Earnings Call: Q1 2015

May 6, 2015

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Tesla Motors First Quarter 2015 Financial Results Q and A Conference Call. After opening remarks, we'll open the floor to your questions. Now, my pleasure to turn the floor over to Jeff Evans. Sir, the floor is yours. Thank you, Huey, and good afternoon, everyone. Welcome to Tesla's Q1 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. We announced our financial and operational results today and a shareholder letter that is available at the same link as this webcast and a replay of the webcast will be available later today at the same link. The shareholder letter includes GAAP and non GAAP financial results and as well as reconciliations between the 2. Our non GAAP measures add back deferred revenue and related expenses for cars delivered where cash has been or will very soon be collected. And these non GAAP results also exclude stock based comp and non cash interest expense. Revenues and costs associated with cars leased directly through Tesla are treated the same in our GAAP and non GAAP financial information. And during our call, we will be discussing our business outlook and making other forward looking statements, which are based on our projections 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 ks filed with the SEC. And now Huey, if we could please have the first question. Sure, thanks. Our first phone question will come from the line of Dan Galves with Credit Suisse. Please go ahead. Your line is now open. Good afternoon. Thanks. So if you if we assume Model S volume of 50,000 in 2015, deliveries need to average over 14,000 per quarter in Q3 and Q4. What's the biggest challenge to get there? And do you have order rates today that support that level of volume in the back half? Sure. So yes, I mean that's about right. I mean, obviously with the Model X production ramping up quite heavily in Q4, depending upon how that ramp goes and obviously it's difficult to predict that with perfect clarity, but the our volume essentially doubles in Q4. So depending upon how the ramp goes. So I do want to emphasize like something like sometimes people don't totally appreciate is that there are several 1,000 unique parts in a car. And if even one of those parts is not available for any reason, then you cannot ship you cannot scale production. So essentially the production ramp goes according to the unluckiest and worst performing supplier or part of Tesla. But that said, we do expect to see a significant ramp in Q4 for the X and have something that may be as much as 2x other quarters in Q4. So that's and as far as demand for that, we do not see that being a problem. There are huge advance orders for the X and we see a steady climb in demand for the S. Okay. Got it. And then just a follow-up. You've improved the Model S a whole lot in the last of years. Does that make it easier to launch Model X at a high quality level? And does it allow you to move engineering and design resources towards Model 3 faster than you moved resources to Model X? Yes. In the case of the X, the X ended up having a a lot being a lot more different than the S than we originally anticipated. So the development took a lot longer and we were distracted solving all sorts of issues with the S during that time, which made it difficult for us to allocate engineering resources to the X when there were issues to be solved with the X. So I think we'll do a lot better with the X. And we're paying close attention to some of the things that are different about the X to make sure that they're not an issue, particularly the buckling door and the 2nd row seats. And so I'm feeling pretty good about things. But because that production ramp just scales exponentially depending upon where that exponential curve falls across a quarterly boundary can actually make quite significant make quite a significant effect on the production and deliveries in that quarter. So that's why it's like it's like a lot easier to predict this continuous than if it's discrete with offshore quarterly cutoffs. So but I really think the X is going to be it's really going to be a great car. And I just drove the latest prototype today and it's like wow, this is by far the best SUV. Sounds good. Thank you. Go ahead, Huey. Next question please. Yes, sir. Next question comes from the line of John Lovullen with Bank of America Merrill Lynch. Please go ahead. Your line is now open. Hey, guys. Thanks very much for taking my call as well. First question is, do you guys earn 4 or 9 ZEV credits per vehicle? And how many vehicles are participating in your battery swap beta program? The amount of credits debt credits we earn depends on the size of the pack, different for what we're doing for $60,000,000 versus $85,000,000 and now the new ones at $70,000,000 That has been varying over time, the amount of ZEV credits we earn. So I'll need to confirm that before I give the official number here. I mean, the ZEV credits thing is not like I mean, it sort of moves things by like 2%. It's like not super material. So I'm not sure what the point of your question is. Well, yes, here's the point of the question is that assuming that you guys sell 10,000 vehicles in ZEV states this year, that would mean that you would need 4 100 vehicles involved in this battery swap program, if you assume that each of them swap 25 times each, so a minimum of 400 vehicles. I'm just curious if there are 400 vehicles involved in the battery swap program? Well, I mean, you do realize like ZEV credits don't sell for $100 on the dollar. They sell like $0.50 or sometimes less. And they're not always customers for the ZEV credits. So Yes. I'm just asking about in terms of what you guys are actually earning per vehicle. Okay. And I guess the next question And as more of our production goes overseas, obviously, there are no Dev States overseas. And as our sales increase outside of California also the or Canada there that does not say that states. So this is like their stuff is like an increasingly small part of the picture over time. Okay. That's fair. We do have hundreds of vehicles in the battery swap pilot program. It's not like 10 or something like that. It's hundreds of vehicles. Yes. We've