Earnings Call: Q2 2015

Aug 5, 2015

Ladies and gentlemen, thank you for standing by, and welcome to the Tesla Motors, Inc. Second Quarter 2015 Financial Results Q&A Conference Call. As a reminder, this conference may be recorded. It's now my pleasure to turn the floor over to Jeff Evanson. Sir, the floor is yours. Thank you, Huey. Good afternoon, everyone. Welcome to Tesla's second quarter Q&A webcast. I'm joined today by Elon Musk, Tesla Chairman and CEO, J.B. Straubel, our CTO, and Deepak Ahuja, Tesla's CFO. Our Q2 results are announced in the shareholder letter at the same link as this webcast. As usual, the letter includes GAAP and non-GAAP financial information and a reconciliation between the two. During our call, we will discuss our business outlook and make forward-looking statements which 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, Huey, let's go to the first question, please. Yes, sir. As a reminder, ladies and gentlemen, to queue up for a phone question, you may press star then one on your touchtone phone. Our first question will come from the line of John Murphy with Bank of America Merrill Lynch. Please go ahead. Your line is open. Hi, good afternoon. Just a first question on the pre-owned program. It seems like there's a fair level of success there with $20 million in revenue. I'm just curious if you could dimension how many vehicles were sold through that program, how many units remain in inventory there? If we think about how that inventory is restocked, sort of what percentage of new unit Model S's that are purchased are accompanied by a Model S trade-in? Hang on one second. Hi, John, Deepak here. You know, firstly, we just kicked off the program in April, so it's actually been pretty heartening to see how it's done so far. You know, to keep it at a high level, we are actually selling these cars at a faster rate than we are getting these trade-ins to come in. As this program picks up, it's gonna really be a successful program and it's creating good demand for us on the pre-owned side. Yeah. I mean, I'd hesitate to make predictions based on such early history. I mean, I think there's reason for optimism in the future here, because these are obviously very low. We don't have to make the car, so we're essentially getting commission on selling the car, and it's very capital efficient. You know, I think there's some upside potential there, but nothing we wanna sort of really make predictions on until we have more of history. Okay. Yeah. Maybe to think about it sort of in terms of, you know, I mean, the every vehicle that's going into this pre-owned program, I would imagine, is accompanied with a new Model S sale. I'm just trying to understand how the acquisition process is working. Absolutely. Yeah. Okay. We accept a trade-in only when that customer is buying a new Model S, if that's what you're trying to suggest. Yes. Yeah, that's sort of what I was trying to get at and understand the percentages, but I guess it's too small right now to be too material. Yeah. Just a second question. As we think about the referral program, you know, an interesting, you know, marketing angle here. Just wondering if you can sort of juxtapose what you think the ultimate cost was. It looks like it's about $2,000 all in versus your acquisition cost for a customer. I'm just trying to understand where you're going to save money and how this makes the sort of the customer acquisition process more cost effective. Well, it's not necessarily making it more cost effective. It's intended to be somewhat of a wash so that if we achieve a $2,000 savings, we essentially pass that on to the end customer. We don't know what that's really gonna look like until the program is complete, which is you know, sort of almost 90 days from now. Early indications are quite positive. Obviously, you know, for this 90-day period, there's gonna be some overlap where we essentially incur dual expense, because we're not, you know, we still have all of our stores and we're, you know, have the referral costs. I don't think it's gonna have a big impact on our numbers, but there will be some dual expense because there's no way. You have to kind of run these experiments in parallel, there's no real way to do it otherwise. How did you build up the $2,000 acquisition cost? As you mentioned, it seems like there's a lot of fixed costs that wouldn't get taken out that quickly in the test phase. I'm just trying to understand how you think about that $2,000 number and how you come up with that. Yeah. It's not taken out in the test phase. It's to inform our long-term decision in terms of how many stores should we open. I mean, the store should be thought of as like a demand generation item. In order to understand should we do a lot of stores, small number of stores, somewhere in between, we kind of need to know how effective a referral program is. I mean, if you can think of some other way to do this that we're not aware of, we'd love to hear about it. Sure. We'll, we'll brainstorm on that. Just, just lastly, as we think about, you know, the cash burn in the quarter but also the setup of the credit lines, it seems like, you know, you guys are recognizing that, you know, at some point down the line there might be a need for a capital raise. You know, would you consider an equity raise in the market or do you think these credit lines are enough to lean on for now before you know, you ultimately have to make a decision on raising capital in the next 12 to 18 months? Yeah. We only drew down $50 million on our credit line, so we have sufficient lines available and that's expandable too to $750 million. Which gives us some comfort that we can be close to $1 billion as we go through the year. Clearly as Model X ramps up and gets to steady state it enables us to generate free cash flow. We feel pretty comfortable overall on that front. You know, we'll just take it, you know, as opportunities come in the future. Deep, do you think as you go through the launch of the Model X and ultimately the Model 3, that you'll turn cash flow positive at the right point where you might not need to do a capital raise going forward? Is that kind of how you're thinking about this with the credit lines on top? I mean, we are comfortable with the cash levels, I'll put it that way. I think that there's not a need to raise equity capital. There may be some value in doing so as a risk reduction measure, but to be clear, what Deepak is saying is that even in the absence of any additional capital generation activity, we would have on the order of $1 billion through year, you know, basically that would be our minimum cash position. Yeah. No, I think the risk reduction function you mentioned is probably the most valuable and that's kind