significant hires, the first which is Jason Wheeler. He will be our CFO starting next month. Deepak and Jason will be working closely together for the 1st few months to have a smooth transition. And once again, I'd like to thank Deepak for his awesome contribution to Tesla. Thank you, Elon. Elon. And so Jason comes to us from Google, where he was basically finance guy at Google, responsible for their global finance function. And just thought he was a super smart guy and really understood what we were doing and was like a great cultural fit with the company. So I think that's going to be great. And then in addition, John McNeil has joined as Head of Global Sales and Service. And John is the former CEO of Inservio. He's been named sort of most admired CEO in the small and midsized company category. In fact, I believe this is the first time in maybe a decade or more that John actually has not been head of the company that he was working at. So and before Insovero, he co founded Stilink Collision, which where he was able to reduce industry repair times by 90%. So the average repair time went from 18 days to less than 2 days, while growing the business at 40% a year. So I think John's an awesome addition to the team as well. And he's actually he's been doing great. He's been working out part time at Tesla for a few months and just started full time and has already done a lot of good. So I'm pretty excited about those 2 people joining the team, and we expect to have some additional announcements in the months to come as we add bench strength to the Test and 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. Great. Thanks for taking my question. In the press release, you seem to address In the press release, you seem to address it a little bit, but there has been a lot of chatter about cancellations for orders for the X. I mean, and I think the press release says Signature Series. Is that across the models? And how should we think about the different versions of the X rolling out over the next couple of quarters? Rich, over there? I don't think there's been anything fundamentally different. I mean, so far on the Signature Series Model X, we've seen a much higher or higher conversion rate than we had seen on the S since we launched S. So overall, the demand for the X after the launch of the X and has been higher. So we don't see any fundamental issues. Yes. I mean, as we talked about before, really, the main thing with DX is just scaling up production. We're making steady progress with each passing week. Actually, 7 days a week, every day, I get an update on manufacturing progress and what the issues are. And we see no fundamental issues on the production ramp. It's just a question of how quickly we can solve each issue. And they're really down to like the little things like the placement of the seal on the door and whether that results in the Brightrim alignment being correct. This is quite nuanced. So we feel very confident of being able to get to several 100 vehicles per week by the end of the year. Okay. And can you give an update on stationary storage? Is that still trending to your target of $2,000,000,000 to $5,000,000,000 by 2017? And I think the release mentioned that there are some institutional orders. I mean, are there any noteworthy orders that you'd want to call out on the storage side that we should kind of look at being big drivers? And are you still confident in your sort of 15% gross margin for that business? Sorry, that was like a whole bunch of questions. The with respect to stationary storage, I mean, that has gained sort of a production limited thing. So we're trying to scale that production as much as possible. I mean, we've by almost any metric, we're if we imagine the most we could possibly make in 2016, we've already sold out of that. We've already sold out of that. Or 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, they will be sold out of all 2016 production and be well into 2017. So it's really mostly about predicting our production rate. And 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 the that you place that exponential has quite a big impact on the numbers. So and in fact, in general, in Tesla, I want to be a little more cautious about giving quarterly numbers, particularly when we have very dramatic ramps like 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. So like you know where it's going to end up, but not what it looks like in that rapidly changing S curve situation. Yes. And on the market side, is it still on target? Sorry, on the you're breaking up a little bit on the margins? The gross margin, is it still at your or is it still trending to the 15% target, I think, you mentioned on the last call? Oh, 15%, yes. 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. So yes. Yes. 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. Yes. I mean, yes. Once you get away from the very early stage of production, I think long term margin of 15% is no problem. Okay. Thank you for taking my question. Thank you. Liz, next call please. Our next question comes from the line of James Alberty with Stifel. 