Earnings Call: Q2 2015

Aug 5, 2015

Ladies and gentlemen, thank you for standing by, and welcome to the Tesla Motors Incorporated Second Quarter 2015 Financial Results Q and 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, and good afternoon, everyone. Welcome to Tesla's Q2 Q and A webcast. I'm joined today by Elon Musk, Tesla Chairman and CEO JB 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 2. 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. And now, Huey, let's go to the first question, please. And 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 $20,000,000 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? And 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 trading? Hang on one second. Hi, John, Deepak here. Firstly, we just kicked off the program in April. So it's actually been pretty heartening to see how it's done so far. And to keep it at a high level, we were actually we are actually selling these cars at a faster rate than we are getting these trade ins to come in. So as this program picks up, it's going to really be a successful program and it's creating good demand for us on the pre owned side. Yes. And I mean, I'd hesitate to make predictions based on such early history. But I mean, I think there's a term 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 a commission on selling the car, and it's very capital efficient. So I think there's some upside potential there, but nothing we want to sort of really make predictions on until we have more of history. Okay. Maybe to think about it sort of in terms of 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. Yes. Okay. Yes. 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. Yes. 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. Then just the second question. As we think about the referral program, an interesting 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. And we don't know what that's really going to look like until the program is complete, which is sort of almost 90 days from now. Early indications are quite positive. But obviously, for this 90 day period, there's going to be some overlap where we essentially incur a bill expense for because we're not we still have all of our stores and we're have the referral costs. So I don't think it's going to have a big impact on our numbers, but it's there will be some dual expense because there's no way you have to kind of run these experiments in parallel. So there's no real way to do it otherwise. And how did you build up the $2,000 acquisition cost? Because as you mentioned, it seems like there's a lot of fixed cost 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? Yes. 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, a store should be thought of as like a demand generation item. And 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 this referral program 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 brainstorm on that. Then just lastly, as we think about the cash burn in the quarter, but also the setup of the credit lines, it seems like you guys are recognizing that at some point down the line there might be a need for a capital raise. 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 ultimately have to make a decision on raising capital in the next 12 to 18 months? Yes. We only drew down $50,000,000 on our credit line. So we have sufficient lines available and that's expandable to $750,000,000 which gives us some comfort that we can be close to $1,000,000,000 as we go through the year. And clearly as X ramps up and gets to steady state it enables us to generate free cash flow. So we feel pretty comfortable overall on that front. And we'll just take it as opportunities come in the future. So Deepak, 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? Yes. I mean we are comfortable with the cash levels. I'll put it that way. I don't 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, we keep on saying is that even in the absence of any additional capital generation activity, we would have on the order of $1,000,000,000 through your basically that would be our minimum cash position. Yes. 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 the cash burn and 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. So that's why we're asking. Yes. So I mean I think we're in the same sort of mind frame as you are. Great. Thank you very much. All right. Thanks. Thank you, sir. Our next phone question will come from the line of Rod Lesh with Deutsche Bank. Please go ahead. Your line is open. Hi, everybody. A couple of questions. First, maybe you can just elaborate a little bit on the drop in the forecast from $55,000 to $50,000 to $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 going to be quite a challenging production ramp on the X. And if we are faced with a choice of deliver great we only want to deliver great cars. So we don't want to drive to a number that's greater than our ability to deliver high quality vehicles. So and the nature of the production ramp, which is basically an exponential ramp that then becomes an S curve is that basically for every week that longer that it takes us to climb up that exponential is about an 800 vehicle reduction of the X. But that's why we sort of do want to emphasize the longer term long term really just meaning like 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 highly confident of the 1600 to 18 100 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 1600 to 1800? And are we thinking about like a 48 week production year? Or are you thinking about this in terms of the full calendar year? Yes. So