of why we're asking about that when you look at, you know, the cash burn and you know how the capital markets sometimes shift very quickly. It just seems like an opportune time to take advantage of what you might need in the future. That's why we're asking. Yeah. I mean, I think, I think we're in the sort of same sort of mind frame as you are. Yeah. Great. Thank you very much. All right. Thanks. Thank you, sir. Our next phone question will come from the line of Rod Lache with Deutsche Bank. Please go ahead, your line is open. Hi, everybody. Couple questions. First, maybe you can just elaborate a little bit on the drop in the forecast from 55,000 to 50,000-55,000. Is there some aspect of the Model X launch that isn't what you projected? It doesn't really sound like this is related at all to the backlog of orders for Model S. Correct. I mean, we do think that it's gonna be quite a challenging production ramp on the Model X. If we are faced with a choice of, we only wanna deliver great cars. We don't wanna, you know, drive to a number that's, you know, greater than our ability to deliver high-quality vehicles. The nature of the production ramp, which is basically an exponential ramp that then becomes the S curve, is that, you know, basically for every week that longer that it takes us to climb up that exponential, is about an 800 vehicle reduction of the Model X. That's why we sort of do wanna emphasize the longer term, long term really just meaning like, you know, Q1 next year type of thing. It's not super long term. I think if one gets a better picture of the business, just sort of thinking about that and that's where we feel really, you know, highly confident of the 1,600-1,800 combined production of S and X, and both production and demand. Okay. Was there an adjustment from something like 2,000 units a week to that 1,600-1,800? Are we thinking about like a 48-week production year or are you thinking about this in terms of a full calendar year? Yeah. That's a good question. That's averaged over the year. That means like in a given week we might go as high as 2,000 to make up for holidays, you know, factory retooling and that kind of thing. Mm-hmm. Okay. Your run rate of gross margin obviously is being affected by a number of things, by launches, by mix, the deferral of Autopilot revenue. Can you just talk a little bit about what are some of the issues there? What is the issue with Autopilot? Would we, would it be reasonable to expect the margins to rise again to the 25% plus level once X is out and Gigafactory begins to ramp? Rod, yeah, definitely. The most of the Autopilot deferral, we should be able to recover that later this year. There may be a small portion going into 2016 but difficult to say at this point. You know, the two big issues that have been affecting us I'd say is the dollar, the strong dollar and then the mix especially as we have started to build 70D. Cars recently. The dollar has had a huge impact, just from Q1 to Q2, it took 100 basis points out for us, roughly. Even after we consider all that and we look at 2016 to say that we'll be at 25% and better with SNX combined, yes, we should be there. Okay. Just lastly, you've had a few more weeks here since the announcement of the stationary storage business. Do you have any additional thoughts on how that's expected to ramp? I do wanna bracket this with, you know, some degree of uncertainty because this is quite new. Again, we've got that challenge of, you know, exponential ramp. Depending upon how you move on how the base fit over an exponential ramp, the actual numbers in a given quarter could be quite different. The demand has been really crazy. It's well in excess of I mean, if you just take the reservations that have been made thus far, it's for well over $1 billion worth of Powerpacks and Powerwalls. That's with no marketing, no advertising, no sales force to speak of really. We've not tried to sell it. It's basically a presentation and a webcast and three minutes of press Q&A. there's probably room to improve. Yeah. This is, I mean, really, we're basically sold out of what we could make in 2016 at this point. you know, assuming these orders are real, which they seem to be. So we're looking at maybe, again, you know, just bracket this with meaningful uncertainty, $40 million-$50 million in stationary storage in Q4, and maybe as much as 10 times that number for next year. It's, you know, $40 million-$50 million, you know, this year, and 10x that next year. I mean, that growth rate is probably gonna just, you know, keep going at quite a nutty level. It's probably at least a few billion dollars in 2017. So much speculative at this point, but I think that's likely. It's sort of growing by half order of magnitude to an order of magnitude per year. Great. Thank you. Yes. Thank you, sir. Now our next question will come from Trip Chowdhry with Global Equities Research. Please go ahead. Your line is now open. Thank you. A couple of questions regarding the validation units. I was wondering regarding Model X, do we have a general ballpark number in terms of how many validation units we may have to produce before the robots become smart enough? I'm not sure I totally understand your question. When we had the Model S retooling, we created few Model S validation units, I think probably around 40 or 50 units, which were used to train the robots. Before the product really goes into production, I do believe there are some validation units of the car that are produced so as to train the robots. I could be wrong, but that's my understanding. No, that's true. There are actually It's a little more complicated than that because there are parts of the factory that are much more automated than other parts. There's, you know, in terms of the programming, the robots, it varies quite a bit in terms of how much programming there is, how difficult that programming is. We actually have, you know, now produced several Model Xs off the, you know, the Tesla production line. This is a complex machine with several thousand unique components. There are still a lot of low-volume parts from suppliers on the Model X. With each week, we keep building more and more Xs off the line, with greater and greater part maturity. Then, as Elon says, we expect to do our first delivery of production Model Xs at the end of next month. Excellent. I had a question also on the Autopilot. I was wondering, are you aware of this research paper from Alex? I think they also call it AlexNet. In few conferences we went, they talk a lot about image classification, especially with NVIDIA. If you haven't heard about it, that's fine. If you have heard about it, I was wondering, are we working with some similar technologies with Autopilot or we are doing