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? And 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 order it with the Autopilot convenience features. So the Autopilot safety features are default on in all vehicles. Versus automatic emergency braking, side collision avoidance, forward collision warning, that kind of thing. The convenience features like autostear, autopark are $2,500 But like I said, most people have actually had actually already ordered that. So those that haven't ordered it can actually turn it on for it's actually slightly more if you get it after the fact, turn it on for $3,000 And 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. Yes. Okay, great. And then I wanted to ask a question as it relates to now that we're past sort of 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 Q4? And maybe it sounds like you've reiterated the positive free cash flow guide you had originally stated earlier this year, But just some thoughts as it relates to the cash flows in the Q4 would be great. Yes. I mean, in 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 production are proving out their production as our suppliers are proving out their production tooling as well as the equipment is getting installed and getting signed off in our factory. So Q4 is going to be a peak for Model X. Clearly, 20 16, our CapEx should be less than 2015, and then we'll provide you further guidance on that in the next earnings call. Much appreciated. And sorry, go ahead. Sorry, I was going to say, we do have a like a very strong push towards free cash flow. I mean that is our aspiration is to be positive I do emphasize this is an aspiration, not promise, but our aspiration is to be positive cash flow in Q1. Understood. And thank you for that color. Deepak, best of luck, and we look forward to meeting Jason when he's fully ramped and onboard. 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. I mean, 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. But still no comment. Why? Okay. I won't antagonize. Let's move on. I mean it's just odd because you normally are I've never heard you punt like that. That's all. But in any case. Is it because of a competitive sensitivity? Or is it because the concept itself is just too influx? Think that's the right time to make announcements. This is not that time. Fair play. All right. Can I ask one on autopilot? And NOR I mean NOR is our strategy fully baked here. So for us to state what it would be, It's not fully baked. So there's no we'd prefer to announce something when it's when we think we've got the full story understood. So saying it's not fully baked implies there's something in the oven, but just Okay. We're going to need to move on. Let's move on. JB, all right, let's go to JB real quick then. On 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 eliminating. Thanks guys. Well, I don't think we want to share any particular details on specifics around user feedback on that. But 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 100,000 miles of driving. So So 1,000,000 a day, I think. It's almost 1,000,000 a day of cars that are have autopilot hardware. So I mean, the early data, this is early data, I would emphasize, is that it's very positive. So we're aware of many accidents that were prevented from autopilot, and we're not aware of any that were caused by autopilot. That's but this is still early, and but it's a good indication. So it appears to be quite beneficial from a safety standpoint, and I believe some of our customers have posted videos to this effect. Our next question comes from But I do want to emphasize, we're discouraged. There's been some fairly crazy videos on YouTube. We are this is not good. And 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 from 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 you hear 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 fixed can't be OTA to the vehicle both. 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. So how does that build outlook going forward? And how would you potentially handle a hardware situation at this point? I'm not sure I fully understand your question. So you mean can you give me an example of what you're saying? If you had a hardware recall for Just like, I mean like, sure. I mean we've handled recalls in the with our service team. It's gone quite well. In general, we try to be proactive. So if we without well before we're sort of forced to recall, we proactively try to fix things in the cars that we think might in the future be an issue. And the customer happiness is 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 like 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. And then 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. So how do you think about managing the brand in the vehicles when that happens? Because as the sensor suite changes, it can create 2 potentially different experiences when and I guess a little bit more 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. So you're not so I guess just wondering how you think about that and maybe some thoughts on how on your current center suite and how you see that evolving as well. Okay. I think it's pretty open to your questions. But we have a plus we have just continuous improvements. So every week, there are approximately 20 engineering changes made to the car. So it's not really as discrete 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. So 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. But we try to actually keep those step changes as small as possible. And so that I mean, essentially, like a common question that I get is from friends is, when should I buy a Model S? And my answer is always right now because and they say, well, aren't you going to make a better one 6 months? They're like, yes, of course. But if their goal is to only buy a Model S when there aren't significant improvements happening, then they will never buy 1. Okay, Liz, why don't we go to the next caller? Our next question comes from the line of Patrick Archambault Goldman Sachs. Your line is now open. Okay. Yes, great. Thank you. Good evening. A couple of 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, that seemed like a pretty low number. And I don't know, maybe