that's a good question. It's like yes, that's averaged over the year. So that means like in a given week, we might go as high as 2,000 to make up for holidays factory retooling and that kind of thing. Okay. Your run rate of gross margin, obviously, it's 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 X is out and Gigafactory begins to ramp? Hi Rod. Yes 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 20 16, but difficult to say at this point. And the 2 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 70P and the 70 cars recently. The dollar has had a huge impact, just from Q1 to Q2. It took 100 basis points out for us roughly. So even after we consider all that and we look at 2016 to say that we'll be at 25% and better With S and X combined, yes, we should be there. Okay. And 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? Yes. I do want to bracket this with some degree of uncertainty because this is quite new. And again, we've got that challenge of exponential ramp. And then depending upon how you move the on how the base fit over exponential ramp, the actual numbers in a given quarter could be quite different. But the demand has been really crazy. So 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 $1,000,000,000 worth of power packs and power walls. So and 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 3 minutes of press Q and A. So there's probably room to improve. The and so this is I mean really we're basically sold out of what we could make in 2016 at this point, assuming these orders are real, which they seem to be. So we're looking at maybe again, just practice with meaningful uncertainty, dollars 40,000,000 to $50,000,000 in stationary storage in Q4 and maybe as much as 10 times that number in April next year. So it's $40,000,000 to $50,000,000 this year and 10x that next year. And I mean that growth rate is probably going to just keep going at quite a nutty level. It's probably at least a few $1,000,000,000 in 2017. Somewhat speculative at this point, but I think that's likely. So it's sort of growing by half order of magnitude to an order of magnitude per year. Great. Thank you. Thank you, sir. And our next question will come from Trip Chowdhury 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. Like 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. So 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. So there's in terms of the programming, the robots, it varies quite a bit in terms of how much programming there is, how difficult their programming is. We actually have now produced several Model Xs of the Tesla production line. But this is a complex machine with several 1,000 unique components. So there are still a lot of low volume parts from suppliers on the Model X. And but with each week, we keep building more and more Xs off the line with greater and greater part maturity. And then as our letter 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. And if you haven't heard about that's fine, but if you 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 sharing? The overall system is designed by Tesla, but then there's components from a number of other suppliers. The autopilot that or the AutoSteer highway autopilot essentially is using a combination of the forward camera, forward radar, the side ultrasonics and then the GPS navigation system. So it integrates those four systems in order to do auto steer on the highway. And yes, 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 15. And then 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 high Autopilot and Autopark in 1 to 2 months after that. Last question is regarding the calendar year 20 16 production. I was wondering in 2015, this current year, we are having a few retooling and 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 straight And 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 on a Saturday, Sunday. But we're not anticipating any significant downtime for S and X is just sort of like maybe it's 1 or 2 weeks out of the year something like that. And those are because we do productivity improvements to reduce the production cost and 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 we never enjoy something and 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 some things that are definitely a lot more challenging than others. And the Model X is I think a particularly challenging car to build. Maybe the hardest car to both in the world. I'm not sure what would be harder. Excellent. But it is an amazing vehicle and I think it's going to blow people away. Looking forward to it. Thank you. All right. Thank you. Thank you, sir. Our next question in queue comes from Adam Jonas with Morgan Stanley. Your questions please. Hey, Ilan 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 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? 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 a German consortium bidding firm for here, Nokia's business. I would love to hear your views, Elon, on how you view Tesla's mapping capabilities. Is this something you need continue licensing from outside vendors? Or can you use your own unique connected machine learning fleet to build your own mapping capabilities be self sufficient? Can you answer that? Or would you rather not answer that? Well, the fact of the matter is there is no publicly available data that is sufficiently accurate for autopilot. As far as navigation data, street data, it's too coarse. So 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. Yes. I mean, it's yes, yes, that's just the only way we can think of to do it. Great. Thanks. Thank you, sir. And 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, I'm just curious what the new guidance for a range of deliveries $50,000 to $55,000 versus $55,000 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 1Q, 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. But then if you look at the full quarter, it's somewhat closed call. Okay, okay. Thanks. That's helpful. And then just last question. It seems like we've seen a number of announcements since your quarter now by utilities and other companies about using your power pack, companies like Amazon, etcetera. 