everything in-house in terms of image recognition and auto-steering? The overall system is designed by Tesla, but then there's components from a number of other suppliers. The Autopilot that, or the Autosteer, High-Highway Autopilot essentially, is using a combination of the forward camera, forward radar, the side ultrasonics, and then the GPS navigation system. It integrates those four systems in order to do Autosteer on the highway. Yeah, so that's what we're sort of working out the final details on. We're targeting release to our early access customers on August 15th. Depending upon how that is received, and what issues we encounter in different parts of the world, we expect to go to wide release on Autopilot, highway Autopilot and Autopark, in one to two months after that. Last question is regarding the calendar year 2016 production. I was wondering, in 2015, this current year, we are having a few retooling and, you know, getting the assembly lines or I should say the production lines of Model X and Model S little up and coming. Do we see any similar disruption happening in 2016 or we are pretty much great? When we will put the Model 3 line in place, it will be completely isolated from Model X and Model S? There are periodic down periods in order to do equipment maintenance, where that can't be accomplished in, let's say, you know, on a Saturday, Sunday. We're not anticipating any significant downtime for S and X. It's just sort of like maybe it's 1 or 2 weeks out of the year, something like that. And that, because we do productivity improvements to reduce the production cost, and, you know, like I said, just general equipment maintenance. For the Model 3, we're really doing our best to make sure that it does not affect S and X production. We don't currently anticipate it affecting S and X production in 2016, but there may be some effect in 2017. If I may squeeze in one more. You did mention that Model X production is challenging. Like there's a difference between saying doable and undoable and everything is challenging in the world. Like I was wondering like we have a control over this challenge because every problem is if it's not if we never enjoy something, it's not challenging. You're saying it from a challenging like it is out of control or challenging because you're enjoying doing it? Well, I think there's a, there's, some things are definitely a lot more challenging than others. The Model X is, I think, a particularly challenging car to build. Maybe the hardest car to build in the world. I'm not sure what would be harder. Excellent. But it is an amazing vehicle, and I think it's gonna blow people away. Looking forward to it. Thank you. All right. Thank you. Thank you, sir. Our next questioner in queue comes from Adam Jonas with Morgan Stanley. Your questions please. Hey, Elon, Deepak. First question, Steve Jurvetson was recently quoted saying that Uber CEO Travis Kalanick told him that if by 2020 Tesla's cars are autonomous, that he'd want to buy all of them. Is this a real I mean, forget like the 2020 for a moment, but is this a real business opportunity for Tesla supplying cars to ride-sharing firms? Or does Tesla just cut out the middleman and sell on-demand electric mobility services directly from the company on its own platform? That's an insightful question. You don't have to answer it. I think, I don't think I should answer it. Okay. Let's move on. Second question is there's been Sometimes you can tell more from the non-answer than from the answer. There's been a lot of excitement about mapping technology from for autonomous and semi-autonomous applications with the German consortium bidding firm for HERE, Nokia's business. Would love to hear your views, Elon, on how you view Tesla's mapping capabilities. Is this something you need to license, continue licensing from outside vendors? Can you use your own unique, connected, machine learning fleet to build your own mapping capabilities and be self-sufficient? Can you answer or would you rather not answer that one? Well, the fact of the matter is there's no publicly available data that is sufficiently accurate for full Autopilot, as far as navigation data, street data. It's too coarse. It looks like we don't really have much choice but to create our own data set for driving, in order to, in the long term, in order to provide a high-quality Autopilot experience. That's awesome. Yeah. Yeah, I mean, it's, yeah, that's just the only way we can think of to do it. Great. Thanks. Okay. Thank you, sir. It looks like our next question in queue will come from Ryan Brinkman with JPMorgan. Please go ahead. Your line is open. Hi. Thanks for taking my question. First question is, you know, I'm just curious what the new guidance, you know, for a range of deliveries, 50-55K versus 55K prior. What does that mean, if anything, for the earlier target of free cash flow, breakeven in 4Q? Is that something we should think about maybe more in 1Q 2016 then? Certainly in one Q, we will be free cash flow positive. Q4, it's hard to predict given that range. Certainly towards the end as Model X deliveries are ramping up, we would be. If you look at the full quarter, it's somewhat close to call. Okay. Okay, thanks. That's helpful. Then just last question. You know, it seems like we've seen a number of announcements into your quarter now by utilities and other companies about using your Powerpack, you know, companies like Amazon, et cetera. I'm curious how much of the Tesla Energy business do you now expect to generate from corporate or institutional demand versus more retail customers? I'd be interested too if this mix and expectation, if it's changed over time at all since you first debuted the product. Sure. This is JB. You know, we're getting a little bit better sense of it, but it's still early days and, you know, I think initially we thought that the majority of the business would be the Powerpack and the commercial or institutional business. You know, we've actually been a bit surprised at how strong the Powerwall, the retail demand is and the interest is. You know, again, it's hard to guess at numbers, but I would say that, you know, we're perhaps in the maybe not quite close to 50/50, but I think 70% perhaps Powerpack. Yeah. It, it's really early days because a big dependency here is when someone orders a Powerpack, how many Powerpacks do they order? You know, 'cause so Powerpacks are for 100 kilowatt hours, you know, industrial and utility customers may order as many as 100 or 200. I'm not sure what's our biggest order one so far is, like 200. Yeah, SyncroSite and that, yeah, and that order bank, 200s. Yeah. Yeah. It's, I think our biggest one is around 250 or so. Yeah, it could be quite a large, in terms of kilowatt