JB, how did you guys react to that presentation? Is it realistic? I mean, are you worried about the threat of a large form factor battery being the same cost as yours within kind of a 1 to 2 year timeframe would be my first question. Well, we definitely read the report and 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 sell price versus pack cost. And 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 positioning, cost roadmap in the future. Yes. And so Really high probability. I mean, we're constantly agonizing about the sale cost and pack cost. And 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. And maybe just a little color on that. I mean, that's obviously impressive, given the 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. I think all of them may the way to put it is Europe and APAC were really strong and So was North America. And North America North America has always been strong. And with Europe and APAC being strong too, we were at 50% year over year. Yes. I mean, maybe quite frankly, looking at the other way around, I think we were actually relatively weak in APAC and relatively weak in most countries in Europe. And we're fixing those fundamental weaknesses by ensuring that we've got a good supercharger infrastructure, a good service center infrastructure, that any perceptions about the company are addressed. And in a lot of places, it takes time to build consumer confidence. They need to hear they need to hear about Tesla a lot before they're comfortable making a significant asset purchase. So Yes, it's a matter of the execution, but the team brand awareness and our expansion of our global net. Yes. So it's but I wouldn't say it's not like really I mean all regions have improved quite significantly. Yes. 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 like taking exits and stuff when it wasn't told to and things like that. And I don't I just didn't know if there was much validity in any of that stuff. I mean, have you guys are any of these things true? Because I mean, you sound very confident about the technology, yet initially there were some reports of errors and things like that? I don't think it should be a surprise that there were reports of errors. I mean we described the beta release and at one end that the system will learn over time and get better, and that's exactly what it's doing. So I think it's exactly what we described is occurring, and the system is getting better with each passing week. So I would expect that learning to accelerate And for I think it will 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 of questions. Just first on Model X. I just wanted to confirm, did you say you thought you can get a few 100 produced and delivered by year end? And 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 100 per week. We expect to reach the production rate of several 100 per week next month. And is everyone to predict the exact number that will be developed because of what I was mentioning earlier of like we're on kind of an exponential ramp. So exactly 1 week this way or that can actually make a significant number a significant impact in the absolute number of vehicles delivered. We do feel comfortable at this point of reaching the 700 per week production rate before the end of the year, I. E, next month. And the issues are a bunch of little things. Door seals right now is a challenge, for example. The mono post seats in the 2nd row is still a challenge but less of a challenge. It's not the gating factor. This is basically going through a series of constraints, and those constraints can change from one day to the next. But the important point is that we see we don't see any fundamental obstacle to achieving a production rate of several 100 per week sometime next month. Okay. And it sounds like the target that you laid out, the 1600 to 1800 a week, it sounds like you might think that that's achievable in early 2016 and wanted to confirm that. You didn't provide CapEx for next year, but also if you can just confirm, is that what you're sort of thinking you need to achieve that free cash flow breakeven? Yes. We I think it's likely that we can be in that 1600 to 1800 range. We have per week range in Q1. I mean, I'm guessing it would probably be towards the lower end of that range, but then maybe exceed that, the high end of that range towards the end of next year if things go well. I mean there are some caveats there, but it depends on what macroeconomic conditions are like around the world next year. But right now, we do see that 1600 to 1800 per week on average as occurring in Q1. Great. And 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 Energy. Yes. I mean, I think just to sort of provide a broader perspective, broad the CapEx increase so let's talk 2016. The CapEx in 2016 is primarily going to be for Model 3 and the Gigafactory as we are looking at 2018 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 in sourcing. I mean, obviously, you guys are pulling the 2nd 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 would be opportunity to in source more parts to really kind of solve the issues you're facing with some of these suppliers. And as you think about that, how you make that decision around cost and capital intensity? And if you get that right and can in source more, if you could potentially increase the cadence of your product introductions and the product launches themselves. Yes. I totally agree with that. That's exactly that's the reason like we've only actually in whole history of Tesla only done one tiny acquisition, and that was for Riviera Tooling in Michigan. And we're planning to use that as a hub to recruit top tool and die