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. We're getting a little bit better sense of it, but it's still early days. And I think initially we thought that the majority of the business would be the PowerPack and the commercial or institutional business. And we've actually been a bit surprised at how strong our wall, the retail demand is and the interest is. So again, it's hard to guess at numbers, but I would say that we're perhaps in the maybe not quite close to fifty-fifty, but I think 70% perhaps Power Pack. Yes. It's really early days because a big dependency here is when someone orders a PowerPack, how many PowerPaks do they order? And because so power packs are 100 kilowatt hours and industrial and utility customers may order as many as 100 or 200. I'm not sure that's our biggest one so far. So it's like 200 and As single site in that yes, in that order bank, 2 times. Yes. So I think our biggest one is around 250 or so. So yes, it could be quite, quite a large in terms of kilowatt hours, quite a large amount going in the direction of power pack. In terms of unit volume, the power wall would be the greatest. But the likely thing for Powerwall is somebody's going to order maybe 1 to 3, maybe it's average of 1.5 or something like that, whereas PowerPack could be an average of 5 to 10. Yes. And I think as the market grows and as go further into the future, we're going to see more and more total energy demand coming from PowerPack. That's still our expectation. Yes, exactly. So I mean, a real important thing to understand I mean, maybe worth drilling at this a little bit that for stationary storage, the fundamental economics of cost are always true, meaning that the 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. So 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 or wind or if 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. I see. That's very interesting. Yes. 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. Stationary storage is really as compared to existing power plants. Great. Thank you. Yes. And then like depending on the country that may be represented as a price to the user of the electricity. So for example in Germany and Australia there is time based cost of electricity. It's like cost more sometimes today than others. Whereas in most of the U. S. You just have a meter that's taking over. So it doesn't differentiate between, say, day use of energy or night use of energy. So in places where the price represents the cost, the Powerwall makes economic sense, but the Powerpack makes sense everywhere. Great. Thank you, sir. Our next one question will come from Patrick Harshman with Goldman Sachs. Please go ahead. Your question is please. Yes. Good afternoon. Thanks for taking my questions. Just wanted to follow-up on the autopilot. And I'm sorry if you guys have said this, but can we talk a little bit more about the capability that that's going to bring? Is that kind of a hands off, feed off kind of product that would be somewhere close to like NHTSA level 3 or we're just talking about kind of more lane keep assist and forward collision warning that sort of stuff that would still be kind of 1% to 2%. Let me just start off with that question. Yes. I'm not too familiar with what rarestness levels mean, but I'll tell you just what it will translate to in initial autopilot. But we don't want to set the expectation that it's that you can just basically pay no attention to what the car is doing. We do want to set the expectation that it's much like the autopilot in a plane where you turn the autopilot on in a plane, but there's still an expectation that the pilot will pay attention to what the plane is doing and won't sort of go to sleep or disappear from the cockpit. So we don't want to 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. And 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 in 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. And it will get better over time as we refine the software. So 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. And then I take it there's some kind of 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 want to see how the Early Access program goes. That's basically our public beta. And based on that, we'll set the warning levels. Got it. More of a guidance question. It was touched on earlier that the 16 to 18 is down from I think what was being floated around as 2,000 for next year's production level. I get that the production overall might be lower based on a slower ramp. But is there something structural that's keeping you from hitting that 2,000 on a run rate basis understanding that you can kind of surge to that at certain points. Is there something that kind of in preparing for the launch you've realized that you're just not going to have the capacity Frankly, the main thing is we don't want to set high expectations and then the only way for us to feel good about the future is that if we exceed really high expectations. So it's sort of like winning needs