hours, quite a large amount going in the direction of Powerpack. In terms of unit volume, the Powerwall would be the greatest. The likely thing for Powerwall is somebody's gonna order maybe 1 to 3, maybe it's average of 1.5 or something like that, whereas Powerpack, you know, could be an average of 5 to 10. Yeah. I think as the market grows and as we go further into the future, we're going to see, you know, more and more total energy demand coming from Powerpack. That's still our expectation. Yeah, exactly. I mean, a really important thing to understand, I mean, maybe worth drilling into this a little bit, that for stationary storage, the fundamental economics of cost are always true. Meaning that there's always a cost advantage to someone to a system-wide implementation of stationary storage because of the high peak-to-trough electricity usage. If you have buffering, which is what stationary storage allows for, then you only need your power plants to operate at the average energy usage, which means that you can basically, in principle, shut down half of the world's power plants if you had stationary storage. This is independent of renewable energy. It does not matter whether you have solar panels, wind. This is just being able to shut down half your power plants if you have buffering, because you can then have your power plant output at the average of what is needed by the consumers. See, that's very interesting. It seems like sometimes people link this too much to renewable energy. Of course, we're huge believers in renewable energy, but that is not the getting function of demand for stationary storage. If stationary storage is really as compared to existing power plants. Great. Thank you. Yeah. Then, like, depending on the country, that may be represented as a price to the user of the electricity. For example, in Germany and Australia, there is time-based cost of electricity. You know, it's like, costs more some times of the day than others. Whereas in most of the U.S., you just have a meter that's ticking over. It doesn't differentiate between, say, day use of energy or night use of energy. In places where the price represents the cost, the Powerwall makes economic sense. The Powerpack makes sense everywhere. Great. Thank you, sir. Our next phone question will come from Patrick Archambault with Goldman Sachs. Please go ahead, your questions please. Oh, yeah. Good afternoon. Thanks for taking my questions. You know, just wanted to follow up on the Autopilot. I'm sorry if you guys have said this, but, you know, can we talk a little bit more about the capability that that's going to bring? Is that, you know, kind of a hands-off, feet-off kind of product that would be somewhere close to like NHTSA level 3, or we just talking about, you know, kind of more lane keep assist and, you know, forward collision warning, that sort of stuff that would still be kind of 1 to 2. You know, let me just start off with that question. Yeah. I'm not too familiar with what the various NHTSA levels mean, but I'll tell you just what it will translate to in the initial Autopilot. We don't wanna set the expectation that it's that you can just basically pay no attention to what the car is doing. We do wanna set the expectation that it's much like the Autopilot in a plane where you turn the Autopilot on in a plane, there's still an expectation that the pilot will pay attention to what the plane is doing, and, you know, won't sort of go to sleep or just disappear from the cockpit. We do wanna set that expectation with consumers. That said, in terms of what the capability of the system is, I think its capability in steering and control of acceleration and braking is excellent when it has a tracking vehicle in front. You know, you could basically have high confidence in steering, braking and acceleration when, basically when you're in some kind of traffic situation where there's a car on the road in front of you. I think it's pretty good in the absence of that, so if it's just lanes, it's pretty good. It will get better over time as we refine the software. This I would certainly not take the initial version of Autopilot as the final version. It will just get better and better over time. Got it. No, that's helpful. Just with software updates. Just with software updates, to be clear. I take it there's some kind of sort of, you know, human machine interface thing that keeps you focused and beeps if you try and use your BlackBerry or something. That's still something that we're debating, and I think we wanna see how the early access program goes. That's basically our public beta. Based on that, we'll set the warning levels. Got it. More of a guidance question. You know, it was touched on earlier that, you know, the 16-18 is down from, I think, what was, you know, being floated around as 2,000 for next year's production level. You know, I get that the production overall might be lower based on a slower ramp, but is there, you know, something structural that's, you know, keeping you from hitting that 2,000, you know, as on a, on a run rate basis, understanding that you can kind of surge to that at certain points? Is there something that, you know, kind of in preparing for the launch, you've realized that you're just not gonna have the capacity that you thought you would have? frankly, the main thing is we don't wanna set, you know, high expectations and then the only way for us to feel good about the future is that if we exceed really high expectations. It's sort of like, winning needs to feel like winning, if that makes any sense. That's really what, you know, why we're sort of setting those numbers. You know, could we do 2,000? You know, aspirationally, yes. Do we wanna commit to that? Ideally not. Yeah. Got it. Understood. Just setting the bar at achievable levels is something that makes sense. Just last one for me, like, an accounting issue. I think there was, like, a $0.10 gain or a $0.13 gain on, like, FX revaluation. Like, I don't know, Deepak, what I didn't know what that was exactly. Yeah, that's driven by our balance sheet currency and receivable revaluations that happen at the quarter end exchange rates. It's not representative of what happens during the quarter, in the middle of the months. Based on where the exchange rates were, we had good news this time from that revaluation. Clearly, as you are aware, Q1 we had significant bad news. If you really net the 2 out on a full year basis, it's a small number. Okay, got it. It's just the impact of transactional stuff sequentially. Yeah. Okay, got it. All right. Thanks a lot, guys. Okay. Thank you, sir. Next question. Just to clarify, there's translational and transactional in the sense that we have foreign currencies on hand, which we