manufacturers, basically tool and die engineers, to Tesla, Michigan and with that exact goal, which is how do we reduce our critical path to market our time to market for new products because we end up being constrained by basically tools and molds. And anything we can do to tighten that time frame organically was an acquisition is a good thing. I mean the I mean the crazy thing is that $10,000,000 or so that we spent acquiring Rivera was less than what we spent on expediting our stamping dies. So it's like a no brainer. And we want to do that in general. We're like looking at all of our critical path items and saying, okay, how do we execute faster on 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. But is this significantly just around tool and die or are there other parts like I mean where you could actually be doing all the seating internally or start doing thinking about wiring harnesses or stuff that would be that intensive and as far as in sourcing? We actually are we have substantially in sourced the seats at this point. So Tesla is producing its own seats. Yes. So that's actually something we've already done. Okay. And then just a second question on the Q4. You're talking about 17,000 to 19,000 units being delivered. I mean, is the sort of 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 is sort of your base with your Model S? Just trying to understand that the range and sort of how we should think about mix in the Q4. Yes. The big variables are what exactly in which week do we are we able to really spool up Model X production. And a few weeks' movement, one way or the other, has quite a big impact on Model X production. And then of course, we'd like to get those cars delivered. So and at the end of the year, there can often be logistical challenges because it's like Christmas and New Year's, and all the logistics channels are jammed and people are not home. So and it can also be adverse weather events like blizzards and things. So that's what it's sort of logistical challenges at the end of quarter and when exactly does the and what exactly does the Model X production ramp exponential look like? That's what introduces the uncertainty. Okay. So we shouldn't think of the 17,000 as sort of base level for Model S. There's a lot of variables that are going in here in addition to the Model X ramp, right? Yes. End of quarter logistical challenges around Christmas or oysters is a bit of wildcard. Got you. Okay. And then just lastly, real quick. I mean, with everything that's going on 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 Q4 as far as the sales, or actually at all for sales or gross profit. But I mean, over time, I mean, is there an opportunity to maybe sell them at a much higher price if you as they become available? I know it's not a big part of the business, but I mean, it does seem like an opportunity to maybe in the short run make a lot of money on some increasing demand. I mean, it really depends on what happens with 0 emission vehicle regulations over time. You'd think, given diesel gain and all that, that there should be a tightening up of 0 emission requirements like but we're not seeing that yet. Frankly, the we do not think that the California Air Resources Board is being sufficiently stringent in this regard. I mean if we can't sell their credits, then it's obviously not the regulations are 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 and efficiency? And how does it make you feel about kind of the ability to hit production numbers and margin in 2016? And I'm not sure what changes are you referring to in Q3. What you guys did during the shutdown to final assembly and the body shop? Well, that was essentially at that point to put in additional capacity in our for Model X. And it sets us up for our production needs in 2016. Overall, clearly, we'll provide further guidance in the next call. But our goal is to keep on working on manufacturing cost reductions. On S and X. We see the opportunities and the team is going to be focused on that while also working on Model 3. So we're truly a multiproduct company and working on several directions. Okay, great. And then just one question on autopilot. I mean, a lot of automakers talk about mapping as a key constraint to getting to higher levels of vehicle automation. Does your does the experience the miles being driven by Model S autopilot help you guys in that regard at all? I mean, are you planning to come up with your own mapping? I think this is earnings call is not the time for future product announcements. In general, this is not meant to mean anything. So in general, we're going to pounce on making product announcements in earnings calls. Okay. Maybe just to squeeze in one more. The newer DRiV unit, how is kind of the quality level then on that versus I think you had kind of a bigger drive that you used initially for the 1st couple of years? Yes. Right now, we're actually very happy with the quality of the drive units. I mean internally, our goal we changed the goal of the drive unit Endurance from being approximately 200,000 miles to being 1,000,000 miles. Just basically, we want drive units that just never wear out. That's our goal. And I think we've made a really good progress in that direction. So the drive units going out now are and for the last several months have been excellent. We should probably note that, I mean, we've also made improvements to the large drive unit and those issues were really limited to early population large drive unit. So today, we hold the same standard on both units that are being built. Yes. Exactly. There was like this one period of time where we had I mean, it's like the risk of getting into