steadily increased the invitation list. We just found like it's there just is not a lot of interest in people doing Paxlov. So we make the invitations and we get a very small percentage that actually take us up on invitation. Right. Now the only point is there's a difference of 5 ZEV credits per vehicle. That was the only point. Second question would be a final question. There is some news reports saying that SolarCity has said that they're not going to use the 7 kilowatt hour battery. In fact, I think there was a quote from a spokesman whether it's true or not, we don't know, saying that it doesn't make economic sense. I mean, could you guys just comment on that please? Yes. I mean, let me just sort of talk more broadly about the response to the Powerwall and Powerpack, because I think that's really the question you should be asking. The response has been overwhelming, okay? It's like crazy. In the course of like less than a week, we've had 38,000 reservations for the Powerwall, 2,500 reservations for the Powerpack. The Powerpack, it should be noted, typically, this is bought by utilities or large industrial companies for heavy industrial work. So typically power pack, it's like at least 10 power packs per Powerwall also is we suspect is probably an average of number of power packs is probably 1.5 to 2 per installation. So 30,000 reservations is more like 50,000 or 60,000 actual Powerwalls. So the I mean there's like no way that we could possibly satisfy this demand this year. We're basically like sold out through the middle of next year in the 1st week. This is crazy. We had 2,500 requests from companies that want to distribute and install Powerwall and Powerpack. We can't even respond to them. This is we have to like triage our response to those who want to be a distributor. So it's like crazy off the hook. Yes. And it's just it seems to have gone super viral. The for the specific case of SolarCity, what they're referring to is that there's 2 versions of the Powerwall. There's the daily cycling version and there's the power backup version. One's energy optimized and one's daily cycling optimized. For the daily cycling optimized one, the economics it is true in the U. S. With rare exception are more expensive than utility. So if somebody do a daily cycling basically go off grid, it's going to be more expensive than being on grid. This doesn't mean that people won't buy it because there are people who want to go off grid on principle. They just want to be independent. And that's what the SolarCity comment is about. Yes. It might also be worth noting that SolarCity doesn't yet operate in Europe. And the main target application for the daily cycling battery pack was actually were several markets not in the continental U. S. And particularly Germany and Australia are very strong markets where it does make economic sense today based on the feed in tariff and the electricity rate structures in those countries. So SolarCity's comments I think need to be sort of put in the regional context. Yes. SolarCity is only operating in the U. S. And I mean the Powerwall will be available from SolarCity and from other installers in both configurations. But if someone's doing the daily cycling application, they're doing it out of because they specifically want grid independence. And there's some number of people who will want to do that and that's good. It's also important to appreciate like even for the let's say the power backup systems that you always have power in a power outage. If like let's say that appeals to like 2% of households in the U. S. Like so or 1%. Like that's 1,000,000 households. Like is this 1 person in 100 care about having battery backup in the event of a utility outage probably? We couldn't even support a small fraction of that. So right now, so it's like it's kind of a moot point. Okay. John, I hope that takes answers your questions. Hugh, I guess we're ready for the next question then. Sure. Thanks. Our next question comes from Andrea James with Dougherty and Company. Please go ahead. Your questions please. Hi. Thanks for taking my questions. Just to build on the Tesla Energy conversation. What are your revenue and gross margin targets on that business? And how do we look at the 20 16 ramp? Well, I mean, there's sort of the gross margin revenue obviously is to change with time. So when it's low volume, made in Fremont, it will be relatively low margin. Once we get to Gigafactory up and running and high volume and get the economies of scale working. This is just a guess right now, but I mean like maybe it's somewhere around 20%. This is not like it's like we just don't have enough information to say exactly what that would be, but probably 20% is a reasonable guess. And then in terms of volume, I mean, we're going to try to scale it as fast as we can as the slowest manufacturing constraint. So I mean like it's easier to say what's the long term without saying like exactly which quarter is it going to be in. I don't know. But I think we'll see demand for stationary storage in as measured in sort of megawatt hours or gigawatt hours to be approximately double that of the car. That's our best guess for long term demand. Yes. How do we think about your capacity or even your costs per kilowatt hour because it's different than a car, right? The duty load is way different for stationary storage applications. So could you just educate us a little bit on how we look at analyzing that business and the difference between that and the energy needs of the car business per pack? Yes. There's 2 applications which are quite different. 