are translating to $ at quarter end, and that impact has to flow through income. Got it. We haven't actually done the exchange. Yeah. Right. Yeah, it's unrealized. Right. There is some realized portion that happened during the quarter. Most of it is unrealized. Yeah. All right. Understood. Thank you. Thank you. Next question comes from the line of Emmanuel Rosner with CLSA. CLSA, please go ahead. Your line is open. Hi, good afternoon, everybody. I wanted to start just with a quick math question. Your comments suggested that if there's any sort of delay towards the end of Q4, this would have an impact of about 800 Model X units per week. You're also guiding to about 1,600-1,800 combined volumes of production per week next year. Does that just simplistically mean that you're targeting the mix to be roughly 50/50 between X and S right from the get-go in 2016? It does, although it's I wouldn't put too much precision on that because what we're going to try to do is to push the production slightly more in direction of X because people have been waiting for a long time for their cars. And then, you know, in any given month, it could be 60/40 one way or the other. If you look at worldwide demand for SUVs and sedans, it's almost dead even at 50/50. And, you know, some regions, sedans are favored, some regions, SUVs are favored. But generally it's, on a worldwide basis, 50/50. It is difficult for us to say exactly what the S/X demand ratio will be until the car is out there and people are experiencing it and we see what the relative order volume is. We have so many advanced orders on the X that this certainly not gonna be an issue in the early days. We are going to try to get people their car as fast as we can. Okay. I understand the demand aspect, but I guess from a production capacity point of view, you think that, as of early 2016, you could theoretically have as many X as Model S's being produced? I mean, to sort of put our cards on the table here, we're setting factory capacity to be 1,000 S's and 1,000 X's per week. This is capacity. You know, what actual production and capacity on are not exactly the same thing. There's always, you know, some percentage lower than the capacity that is, you know, occasionally you may hit capacity, but it's hard to maintain capacity. You know, our goal is what our internal plan is, I can tell you is that we want the factory to be able to make up to 1,000 X's, up to 1,000 S's per week next year and in terms of capacity. Actual production, you know, is affected by real-world issues. There will be, you know, maybe some weeks where there is 2,000 produced and some weeks where there's very few produced because we've got factory tooling situations, hence the 1,600-1,800 average over the year that we're predicting. I think it'd be fair to say the goal of the factory is to not just produce cars, but it's to produce cars with the right cost and the right quality. Yeah. Yeah. Particularly, I mean, once we hit steady state, we can certainly, you know, do that, but it's just difficult during the ramp phase. Yeah. Okay, that's very clear. One question on China. Very happy to see that your revised strategy is getting some traction. What exactly are you doing differently there, I guess, besides offering a home charger for, you know, the buyers of Model S? Are there any other things you're doing differently in China? Any lessons that you can learn from there in terms of, you know, applying that to other regions? Well, China is, you know, does have a unique set of challenges. The, you know, for example, is the whole license plate question. You know, to get a license plate to drive a car in a lot of the major Chinese cities is quite difficult. Whether you have the electric vehicle exemption in a given city or not makes a big difference because if you don't, then people can buy the car, but they can't drive it. It's taken us a while, but we've been successful in getting EV plate exemptions in, you know, everywhere except Beijing, and we're optimistic about Beijing receiving Beijing exemption in the future, hopefully near future. That's important for China, but not something that one can extend to other parts of the world. I mean, it's really just that in China and in most countries that there is a bit of a slow build of awareness and confidence in Tesla. And depending upon when we went to market in a particular country, that feeling is gonna be at a low or a high stage of maturity. In the U.S., particularly California, it's a high stage of maturity. The awareness and comfort with Tesla in California is very high. You know, that's sort of at a moderate stage of maturity in, say, the northeast of the U.S., and still at the low stage in most of Asia. The same has been true in Europe. Basically, it seems like with every country, you've got to build confidence in the brand over time. It just takes time. You can't just have it be immediate. Just because people love it in California does not mean they automatically love it in other places. You've just got to build the confidence over time. Yeah. We've been in China now only slightly over a year. Yeah, just a year. Yeah. Understood. Final one just on the Gigafactory. Can you just give us an update on, you know, how things are going there in terms of the preparation? There was also, I think you've been mentioning a bunch of hints throughout, you know, throughout the months on, potentially, wanting to add some space there, you know, adding some, you know, capacity. Can you talk, I guess, more precisely in terms of, you know, where would you see capacity go beyond sort of like the initial stages? Yeah. I'll say a few words and maybe JB can weigh in. I mean, whenever engaging in speculative comments like this, I think it is important to just remember they are speculative, and not a prediction that we would have, say, with very high confidence. What we have found is, with the Gigafactory, is that as we've spent more and more time on it, we've found we've been able to improve the space efficiency of the production and the overall efficiency by more than our initial expectations. The net result is that we think in the same volume, we can do potentially significantly more output. JB, do you wanna elaborate on that? Yeah. I think our plans are still on track and unchanged for the first, you know, phases of production to support Model 3 and to support the Tesla Energy business. The ultimate production capability of the site is what we, you know, believe can go much higher than we maybe initially thought it could. And we do remain on track for construction at the site. You know, we'll have first equipment, you know, being installed at the end of this year and planning to start production on Tesla Energy products in Q1 2016. In at the Gigafactory. Well, we're already in production. In Fremont, clearly. Sorry. Yeah, we're already in production with Tesla Energy products in Fremont, but that production will transfer to the Gigafactory next year. Expand and ramp significantly. Yeah. Perfect. Great to hear. Thank you very much. Thank you. Thank you, sir. Our next phone question will come from the line of Brian Johnson with Barclays. Good. I've got 2 questions, one on the Powerwall, excuse me, Powerpack opportunity and another relating back to Model S product. On the Powerpack, wanna get sort of a deeper understanding of where you see your competitive advantage. If I think about simplistically 4 levels of a stack in terms of the utility Powerpack solution, with the upper level being sort of the grid software to interface with the grid, kind of tie in when it's needed, when it's not needed. 