to feel like winning, if that makes any sense. So that's really what why we're sort of setting those numbers. Could we do 2,000 aspirationally? Yes. Do we want to commit to that? Ideally not. Yes. Got it. Understood. Just setting the bar at achievable levels is something that makes sense. And then 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. Yes. That's driven by our balance sheet currency and receivable revaluations that happen at the quarter end exchange rates. It's not really it's not representative of what happens during the quarter during in the middle of the months. And based on where the exchange rates were, we had good news this time from that evaluation. Clearly, as you are aware, Q1, we had significant bad news. And if you really net the 2 out on a full year basis, it's a small number. Okay. Got it. So it's just the impact of transactional stuff sequentially? Yes. Okay, got it. All right. Thanks a lot guys. Thank you, sir. Next question Just to clarify this translational and transactional in the sense that we have foreign currencies on hand, which we are translating to dollars at quarter end and that impact has to flow through income. Got it. We haven't actually done the exchange. Yes. It's unrealized. There is some realized portion that happened during the quarter. Most of it is unrealized. Yes. All right. Understood. Thank you. Thank you. Next question comes from the line of Emmanuel Rosner with CLSA. Please go ahead. Your line is open. Hi, good afternoon, everybody. I wanted to start just with a quick mass question. So your comments suggested that the if there is any sort of delay towards the end of Q4, this would have an impact of about 800 Model X units per week. And then you're also guiding to about 1600 to 1800 combined volumes of production per week next year. Does that just simplistically mean that you're targeting the mix to be roughly fifty-fifty between X and S right from the get go in 2016? It is 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 the direction of X because people have been waiting for a long time for their cars. And then in any given month, it could be sixty-forty one way or the other. If you look at worldwide demand for SUVs and sedans, it's almost dead even at fifty-fifty. And some regions sedans are favored, some regions SUVs are favored. But generally, it's on a worldwide basis fifty-fifty. But it is difficult for us to say exactly what the Sx demand ratio will be until the car is out there and people are experiencing it and we see what the relative order volume is. But we have so many advanced orders on the X that specifically not going to be an issue in the early days. And we are going to try to get people their car as fast as we can. Okay. So 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 Xs as Model S is being produced? Yes. I mean to sort of put our cards on the table here, we're setting factory capacity to be 1,000 Ss and 1,000 Xs per week. But this is capacity what actual production and capacity are not exactly the same thing. So there's always some there's always some percentage lower than the capacity that is or like occasionally you may hit capacity, but it's hard to maintain capacity. But 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 Xs up to 1,000 Ss per week next year and in terms of capacity. And then actual production is affected by real world issues. So there will be 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 1600 to 1800 average over the year that we're predicting. I think it would 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. Yes. Yes. I mean once we hit steady state, we can certainly do that, but it's just difficult during the ramp phase. Okay. That's very clear. And then one question on China. So very happy to see that your revised strategy is getting some traction. So what exactly are you doing differently there? I guess besides offering a home charger for the buyers of Model S, are there any other things you're doing differently in China? And any lessons that you can learn from there in terms of applying that to other regions? Well, China is does have a unique set of challenges. For example, if the whole license plate question. To get a license plate to drive a car in a lot of the major Chinese cities is quite difficult. So 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. So we've been it's taken us a while, but we've been successful in getting EV plate exemptions in everywhere except Beijing and we're optimistic about Beijing. We're seeing Beijing exemption in the future, hopefully near future. So that's important for China, but not something that one can extend to other parts of the world. The I think the yes, I mean, it's I think it's really just that in China and in most countries that 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 going to be at a low a high stage maturity. In say in the U. S, say particularly California, it's a high stage of maturity. The awareness and comfort with Tesla in California is very high. And that's sort of at a moderate stage of maturity in say the Northeast of the United States and still at the lowest stage in most of Asia. And 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. And it just takes time. You can't just have it be immediate. And just because people love it in California does not mean they automatically love it in other places. You've got to build the confidence over time. We've been in China now only slightly over a year. Yes, just a year. Understood. And then final one just on the Gigafactory. Can you just give us an update on how things are going there in terms