1 is backup power or peak up sort of the equivalent utility scale of like a peaker plant, which is a high energy application. And then there's the daily cycler application. There are different chemistries depending upon one you have. So the backup power chemistry is quite similar to the CAR, which is like a nickel cobalt aluminum cathode. The daily cycling control constituent is nickel manganese cobalt. So there's quite a lot of manganese in there. And they're just ones meant for call it maybe 60 or 70 cycles per year. And the other one is meant for daily cycling daily deep cycling, so it's 3 65 cycles a year. And the daily cycler 1, I mean, we expect it to be able to daily cycle for something on the order of 15 years. Plus the warranty period would be a little bit less than that, but we expect it to be something that's in the kind of 5,000 cycle range capability. Whereas the high energy pack is more like around the maybe depending on how it's used anywhere from 1,000 to 1500 cycles. And that's they're comparable calendar lives. And yes, so that's now that for the high energy one, it's important to appreciate that this actually has a lot of interest from utilities, because utilities have to maintain these things called peaker plants. And for when there's like a sharp increase in usage, like you can imagine like the highest energy day in California on like a hot summer day where there's a heat wave, the energy consumption there is very high compared to a pleasant spring night where nobody's air conditioning or heating is on or for very little and like commerce is not happening and people are asleep and lights are off. That can be a huge delta. Depending upon the situation, it can be anywhere from like a 5x to 10x difference. So then having a battery pack that can take out those like very sort of weird sharp peaks like the heatwave day. You could either have a battery pack, which requires basically no maintenance and doesn't require any fuel and it's going to peak shave those really troublesome days. Or you could have like a power plant that requires fuel and maintenance and it's got to be or it's always got to be maintained and it takes time. It's not you can't just start it up in 3 seconds. Like, you've got to have a bit of notice. The high energy pack is actually very economically competitive in those sort of situations. And then the high cycling pack is really great for if you've got some sort of wind or solar situation that's where the daily the high cycling one is really great on the utility scale. And I should say like we expect most of our stationary storage sales to be at the utility or heavy industrial scale. It's probably and just a guess because it's early days, 5 to 10 times more megawatt hours will be deployed at the utility and heavy industrial scale than at the consumer scale. So the power pack would be the one that's like the heavy duty like the big production sales one, not so much the Powerwall. Powerwall is great, but it's like I said, it's probably only 10% to 20% the size of the Powerpack demand. Yes. Maybe one point on the cost structure. There's definitely a lot of commonality in the supply chain and even the manufacturing base on how we do the modules themselves for the Tesla Energy products along with the vehicle products. So as we ramp up production on the Tesla Energy products, there definitely are benefits to the vehicle costs of energy storage from scale and from just generally moving more material and kilowatt hours through that whole chain. So both businesses benefit each other. Yes. I mean clearly given the high demand that we're seeing for Tesla Energy Products, we're actually trying to figure out if we can go from like our current production target of like 35 gigawatt hours at the cell level and 50 at the pack level in our Nevada plant to maybe 50% more than that or even higher because just the sheer volume of demand here is just staggering. We would easily have the entire Gigafactory just do stationary storage. You're right. So you have some capacity. I think you said maybe 15% of your capacity might be reserved for stationary storage. Maybe I've read that in an article somewhere. I'm not sure. It's 15 gigawatt hours or a third of the 50 gigawatt hours that's targeted at the PAC level. Okay. So it's not 15% it's 15 gigawatt hours or roughly 30%. Okay. And you might add now maybe look you're looking at doing another 50% and growing the capacity 50% and you have the space I guess there in Nevada to do that? We do. I don't want to make that a prediction, but it's like that seems like the thing we should do. So we're investigating that. It seems like logical thing to do. So we're going to try to probably try to do that. Yes, because like we're fairly confident at this point like I said that the entire Gigafactory output could just do stationary storage. So then it's like, wow, okay, well we need to make cars too, so we're just trying to make the factory bigger. That's like the sort of the total logic. It's not more complicated than that. But given the choice between making sorry, then I'll get help. Thank you so much for your time. But given the choice between making a pack for a car and making a pack for a stationary storage application, how do you pick which one gets the priority? Well, I guess we'd pick cars, because we've got this whole other plant here in Fremont, made some cars. So cars would get the priority. Yes, that would be the logical priority. And yes, so but it just I mean it really feels like storage demand is just nutty like worldwide, which is crazy. Great. Thank you. Huey, we actually have a question emailed in from one of the analysts that is out of the country. So I'll read those next. And we'll start with the energy storage questions. So guys, do our years in R and D work in vehicle batteries contribute benefits into this Tesla Energy business? Where have we drawn some learnings from the vehicle business for Tesla Energy. We've learned a lot about battery packs. I mean, obviously, how to make them and they haven't last for a long time and work in high temperature ranges and that kind of thing. I think there are a few points of clarification that should be made regarding the Powerwall. Whole inverter issue. So there's the Powerwall does include 8 DC to DC inverter, and that can interface directly with the solar panel installation. And if somebody has a solar panel installation, they already will have a DC to AC inverter for the solar panel system. And so no incremental DC to AC inverter is needed. Like in some of the analysis we've seen online by some kind by people who think they're experts, they don't seem to realize that there is a DCDC inverter. And we haven't been I guess quite clear about that which we need to be. But like if you already have a solar installation or you're going to get 1, the DC AC inverter is already there. That's