2nd layer, the battery management software, and then at the hardware, the inverter and other power electronics, followed by the battery itself. Where do you see your advantage at each of those levels? How is it important to play at all of those levels? How do you interface with some of the existing middle people, you might call them, or consultants in the industry or other software providers who might be providing elements of the stack already? Well, it's a, it's a pretty detailed question. You know, I think one of the, maybe at a high level, one of the biggest benefits that we offer and where we have a competitive strength is having a system that solves pretty much all of those problems together. I think a lot of other people aspiring to be in this market, you know, sell one piece among that entire stack, as you're calling it, and then you'd have to go to different companies to find the other pieces. You know, at Tesla, we're integrating all those pieces together for a very, you know, turnkey solution that, you know, a utility or a commercial customer can just install. Yeah. Yeah. Basically, plug and play matters even if you're at the megawatt scale. Yeah, exactly. I think of course, you know, the pricing fundamentals, starting with the battery itself are really the foundation of that. You know, we have a lot of expertise and a lot of, you know-how in power electronics and software as well, you know, that we've built on the car side of the business for many years. How about the software to interface with the grid and determine when to charge, when to discharge? Yeah, that's something we're working on, you know, now, and we're also working in partnership with many different utilities on this. You know, there's not a, perhaps a universal point of view on exactly where that, where that control and sort of dispatch should live. You know, a lot of utilities want to be very involved in that themselves. You know, we're basically setting up the tools and the infrastructure so that they can control in a way that's familiar and the most convenient for them. It's effectively like an API. Yep That utilities system can essentially call or put or call power to the pack. Then they can query the pack for information about its status. As JB was saying, it does have to interface with quite a heterogeneous set of systems around the world. That's why you have to have basically an API interface to the pack, saying, you know, so that the utility system can request power or put power to the pack. Yeah, and maybe just one more- Okay, and- comment. You know. Oh, sorry. At the commercial level, you know, that is something that Tesla is engaged in much more directly for things like demand management and those type of applications. It's a bit of a different answer depending on which market we're in here. How are you getting the utilities comfort with the cycle, number of cycles and the lifetime of this? Are they sort of taking your word for it or is that something they're seeking to explore through pilots and/or their own high-intensity testing of your battery packs? Well, we have a lot of data, actually. They don't just have to take our word for it. You know, a lot of these tests have been running for a long time, and we can show them, you know, fairly hard cycle data and some lifetime data. That's been very helpful. Also, of course, there's, you know, all the sort of field experience from the automotive fleet. You know, that is much bigger than what we're deploying in the stationary fleet and will remain so for a number of years. You know, having the confidence there and how those batteries have aged and done quite well, is extremely helpful in building confidence. Got it. Just final quick question. Model S, you noted some risks to 4Q depending on what happens with the X ramp up. Early in the year you talked about a 30% gross margin for the Model S part of 4Q. Of course, that was not for 4Q overall. You know, where do you stand on that 30% internal goal now? Yeah, that 30% goal was before the dollar began to really strengthen at this level. Clearly that has had a fairly large impact on it. Also the mix has had some impact. Our focus also in the last few quarters has been much more so on Model X. There are various other cost reduction opportunities that we have that we are hoping to get in Q4, but they could potentially get delayed into Q1. We want to make sure they happen right, we are at the same time focusing on X. I would say broadly, if we put aside exchange, we see a trend of improving gross margin despite mix over time. Okay, no longer a hard 30% in 4 Q. No, not next quarter, basically. Next year, you know, contingent on macroeconomic conditions, not going wacky, that seems like a, you know, potentially an attainable number. Okay, thanks. Thank you, sir. Next question comes from the line of Colin Langan with UBS. Please go ahead with your question, please. Oh, great. Thanks for taking my question. Can I just follow up on some of the numbers you threw out on stationary storage? The $1 billion, is that orders or reservations? I just want to get a sense of how firm that was. It sounds like $400 million-$500 million for next year. Is it $ a few billion for 2017 as the storage market? Is that what you said? Yeah. These are reservations. You can, you know, reservation may be an order or maybe not, but that's certainly what people have said that they want. Yeah. There's over 100,000 reservations that have been placed for Powerwall and Powerpack. And of that, you know, you can sort of speculate as to what the how many Powerwalls, how many Powerpacks per reservation. It's likely to be more than one. Particularly in the Powerpack case. Yeah, that's what leads us to think 40-50 Q4, maybe 10x that number next year, 5-10x that number in 2017. As I said earlier, you know, as we get further away in time, the numbers are more