the weeds. Like the we transitioned from manual just before we transitioned to automatic grease injection into the spline of the raw drive unit, we had variation in how much grease was put into the spline. And if not enough grease was put into the spline, it would have premature wear. So like one example. But other than that, it's been great. Our next question comes from the line of Andrea James with Dougherty and Company. Your line is now open. Thanks for taking my questions. A year ago, you guys have been targeting 20% to 30% gross margins by around this time. But clearly, the world changed on you with currencies and so forth. So 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. But it is it does require quite an intense effort to for every fraction of a point of gross margin. So and that assumes current there's not some radical shift in currencies that happens again. So the so I guess, if according to our plans at least, we would exceed 30% gross margin within 18 months on the S and X line. Okay. And that would be without a meaning go ahead. Yes. It's a combination of various initiatives of the company from material cost reductions, manufacturing production efficiencies and labor hours per unit reduction combined with economies of scale that as our volume goes up, our cost allocation is more efficient, which brings our labor and overhead costs on a per unit basis down. So clearly, as we act on all of those directions and add volume, we see a path that we can achieve that. And it's a lot of hard work and we need to do it. Okay. Maybe you'd prefer to streak up the model a little bit low and let you guys get there? Yes, absolutely. And we're just describing this is our goal, and we believe we've got a plan to get there. But we there could be unexpected issues along the way that prevent us from getting there. But I mean, I think we'll certainly be better than where we are today. I mean that's quite certain. Assuming constant dollar, some of these external Yes. Okay. And just 2 more. Andrea, we've really got a lot of people that want to ask questions. Maybe just one more. Just one more. Okay. So I guess I'll then take a step back. It seems like in the Silicon Valley centric worldview autopilots where driving is going and all the cars are going to be driving themselves. But 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 of saying that I think that all cars will go fully autonomous in long term. I think it will be quite unusual to see cars that don't have full autonomy, let's say, in for new car production in the 15 to 20 year time frame. And for Tesla, it will be a lot sooner than that. So I actually think at the point in which cars are being made that have full autonomy, that any cars that are being made that don't have full autonomy full autonomy will have negative value. It will be like owning a horse. We're not you're really owning it for sentimental reasons. 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 final point on the Q4. So 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? I mean, it doesn't look like in the I guess, in the Model S history, we've seen sort of like such a sequential increase in deliveries. Like so 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. And we continue to ramp the rate all the way from beginning of Q3 through end of year for Model S. So it's actually not too much of a stretch or less than a stretch than it may seem. And certainly, we've had much bigger sequential jumps before. And then this is it's worth noting that 2015. In 2010, Tesla was delivering 500 cars per year. We now deliver 500 cars in just over 2 days. Okay. That's helpful. And then just again, a final point just on the Model X for this particular quarter. It sounds like you're have you actually started production? It sounds like you're still working out some issues there. And what has essentially surprised you as you sort of like ramp this up, which is causing maybe the actual production in larger numbers to be maybe slightly later than you would have been? Yes. I mean the thing about a car is because there's several 1,000 unique components in a car, the production can only move as fast as the slowest component. So 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 rates. So that's the thing that makes car vehicle production really, really challenging and vehicle ramp really challenging. And you don't know in advance what those issues are going to be or you would do something about it. So that's the yes. And then you basically think of like the production will move as fast as the least lucky supplier that we have in our network. So yes, the world. And yes, so it's several 1,000 parts. And effectively, if you go down Tier 2 and Tier 3, several 1,000 suppliers, it moves as fast as the 1,000th worst supplier. Our next question comes from the line of Ryan Brinkman with JPMorgan. Just maybe going back to the diesel gate 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 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, I mean, the this has really shined a spotlight on the whole emissions testing process. And I mean it's now obvious to consumers that especially diesel but also gasoline cars have real world emissions that are substantially greater than what's experienced in the test when they go through testing. And I think the net what one would naturally expect from this is that regulators will no longer turn a blind eye to these things. And so the cost of producing gasoline diesel cars that actually meet the legal emissions requirements is going to be quite a bit higher. So I would expect the car companies to accelerate their plans for electric vehicles, which is great. And there might