an important point in considering the cost of the system. And then the operating temperature, it's actually capable of operating at a much wider band of temperature. So we're going to fix that specification that's stated on the website. Yes. In general, most of the learnings from the car R and D and engineering carry over. I mean, it's part of why we can do this so quickly and Anywhere the car works, pack will work. Yeah. And the car works pretty much everywhere. So in fact, it does work everywhere. So the pack will work everywhere, obviously. If anything it's quite over engineered for a battery pack that doesn't have to move and gets mounted on your wall. So I think that's going to a great benefit for reliability and just longevity of the pack. Okay. And then one for Deepak. Would you be willing to provide any breakdown of the capital the CapEx spending in Q1? The CapEx spending was primarily driven by the capacity expansion that we're doing for Model X including the tooling spend. And then of course we are putting in the new paint shop which is a very significant investment that will be ready in Q3. And then we've also had investments in the Gigafactory and our sales and service network. That's probably the order in which we've been spending. Great. Thank you. Okay, Huey, let's go back to the queue please. Yes, sir. Next question comes from Ghansham with UBS. Please go ahead. Your line is open. Great. Thanks for taking my question. I guess first question staying on the stationary storage topic. I mean, how do you view the you mentioned there's 2 different chemistries. How does that work with the Gigafactory? Does that require all separate lines? Is there any more complexities? They're all within the same facility? And how do you view your chemistries versus other competitive options out there? There are other people who are bullish on things like zinc and other more basic chemistries? Well, they could still both be built in the Gigafactory. It doesn't we have multiple lines operating in the Gigafactory. So if one line is building nickel cobalt aluminum chemistry and another is building nickel manganese cobalt that still works just fine. A lot of the cell assembly then the processes that happen after that are almost identical. Yes. I mean, they look the same at the module impact level. You can't really tell just by looking at them. Yeah. It's just kind of the internal chemical constituents. I mean, if you think of like the I mean, sort of break down the problem like the cell is a chemical engineering problem. It's like a little can of chemicals. And then the module impact problem is mechanical engineering, electrical engineering and software engineering problem. And if you have just like a small number of cells, then as an overall engineering problem, it's like mostly about the cell. But once you get have a lot of cells, then it's then the intellectual property challenge the intellectual challenge becomes more at the mechanical, electrical and software level, which is where Tesla does quite well. That's why you don't really see like nobody else's like has a pack like ours. The cells are relatively generic, but the module and pack is not. Yeah. And we've looked at pretty much every chemistry couple that could possibly be relevant for this and are confident what we're using is going to be the best. But if there's something better, we can also adjust and change over time. So there's a lot of flexibility. Yes. I mean, I'm not sure what the exact analogy would be, but like, if you look at like a laptop and it's like you could say, well, a laptop is really just like Intel CPU and some Micron DRAM chips, like big deal. What's any computer company actually doing? They're doing a lot. So what do you view as your competitive edge? And so it sounds like you think it's the deal, the software and electronic integration is a competitive advantage? Because in your presentation you actually mentioned you encourage other companies to enter the market as well? Yes. I think we're at the in terms of the electrical engineering, the mechanical, the software and the overall aesthetics and just having something really just works and is easy for consumers and utilities and large industrial applications to just order and it just works and just there as a fully integrated system. That's what the value that Tesla is adding. I think there's also substantial benefit to the track record of the automotive fleet. That's something that a lot of the newer start up companies or different technologies in this space really struggle with, especially in the utility application where you need to be sure that it's going to work for 15 plus years. And we have a sense of scale and a great track record on the vehicle fleet that you can really pull from data and pull data from and understand how it's going to work. Yes. I shouldn't say like we're like wedded to a particular chemistry or anything like that. We just want to use the best chemistry. Like whatever little can that contains a cathode and anode and separator and electrolyte whatever that is the best constituents of that chemists are, we'll that's what we will want to use. So we'd love it if somebody could come up with a better internal chemistry for the cell. But it's worth noting that nobody has sent us anything a sample cell that's better than the cell we're producing. So or that something that we will produce in the Gigafactory. So we'd love it if somebody would do that. They just have it. So there's like all these things which are big on promise and short on delivery when it comes to battery chemistry. And it's just a real hard problem. And then a hard day a week goes by that there's not some alleged breakthrough in batteries. But what they'll do is they'll cite the power, but not the energy or they'll forget to mention that it only lasts 50 cycles or uses incredibly exotic more materials. Or one component out of the battery pulled separately. Yes, exactly. It's not like a it's not the full picture. So it's not like we don't want a better chemistry to exist than what we're using. We'd love it if there was such a thing. And I'm sure there will be improvements over time and we will implement them as soon as they are remotely production