speculative. Yeah. Where would that put you in terms of market share and storage at that point? Would that update most of the market for stationary storage in 2017? We don't really know. I mean, the market is definitely growing very quickly, so it's a bit hard. Yeah, exactly. I'd say we're speculating on what the actual entire market is going to do and how that's going to grow. That's. I don't think you can draw a lot of conclusions from, like, what is the market- Exactly. You know, how much of the stationary storage was sold last year. Just as the beginning of electric car production for Tesla, people were trying to say, "Well, how many electric cars were sold last year? Almost none. Therefore, Tesla will sell almost none. Yeah. To summarize what the vast majority of predictions were about the Model S. Yeah, the prices that stationary storage, you know, was selling at last year, for instance, are so much higher than where they would be or will be in 2017 that, you know, you can't extrapolate those two. Yeah. The demand for stationary storage increases at a sort of quite an extreme exponential as the cost of the cost per kilowatt-hour decreases. You know, the utilities used to think of, like, things in terms of levelized cost of energy. Depending upon where you are in the world, that number in some places is very high, some places quite low. As you start to approach the average value, the demand basically scales into the multi-terawatt-hour range, so. Yeah, I mean, grid parity is kind of the wrong concept here, but it's maybe a somewhat of an analogy to think about. I mean, at grid parity, the market is staggeringly gigantic. Right. What is your all-in cost? I know it's $250 for the Powerpack. I mean, when with installation or anything, do you have any estimate of what it actually costs, like, a commercial or a utility all in? Well, it depends a lot on the scope and scale and how many other pieces of that installation are bundled together. We haven't, you know, quoted or listed those numbers since they vary so much from one installation to the next. You know, the battery cost is really what matters most in the economics, that's where we've listed those prices. Any sense of the high-end, low-end range for an installation? Nothing that we'd be ready to share quite yet. Okay. Just last question. How should we think about the margin profile over the next few years as this ramps? I believe you said Q4 would be pretty low. Should that meaningfully improve, and when do you get parity with your gross margin on the auto side? We are getting quite speculative about the battery business. Is that done? I can't read your writing. 15%? I mean, in the early days, the battery gross margins are on the order of 15%. You know, over time, that could rise to 25% or maybe 30%. We just don't know that quite yet. We'd have to look at what the price elasticity of demand is to understand whether we should, you know, where should we be pricing and what's the right gross margin to aim for. Okay. All right, thank you very much. All right. Thank you, sir. Our next question in queue comes from Ben Kallo with Robert W. Baird. Please go ahead. Your line is now open. Hi. Thanks for taking my question. As far as the Model X goes, last time, Elon, you talked about configuration in July, and I understand with the slippage. When can we start, you know, thinking about configuring cars if we have orders out there, customers have orders? You know, with the, you know, about 1 month away from deliveries, when do you expect to show it to people? We're probably into offer configuration in 2 or 3 weeks of the X. That should go live on the website before the end of the month. In terms of the initial deliveries of the X, that's sort of consistent with what we predicted on the last call, which is end of September. Okay. You know, as we look out to the target of 500,000 cars in 2020 and, you know, some of the things that you've learned recently, do you still stand behind that number? You know, what gives you confidence in looking ahead to that number and ramping up production? Sure. I do remain confident about half a million cars in 2020, and, you know, maybe being able to exceed that. I mean, it's worth noting that if, you know, 2020, that's five years from now. If you go five years in the past for Tesla, we were producing 600 cars per year. Now we can produce 600 cars in three days. I think, you know, going from here to 100,000 from here to 500,000 cars a year is much more a leap than what we did over the past five years. Got it. When we think about your currency exposure, are you guys where are you guys at in thinking about moving any kind of manufacturing, outside of the U.S. or any parts of manufacturing or additional manufacturing? Well, it depends on what timeframe. You know, in the next few years, we expect to be focused on Fremont and the Gigafactory in Nevada. Long term, meaning like, you know, again, we're getting very speculative here, but, you know, in the 3-to-5-year timeframe, it's gonna make sense for us to think about localizing production in different markets, having a factory in Asia, a factory in Europe, other factories in North America. In order to, you know, go beyond the 500,000 units a year, that's what we would need to do because our Tesla factory in Fremont and near Reno is that sort of size for the 500K level. Might be able to do a little bit more than that, but say 500K should be pretty achievable. The NUMMI fact-- When it was operating as NUMMI, it did roughly half a million vehicles a year. For us to do a similar number is just quite reasonable, without adding new factories. The new factories would be for going past half a million. My final question. A headline after this call might be, you know, Tesla is gonna raise capital. Just from your comments, I think that some people are gonna walk away thinking that, and I just wanna make sure that you guys can set the record straight if that's, you know, in the cards, in the near term or if it's not. Thanks, guys. Like Jose, we can't comment on that specifically. All right. Next question. Yes, sir. Our next question comes from the line of Andrea James with Dougherty & Company. Hi. Thanks for taking my questions. What have you learned or discovered between the time when you set that 55,000 unit goal and I guess now when you're saying it's better to have some more breathing room on the ramp? I guess one more, just along with that, is there any supplier in particular that's concerning you? I, and I said I don't wanna sort of name specific suppliers, but our biggest challenges are with the second row seat, which is, it's an amazing seat, like a sculptural work of art, but a very tricky thing to get right. The Falcon Wing door actually seems to