of the preparation? And then there was also I think you've been mentioning a bunch of hints throughout the months on potentially wanting to add some space there, adding some capacity. Can you talk I guess more precisely in terms of where would you see capacity go beyond sort of like the initial stages? Yes. I'll say a few words and maybe JV 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. But what we have found is with the Gigafactory is that as we 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. So the net result is that we think in the same volume we can do potentially significantly more output. JV, do you want to elaborate on that? Yes. I think our plans are still on track and unchanged for the first phases of production to support Model 3 and to support the Tesla Energy business. But the ultimate production capability of the site is what we believe can go much higher than we maybe initially thought it could. And we do remain on track for construction at the site. We'll have first equipment being installed at the end of this year and planning to start production on Tesla Energy Products in Q1 2016. In the Gigafactory. We're already in production In Fremont clearly sorry. Yes. We're already in production with Tesla Energy Products in Fremont, but that production will transfer to the Gigafactory next year. And expand and ramp significantly. Yes. Perfect. Great to hear. Thank you very much. Thank you. Thank you, sir. Our next question will come from the line of Brian Johnson with Barclays. Please go ahead. Your line is now open. Your questions, please. Good. I've got two questions. 1 on the Powerwall excuse me, PowerPack opportunity and another relating back to Model S Model X. On the PowerPack, I want to get sort of a deeper understanding of where you see your competitive advantage, if I think about simplistically four 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 to need it, 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? And 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 pretty detailed question. 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 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. At Tesla, we're integrating all those pieces together for a very turnkey solution that utility or commercial customer can just install. I think Yes, basically plug and play matters even if you're at the megawatt scale. Yes, exactly. And I think, of course, the pricing fundamentals starting with the battery itself are really the foundation of that. But we have a lot of expertise and a lot of know how in power electronics and software as well that we've built on the car side of the business for many years. And how about the software to interface with the grid and determine when to charge, when to discharge? Yes. That's something we're working on now and we're also working in partnership with many different utilities on this. There's not a perhaps a universal point of view on exactly where that control and sort of dispatch should live. A lot of utilities want to be very involved in that themselves. So 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. And it's effectively like an API. So that the utilities system can essentially call put our call power to the pack. And then they can query the pack for information about its status. But as JB was saying like it does have to interface with quite a heterogeneous set of systems around the world. So that's why you have to have basically an API interface to the pack, saying so that the utility system can request power or put power to the pack. Yes. And maybe just one more comment. At the commercial level, that is something that Tesla is engaged in much more directly for things like demand management and those type of applications. But it's a bit of a different answer depending on which market we're in here. And sort of how are you getting 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. It's not they don't just have to take our word for it. A lot of these tests have been running for a long time and we can show them fairly hard cycle data and some lifetime data. So that's been very helpful. And also, of course, there's all the sort of field experience from the automotive fleet. That is much bigger than what we're deploying in the stationary fleet and will remain so for a number of years. So having the confidence there and how those batteries have our confidence. Got it. And just final quick question Model S, you noted some risk to 4Q depending on what happens with the X ramp up. Earlier 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. 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. So clearly that has had a fairly large impact on it. And 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 and we are at the same time focusing on X. So I would say broadly if we put aside exchange, we see a trend of improving gross margin despite mix over time. Okay. But no longer a hard 30% in 4Q? No, not in not next quarter basically. But next year contingent on macroeconomic conditions not going wacky That seems like a potentially an attainable number. Okay. Thanks. Thank you, sir. Next question comes from the line of Conan Langan with UBS. Please go ahead. Your question please. Great. Thanks for taking my question. Can I just follow-up on some of the numbers you threw out on stationary storage? The $1,000,000,000 is that orders or reservations? I just want to get a sense of how firm that was. And did you imply that so it sounds like $400,000,000 to $500,000,000 for next year and is it a few $1,000,000,000 for 2017 as the storage market? Is that what you