ready. Thanks for the color. Just one last final question. Any color on the financial question? Other essentially re essentially revaluation of primarily our foreign currencies that we had at the end of the quarter. The dollar was particularly strong against foreign currencies there. And it's also in most cases unrealized losses. So as the currency moves in Q2 in different directions that could have an impact as well a positive impact is what I mean. Okay. So as you kind of consider most of those one time in nature because of FX balance sheet effect? Yes. They're not related directly to our operations. It's simply the revaluation of our currencies and intercompany items. Okay. All right. Thank you very much. Thank you, sir. Next question comes from the line of Rod Lache with Deutsche Bank. Please go ahead. Your line is open. Hi, everybody. Couple of questions on stationary storage. First one is, it seems like utilities move quite a bit slower than other markets. So I was wondering, when you are thinking about the expectations for the trajectory of growth, If you had the capacity today, how long do you think it would take for you to get to that 15 gigawatt hours? Also related to this business, it seems like you're using 3rd parties for most of the distribution installations. So if you achieved maybe a 20% gross margin, can you pass along any thoughts on how we should be thinking in terms of SG and A is allocated? I think it's pretty early days. I mean, we're being super speculative at this point. So it's Yes. Maybe one point on the distributors is we're only focusing on that approach for Powerwall in most cases. So with utilities, we're building those relationships directly. It's not something that is really effective to go through a distribution channel and it's something we've also been doing for a number of years that didn't just start last Thursday. And we've built these relationships partially through vehicle infrastructure and charging questions and back and forth supercharging as well. So there's actually quite a lot of trust built between Tesla and many of the utility companies, which is very helpful to grow that business faster. Thanks. And just a clarification on the comment about the fact that the DCAC inverter is already there for solar. Does the fact that it needs to be bidirectional change the nature of the cost or not really? No, not in most cases, because if you already have solar, typically the energy to charge the battery can come from the solar panel. So I think maybe one way to think of it is that the battery pack, the power wall with its internal DC to DC converter, it can act much like a solar it can feed power back into that. So the existing inverter, it can feed power back into that. So the existing inverter doesn't particularly see a big change. Okay. Got it. On the auto business, do you have any preliminary expectations on the mix of the 70D versus 85? Any thoughts on how that affects margins? And lastly, a question for Deepak. In the past, we were able to look at your supplemental information on leasing, where you disclosed the value of the leases delivered and the value that you're booking this at on the balance sheet, which is presumably your cost. And it sort of approximated your gross margins, but this quarter when you do the math, the implied margins were something like 44%, not like 29%, 30%. Is there something unusual there? I'll answer the second one. No, there's nothing unusual in those numbers as the overall. What you're seeing in the supplemental information is the new cars we've delivered. What's coming through ultimately is the cumulative impact of all the leasing that we have done. But to my knowledge there's nothing else unusual. Okay. It seems like a pretty high margin though when you look at it that way. Anything on the mix, 70d versus 85? I mean, it's still pretty early to be predicting mix, because you have to distinguish between what's sort of initial demand versus sustained demand. So I mean it looks like there may be going to be comparable number of 70s versus 85s, but it's this is difficult to I mean, this is extrapolating on very little information. And I think a key point I should make before this call ends is like we're really optimizing at this point going forward, we're going to be optimizing for the operational efficiency of the company as opposed to specific quarters. This is I feel like what we've done in the past where we've really had to scramble at the end of quarters and sometimes have not a great customer experience at the end of quarters, it's not really the right thing for the company. And so we're going to be operating more for sort of steady state efficiency. And that means that the quarterly fluctuations could be a little higher. But in the long term, it will be much it will be better. So that's an important consideration. Also sort of unlike other car companies, Tesla sales are only recognized when they arrive at the end customer and we've received payment and all the regulatory docs have been processed and all that. So our sales are always kind of true they're always true sales. They're not sales to the channel. In other words, the other car companies are they're sales to the channel. So it's possible to sort of for them to make numbers work where they're selling to their channel as opposed to end customers. In our case, it's always end customers. And this as we're shipping to Asia and Europe and across the U. S, it's fairly easy for there to be a plusminus 5% difference in deliveries just due to logistics issues. It's not a huge variation plusminus5%, but it's that's kind of like the if a ship is late or early, it can affect the it could be 500 cars that are affected. And then that 5%, so which we've seen in the past. So that's an important thing to bear in mind. The number that's much more controllable for us is the production number. So that's our production predictions I think are for the vehicles are at least for the Model S, so not so much for a new vehicle, but for existing vehicle, our production predictions are a lot more controllable. And then as I think people at this point realize the demand is different from production. Like our cars are almost all ordered in advance. So we really