probably not be the, not be a critical path item. There are some interior components, interior trim, that are possibly on the critical path. It, it's always hard to say exactly what lies on the critical path because it tends, these things tend to play schedule leapfrog. It, it's kind of a, you know, a set of constraints that, you know, one day it's this constraint, then the next day it's another constraint. The pace of progress is really dependent on which supplier is the slowest and least lucky. You know, if a supplier has unexpected challenges, which can range from force majeure to somebody having to redo a design because the initial design was wrong, when you have a complex product like the Model S that's dependent on thousands of suppliers, you can say that the pace of progress is determined by the thousandth least lucky and slowest. If we knew in advance which ones those would be, we would take action. Yeah, it's. No, that's helpful. Yeah. An investment in Tesla is a company that's learning as it goes along, so it's always interesting to see what you're discovering as you attempt to build. The other thing, can you walk us through what you accomplished during the factory shutdown in the quarter? It looks like you really did a lot of work in one week. Can you help us understand the significance and then also maybe paint it in terms of what you're doing in the factory this year that's gonna actually be repurposed or can even be used toward Model 3 production? The retooling was both for the Model X as well as for improved efficiency of Model S production. I think we've got a lot accomplished there. For Model 3, the biggest single item is the paint shop. The paint shop is sized to be able to do 10,000 cars a week, so we've laid the foundations for that rate in the paint shop. I think that there's also room for significant increases in our foundry, in terms of casting, and we've also made a significant investment in stamping, and some sort of advanced metal sheet forming technology that isn't stamping. Yeah, anything you wanna add to that? I think in plastics and paint. Yeah, especially paint. we made modifications there on the, on the existing paint shop as we're getting the new one ready. I think we essentially added capacity in many different shops, you know, ahead of Model X, which required some production interruption to do it right, including getting our production control and inventory management processes much better. You just can't do that when production is running. What about the drive unit investments in the drive unit manufacturing? Is any of that small drive unit gonna be used for Model 3, or it seems like you're really scaling up there. We certainly learned a great deal going from the original Model S drive units to the small drive unit, or what's called the small drive unit. It's dramatically easier to build. It's much more automated. That said, I think we will do a further revision for the Model 3 and essentially go to the third generation production technology for the Model 3. Yeah. Maybe one thing to keep in mind is the small drive unit, you know, capacity is quite in excess even of vehicles because of all-wheel drive. You know, as that has ticked up, you know, we've increased the capacity of the small drive unit in production that you see as well. Because you need two of them. Yeah. Finally, I guess, Deepak, I'd love for you to stay as long as possible, I'll just ask this anyway. What's the status of your CFO search? We're interviewing candidates all the time. Deepak is part of the interview process. Yeah, I think we're, we are talking to some interesting candidates. Not sure if there's anything more to say about that. No, I mean, no. Clearly, I'll stay around to ensure there's a smooth transition, and we're continuing to talk to lots of candidates and make sure we find the right person to come in. Okay, thank you. Actually, do you have any progress on regional heads of sales? That's my last one. Thanks. We do have a regional head of sales for Asia who came to us from EMC. Then, you know, there was some press about a head of North American sales who came from Burberry. You know, just 'cause we have, like, one person from Burberry, then people think we're copying Apple, which is ridiculous. He's great, but he's just one guy. We're continuing to search for our head of Europe sales. Thanks so much. Thank you, ma'am. We do have 1 additional question in the queue. Looks like our last question in queue comes from the line of George Galliers with Evercore. Please go ahead. Your line is now open. Good afternoon, and thank you for taking my question. I had a strategic question for you. It looks like in the next 2 years we'll see a list of new and improved battery electric vehicles from your peers, ranging from mainstream models from Nissan and GM to more premium vehicles from Audi and Porsche. Strategically, how do you think about future electric vehicles from other OEMs? A, do you view them as a threat and competition in a limited EV market? B, do you view them as contributors to the common cause, raising awareness of EVs, overall consumer EV adoption, and hence the EV market size? Or C, given certain compromises of the competitors' efforts to date, do you actually see them as the opposite, i.e., they form negative prejudice in consumers' minds with respect to electric vehicles' costs, practicalities, and performance? I think this is the first multiple choice I've gotten as a question. I think if you just look at our comments in the past, what we've said is, like, we're really excited to see other car companies do electric vehicle programs. You know, what's been done to date is not much. They've generally been fairly small programs and often just set to achieve a regulatory minimum. That's hasn't been great thus far, but I am encouraged by what I see about their future plans. They sound like they're headed in the right direction. I would be super happy to see the whole industry go electric. You know, we have open sourced our patent to, those wouldn't be an impediment and perhaps could be helpful. Yeah, it'd be really great if the whole industry would just go electric as soon as possible. In fact, I mean, our view is that the whole industry will go electric. Eventually, they really won't have much choice. The sooner they go electric, the better. Cool. Very clear. Thank you. All right. Thanks. Okay. I think that was the last question in the, in the queue. Thank you, everyone, for joining us, and we'll talk to you next quarter. Goodbye. Thank you. Thank you, gentlemen, and thank you, ladies and gentlemen, for joining us today. We hope that you found today's event informative. This will conclude our call. You may now disconnect and have a wonderful day.