said? Yes. These are reservations. So you can reservation maybe in order or maybe not, but that's certainly what people have said that they want. The yes, so there's over 100,000 reservations that have been placed for Powerwall and Powerpack. And of that, there's you can sort of speculate as to what the how many Powerwalls, how many Powerpacks per reservation, it's likely to be more than 1, so particularly in the Powerpack case. So, yes, that's what leads us to think 40 to 50 Q4, maybe 10x that number next year and then 5x to 10x that number in 2017. But as I said earlier, the as we get further away in time, the numbers are more speculative. And where would that put you in terms of market share and storage at that point? Would that be most of the market for stationary storage in 2017? We don't really know. Well, I mean the market is definitely growing very quickly. So it's a good part. Yes, exactly. I'd say we're speculating on what the actual entire market is going to do and how that's going to grow. So that's I don't think you can draw a lot of conclusions from like what is the market how much of the stationary storage was sold last year? Just at the beginning of electric car production for Tesla, people were trying to say, well, how many electric cars have been sold were sold last year? Almost none. Therefore, Tesla will sell almost none. That's to summarize what the vast majority of predictions were about Model S. Yes. The prices that stationary storage was selling at last year for instance are so much higher than where they would be will be in 2017 that you can't extrapolate those 2. Yes. The amount of precision storage increases at a sort of quite an extreme exponential as the cost of the cost per kilowatt hour decreases. The utilities used to think of like things terms of levelized cost of energy. And depending upon where you are in the world, that number in some places is very high, some places quite low. But as you start to approach the average value, that the demand basically scales into the multi terawatt hour range. Yes. I mean grid parity is kind of the wrong concept here, but it's maybe somewhat of an analogy to think about. A good clarity that the market is staggeringly gigantic. Right. And what is your all in cost? I know it's $250,000,000 for the PowerPack. I mean, when you with installation or anything, do you have any estimate of what it actually costs like a commercial or utility all Well, it depends a lot on the scope and scale and how many other pieces of that installation are bundled together. So we haven't quoted or listed those numbers since they vary so much from one installation to the next. The battery cost is really what matters most in the economics. So that's where we've listed those prices. And any sense of the high end to low end range for an installation? Nothing that we'd be ready to share quite yet. Okay. And just last question. How should we think about the margin profile over the next few years of this ramp? I believe you said Q4 would be pretty low. Should that meaningfully improve? And when do you kind of get parity with your gross margin on the auto side? We are getting quite speculative about the battery business. But is that there? I can't read your writing. Yes, I think the yes, I mean, in the early days, the battery gross margin is sort of on the order of 15%. But over time, that could rise to 25% or maybe 30%. But we just don't know that quite yet. And we'd have to look at what the price elasticity of demand is to understand whether we should where should we be pricing and what's the right gross margin to aim for. Okay. All right. Thank you very much. Thank you, sir. Our next question in queue comes from Ben Cowen with Robert W. Baird. Please go ahead. Your line is now open. Hi. Thanks for taking my question. As far as the Mall X goes last time Elon, you talked about configuration in July and I understand with the slippage. But when can we start thinking about configuring cars, if we have orders out there, customers have orders? And then with about a month away from deliveries, when do you expect to show it to people? We're probably into upper configuration in 2 or 3 weeks of the X. So that should go live on the website before the end of the month. In terms of the initial deliveries of the X, that's consistent with what we predicted on the last call which is end of September. Okay. And then as we look out to the target of 500,000 cars in 2020 and some of the things that you've learned recently, do you still stand behind that number? And what gives you confidence in looking ahead to that number and ramping up production? Sure. I do remain confident about half length cars in 2020. And maybe being able to exceed that. But it's worth noting that if so 2020, that's 5 years from now. If you go 5 years in the past for Tesla, we were producing 600 cars per year. Now we can produce 600 cars in 3 days. So I think you're going from here to 500,000 cars a year is much more elite than what we did over the past 5 years. Got it. And then 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 parts of manufacturing or additional manufacturing? Well, it depends on what time frame. In the next few years, we expect to be focused on Fremont and the Gigafactory in Nevada. Long term, meaning like again, we're getting very speculative here. But in the 3 to 5 year timeframe, it's going to 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. So in order to go beyond the 500,000 units a year, that's what we need to do. So Our Tesla factory in Fremont and in New Reno is that sort of size for the 500 ks level might be able to do a little bit more than that, but say, 500 ks should be very achievable. The Numi fact, when it was operating as Numi, it took roughly 500,000 vehicles a year. So for us to do a similar number is just quite reasonable, I think, without adding new factories. So the new factories would be foregoing past 500,000 dollars And my final question, a headline after this call might be Tesla is going to raise capital. Just from your comments, I think that some people are going to walk away thinking that. And I just want to make sure that you guys can set the record straight if that's in the cards in the near term or if it's not? Thanks guys. We can't comment on that specifically. So all right, next question. Yes, sir. Our next question comes from the line of Andrea James with Dougherty and Company. Please go ahead. Your line is open. 