don't see any demand issue. But you can sort of see that by the delivery times of the cars on our website. But so it's like some people will interpret a quarterly delivery number as somehow being related to demand. This is not the case. It is usually related to like just that's how we've produced a certain number and then we were able to deliver a certain number in the quarter and there's a whole bunch of cars on ships or on trains or on trucks. And so that's because Tesla is different from other car companies, applying that other car company template can lead to incorrect conclusions about Tesla. I mean is this making sense? I mean or should I elaborate for that? Makes sense. Okay. Yes. And to add to what Elon said to be more efficient operationally we are shipping more by train rather than trucks. It's more cost efficient and creates less damage to the car. It gives a better customer experience. So we are taking all these actions. I guess my question is more geared to trying to assess the effect on ASPs and margins as you're changing the mix a little bit. But I appreciate that. Yes. To sort of answer your question on margins, I think there's 2 things that are happening. Like the average sales price is going to decline a little but the but our costs are improving as well. So I mean we see that more or less netting out, so that the efficiency improvements offset approximately the any average selling price change. Got it. And if in the process we are growing the market, which we truly are by heading the right sweet spot then we are doing the right thing with the 70D. And the 70D has a higher gross margin than the 60D for example and 60D was just not hitting the mark. It just didn't have the right attributes that our customers liked. It was a low take rate. And we've brought a product which is far more compelling and much more competitive with other cars. Great. Thank you. Thank you, sir. Our next phone question will come from the line of Colin Rusch with Northland Capital Markets. Please go ahead. Your question As you look at the growth of the organization, the integrity of the culture and the workforce, I know that your employees are extremely motivated. But can you talk about as you grow, how that's growing and changing and what you're doing to maintain that integrity as you go forward? A a consistent culture. I think we're doing okay, as measured relative to most companies. But I mean, we do need to get people to think differently and have an expectation of innovation. And I mean, I think we're doing okay on that front. Yeah. I think having a general mix of people that have been here for a very long time and have seen multiple programs and seen the company when it was even much smaller than today and more scrappy and had to go through even tighter financial difficult launches, things like that, really helps maintain that culture. And we try and pair different managers up with new groups so that that culture sort of infuses throughout. Yes. And our growth rate like this year personnel wise is sort of let's say leveled off. It's still fairly significant, but it's like our net personnel growth this year will probably be 20% to 30%, which is I think a manageable number for kind of integrating with people that already have kind of a Tesla culture. And I think it's also it's pretty big improvement in productivity because we'll we're looking at let's call it like at the upper end of that 30% personnel increase, but a 100% increase in vehicle volume. So I think that's a pretty good indicator of productivity improvements, just like how many people do we have and how many cars are we making. Great. And then the second question is really around some of the choices that you made with the battery product and why choosing 10 kw in the size, £220 is actually pretty hefty for a garage wall and then also the battery management system. I think there's a lot of confusion around where it's located and what the real functionality is as you look out at interfacing with utilities and the signals that you get from the market in terms of looking at demand charge offset, demand response and some of the other advanced functionalities that are going to be able to be monetized in business models with the product. Can you just clarify where the BMS system is really residing and who owns that technology? And why you guys made those choices along with the weight and size choices? Well, some of the different revenue streams you're talking about are kind of mixed between PowerPack and PowerWall. The BMS system lives inside the battery pack in both cases. But with the power pack and the more utility sized installations, there we often will have sort of a site master computer or master controller that controls multiple power packs. And that site controller is what then interfaces to the utility or maybe a commercial customer to sort of run the scheduled charge and discharge that would be appropriate for a given application. On the Powerwall, it's a bit of a different situation. Still the BMS lives inside the battery pack, but in some cases, the inverter, maybe the system that's deciding how to manage energy in the overall house. And that can depend on which type of inverter we're using on how that works. And in terms of the size, we really for Powerwall, again, we optimized the size around what was the most common photovoltaic size and also what we felt was kind of the smallest modular increment for backup. And it's pretty key to note here that you can install multiple power walls together. So having 10 kilowatt hours doesn't mean that you can't very easily put in 20 or 30 or 40. And in many cases, I think people will to have the backup kind of matching that they want to see. But we felt 10 kilowatt hours was the lowest kind of common elements. And if you go smaller than that, you start to run into worse economies of scale and more of the system that's not related to storage. Okay, great. I'll have some follow-up offline. Thanks so much guys. Huey, before we go to the next question, I just want to give everybody a status update here. A lot of important things to talk about on this call. But we're 50 minutes into the call and we still have 7 callers in queue. So just let you guys think about