be some near term benefit to Tesla. But I mean, thus far, we haven't actually seen it, but there might be one. Okay, great. And then just last question. I understand that deliveries for the Model X initially are clearly a function of how many build given your large backlog of orders. But 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, I just want to mention 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? And when do you think we might see sales coming out of the factory and into cars? Well, in particular, as we've mentioned, we've accelerated the production of Tesla Energy products at the Gigafactory. So 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. But 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. And some of those cells would initially be allocated toward Tesla Energy Products. And we still are targeting around 2017 for the 1st cell production that would be going into vehicles and into the Model 3. So that remains on target. And then 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. And as we indicated in the letter, that increase has been fully consumed or taken up by our bank leasing partners rather than just Tesla direct leasing. So whether we do resale value guarantee or leasing from our perspective, it's different and it's a consumer preference. So there's nothing deep or significant that we are seeing in that trend. Our next question comes from the line of Brian Johnson with Barclays. Yes, kind of three quick questions or two 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 the last quarter, production outpaced deliveries and you're guiding to that 4Q. So what's going to be different in terms of hitting that ramp up on deliveries for Model S in 4Q visavis drawing down that inventory? You're referring so for Model S? Yes, for Model S. Yes. I mean, 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. So it's still a fairly good level to support all of our marketing and sales and service activities. So overall, the increase is demand based and it's fully doable. And to clarify Yes, go ahead. Yes. And 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 rigor features. Okay. And does so equipment means battery or range or? Yes. With the same battery and the same number of seats and that kind of Yes. And final question, and maybe this is one for Jason, Deepak, Elon conversation is autos are very capital intensive business. I mean 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 3 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 mean, 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. And it's worth noting that Gipak spent a huge part of his career at Ford. So you have a good basis for comparison. Right. And so 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. So fully agree this is an asset intensive business. And the key here in terms of return on investment is how efficient we are with that capital. That's what we are focused on. Yes, absolutely. We certainly believe in capital efficiency and getting better with that over time. But we also believe that companies build values 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 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 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 2 years. So but I think the cadence of future products should improve as we have more resources to shorten the critical path on things that, 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 2 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. 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 S going forward? And then could we talk a little bit about getting to 20% or above gross margin ex what kind of volumes we need? And then 3rd, can we touch on the energy storage industry? One thing that I hear a lot in the marketplace is it's the commodity business. JB, could you touch on that and anything you're seeing there? And Elon, last time on the call, you threw out some pretty big numbers for energy storage. Yes. I think what we're talking about here. And I don't think that people really gave you a lot of credit there. So could you just talk about what backs up those numbers? I mean, I think it's just basically if as we mature in various markets around the world, Then 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. And then there's also macroeconomic conditions. Will there be a recession? What not will there be? When will there be a recession? And so these all obviously make a difference. But I mean, I think in the long term, there's probably close to $100,000 a year sorry, 100,000 vehicles a year of S demand and maybe something comparable to for X, holding economic conditions constant and assuming full market maturation, which could take like quite a long time in some markets. And maybe to your energy storage question, I mean, obviously, energy is a commodity market, but I don't think that in any way really changes the opportunity there. In some ways, that's sort of creates it and creates It makes it bigger. Exactly. It's what creates the opportunity for us to ramp much faster. And 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. And 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. Yes. I mean, if you can sell $1 for I mean, basically, if you can provide $1 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. And then on the margins on the ex volume? Well, I think they're going to be comparable to the S over time. But it is important to bear in mind that the S is a much more mature product. So we've been in production with the S for 3 years. I would expect the margins to be within a points of one another over the long term. This is what we 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.