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? And also I guess one more just along with that, is there any supplier in particular that's concerning you? I mean, I don't want to sort of name specific suppliers, but our biggest challenges are with the 2nd row seat, which is 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 a critical path item. There are some interior components, interior trim that are possibly on the critical path. But it's always hard to say exactly what lies in the critical path because it tends these things tend to play a schedule leapfrog. And it's kind of a set of constraints that one day it's this constraint, then next day it's another constraint. And the pace of progress is really dependent on which supplier is the slowest and least lucky. So if the supplier has unexpected challenges, which can range from force majeure to simply having to redo a design because the initial design was wrong. When you have a complex product like the Model S with thousands of that's dependent on thousands of suppliers, you can say that the pace of progress is determined by the 1,000 least lucky and slowest. But if we knew in advance which ones those would be, we would take action. So the yes, it's That's helpful. I think everybody understands that your 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 1 week. Can you help us understand the significance? And then also maybe painted in terms of what you're doing in the factory this year that's going to actually be repurposed or can be even be used toward Model 3 production? Yes. So the retooling was both for the X as well as for improved efficiency of S production. And I think we've got a lot accomplished there. For Model 3, the biggest single item is the paint shop. So the paint shop is sized to be able to do 10,000 cars a week. So we've laid the foundations for that rates in the paint shop. I think 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 advanced metal sheet forming technology that isn't stamping. Yes. Anything you want to add to that? I think in plastics and paint, especially paint, we made modifications there on the existing paint shop where we're getting the new one ready. I think we essentially added capacity in many different shops ahead of Model X, This required some production interruption to do it right, including getting our production control and inventory management processes much better. And we 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 going to 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, what's called the small drive unit. It's dramatically easier to build. It's much more automated. That said, I think we would we will do a further revision for the Model 3 and essentially go to the 3rd generation production technology for the Model 3. Yes. Maybe one thing to keep in mind is the small drive unit capacity is quite in excess even in vehicles because of all wheel drive. And as that has ticked up, we've increased the capacity of the small drive unit in production that you see as well. Because you need 2 of them. And then finally, I guess Deepak, I'd love for you to stay as long as possible, but 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. And yes, I think we are talking to some interesting candidates. I'm 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. Actually, do you have any progress on regional heads of sales? And then that's my last one. Thanks. Well, yes, we do have a regional head of sales for Asia who came to us from EMC. And then there was some press about our Head of North American sales who came from Burberry. And then just because we have like one person from Burberry, then people think we're copying Apple, which is ridiculous. He is great, but he's just one guy. And then we're continuing to search for our Head of Europe Sales. Thanks so much. Thank you, ma'am. And we do have one additional question in the queue. Looks like our last question in queue comes from the line of George Gallas 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 pace 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 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 it's the first multiple choice I've gotten to the question. 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. 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. So that 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. And I would be super happy to see the whole industry go electric. And we have open sourced our patent to so those wouldn't be an impediment. Perhaps it could be helpful. And yes, 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. But the sooner they go electric, the better. Cool. Very clear. Thank you. Okay. I think that was the last question 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