how we manage time here. Okay, Huey, let's go to the next question please. Yes, sir. Our next phone question will come from Adam Jonas with Morgan Stanley. Please go ahead. Your questions please. Evening everybody. First question on the Model S and the release candidates. How many release candidates have you produced? What have been some of the issues with the recent production? And why the slight am I seeing a slight further delay biasing late 3Q from what I thought was kind of more of an August time horizon for initial deliveries anything that kind of might be behind that that you would highlight? I think we'll pass on sort of answering super detailed questions about the XRAMP. The thing that really matters is not like when do the first deliveries of the X occur, but rather when do significant deliveries of the X occur. And for the S, we had quite a long ramp from we had like 6 months from the very first deliveries to significant volume. We're trying to compress that to maybe like 2 months or 3 months for at most, cut that in half or more for the X. And we want to make sure we're really delivering a product that has been thoroughly validated in hot and cold weather and through millions of miles of travel and everything. So it would be easy for us to kind of do some initial deliveries in August that would be pretty easy. But we want but then like we don't want to have like we have had door handle issues like people are aware of that with the S. We don't want to have buckling door issues with the X. We want to iron everything out, make sure it's good and then deliver at high volume. So effectively, we would create like a captive fleet and iron out the issues with that captive fleet. It's quite big, several 100 vehicles basically. And maybe that addresses your Release Canada question. And just make sure that those several 100 vehicles really work well in all circumstances before we start delivering cars on mass because we're going to go from small number cars to back 1,000 a week pretty fast. Okay. And just a second question in the interest of time and then final question. Apple has kind of still unofficially perhaps making been making inroads into building up its vehicle engineering and transportation capabilities according to a lot of sources and making investments both in physical and human capital. Are you starting to feel a greater sense of competition with Silicon Valley parties versus your ability to attract and retain key software and automotive engineering talent? And if Apple were to get into the electric car business, do you would you see this as a positive for broader consumer acceptance of electric vehicles? I certainly hope Apple gets into the car business. That would be great. But no, we're not really seeing significant attrition of engineers to Apple for anything, car or otherwise. And actually, anyone can like figure this out by just going on LinkedIn. LinkedIn can statistics on what the relative flow of people is from one company to another. And I think it's like something like 5 if you look at like the trailing 12 months, Tesla has recruited 5 times as many people from Apple as Apple has recruited from Tesla. It's like some fairly high number. Thanks very much. All right. Our next phone question will come from Brian Johnson with Barclays. Please go ahead. Yes. I just really want to ask about the balance between stationary and automotive. It's not unusual for growth companies to change their focus as they evolve. I think at least one of the stories around PayPal, it was going to be a cryptographic PDA focused company until it refocused perhaps through your healthy lung on web based payments. It just I'm hearing you talk about stationary storage as being able to ramp faster perhaps, although you didn't answer this kind of maybe with a lower CapEx and OpEx ratio than the auto business. Yet at the same time, auto takes a lot of capital, takes a lot of OpEx. And Sergio Marchioni pointed out, there's a lot of value destroying capital spent in the legacy industry. Is it conceivable that instead of saving seventythirty auto batteries that could go the other way? It's possible. I mean, this is we're super like really super in guesswork territory here. Like all we know right now is like we have demand like well in excess of our production ramp. So we know like right now I think we should work on is we're trying to increase our production ramp, not trying to increase demand. So that's kind of like the only thing we know for sure right now. And then if you look really long term, you say, well, what's the total energy how many battery what's the total terawatt hours of installation of battery installation that's needed to go to a fully renewable global economy taking into account transportation, current electrical needs full electrification of transport, electrification of all heating and cooling and then the current industrial uses of and commercial uses of electricity. Like basically to go fully electric, the transport is about half the size of everything else. That was sort of our sort of global macro calculations. So ultimately, we think things get there. It could take a long time, but that's where we think things will end up. And yes, so that's where we get to like the $2,000,000,000 power pack number. Whether it's made by Tesla or other companies or some combination, that's kind of the number you need to get to go fully electric. But where things how things track between now and then, it's difficult to predict. In terms of the ROIC, would you be thinking that stationary could be a better ROIC business than say mass market or mass affluent automotive? It might. I mean, it'd be nice to get like maybe a couple of quarters of experience after making the big announcement to really before we like our degree of uncertainty will diminish quite substantially with each passing month. Certainly, a year from now, we're going to have like a really, I think, a really good idea of it. But it's like super speculative at this point. But we just know that there's just no way we can meet the demand that we're seeing right now. And so we got to scale stationary storage as fast as possible. And you mentioned last time that some CapEx was going to product development in the shareholders letter for Model 3, if Model 3 wasn't in this. Does that mean you might be delaying some Model 3 investments? Or just the other things kind of swamp it? Just the other things kind of swamp it. We need to make sure like we're doing quite a bit of advanced work on Model 3, but this just doesn't amount to a lot of CapEx. Yes. And just to clarify Model 3 spend in initial stages is more engineering spend. It's like basically design studio like very early engineering prototypes. So it's just not very cash intensive. Yes. CapEx comes at a later stage when you have all the designs finalized you're kicking off tooling. Yes. So we are in the early stages as to be expected at this point in time. Yes. Okay. Thanks. Well, Brian, you might want to ask the follow-up. Does this impact our Model 3 timing? So I'll throw that one. Well, go ahead. Well, I mean, we are hoping to show off the Model 3 in approximately March of next year. Again, like we've got super healthy to that month, but that's like that's our aspiration. And that's and then be in production with the Model 3 in the I'd like to say mid, but probably closer to late 2017 timeframe. Late 2017 is probably more realistic. Okay. And in the meantime, the Gigafactory sounds like it's maybe ramping up faster, but perhaps those batteries could go not just to Fremont cars, but to Fremont stationary storage or to stationary storage not necessarily touching. Yes. It would just be both actually just right there, not even go to Fremont, really it would just built at the kind of Reno factory or sparks, technically good sparks. Then Nevada factory and ship from there to customers. Yes. Starting Q1 next year, that's our plan for all the all the Tesla Energy products. Okay. Thank you. Our next question will come from Ryan Brinkman with JPMorgan. Please go ahead. Your line is now open. Hi. Thanks for squeezing me in. I have a 2 part question on cash. Firstly, on the last call, you mentioned reaching free cash flow positive in 4Q this year. I'm just wondering with 1Q behind you, how you think you're tracking relative to that goal? And then secondly, if you could perhaps comment on your capitalization and liquidity overall and the potential for or desirability of raising any additional capital? Thanks. We do expect to be free cash flow positive in Q4. That doesn't change. And as we go along, clearly, we are optimizing for efficiency, which results in increased of our finished goods inventory. It makes sense for us to then establish some asset pipelines of credit, which is backed by our finished goods inventory or raw materials. So we'll take those actions to make sure we have a solid balance sheet. Yes. I mean, I think it's yes, I mean, if we're looking I think things are looking pretty good for Q4. Like it's hard exactly on the on that start of Q4 boundary. But it's I think it's extremely likely that this that cash flow is really good at the end of Q4. Okay. That's great to hear. Yes. Thank you. You're welcome. Thank you, sir. Our next phone question will come from the line of Trip Chowdhury with Global Equity Research. Please go ahead. Your line is open. Thank you. A quick question, 2 quick questions. First is regarding the residences, which may not have the solar panels and say that residence goes and buys 2 power walls. Does that customer have to buy 2 inverters or 1 inverter is sufficient for as many power walls the customer buys? Yes. It's basically whatever the capability that inverter is. So typically the inverter would be capable of handling 1 inverter probably capable of handling depending on the situation up to maybe 4 or 5 Powerwalls. The second question I had was regarding the double back tour you had in 10 cities and that was our research indicated that a very successful event with the reservations and orders really skyrocketing. And I think it was only in Canada and USA. Wondering if you could expand that tour to other continents? Yes, absolutely. I mean, we have actually we just did a big thing in Europe through Germany. And they're actually I think there's quite a big tour happening from Slovenia, I think, through most of Europe. So there's actually quite a lot to happen. Actually, I mean, our sales in Europe lately have been pretty great. I mean like, yes, really strong. And we did the tour in Germany too in Europe too sorry with your motor. So Yes. 55D has been vacate in Europe. If I can ask one last question. I was at your Lanthrop factory the other day and there's some interesting construction happening behind it with huge metallic frames being installed. What kind of production could be happening there? And it seems like the factory size has increased by almost 40%. And what is happening there? Any thoughts you can share with us? And that's all for me. Yes. We're establishing a big casting foundry and machining facility there. And that's yes, that's intended to support activity in Fremont. So that's yes, that's what's happening in Lathrop primarily. Sir, our next phone question will come from the line of Patrick O'Shaughnessy with Goldman Sachs. Please go ahead. Your line is open. Thank you. Thanks for squeezing me in. I'll be quick. Just wanted to build on, I think, Ryan Brinkman's question on the 4th quarter cash flow guidance. Does that include income from those warehouse facilities to offset leased vehicles? Or is that exclusive of that? I mean, our projection as Elon said towards the end of the quarter as we ramp up production we should be free cash flow on a positive on a pure sense. But frankly our operations should be looked at without the impact of unique or a distinct decision we've made to be in that business. Okay. And then just a unique or a distinct decision we've made to be in that business. Yes. No. It's not a problem. Hold on a second Pat. Yes. Deepak, do you want to explain about the classification of cash inflows within the statement of cash flows? Sure. So if you look at our Q1 cash flows for example, we received $155,000,000 from our either the warehouse line or banking partners related to our leasing business. But that cash flow does not show up as an offset in our cash flow from operations. It shows up in our financing activities. So our cash flow from operations shows up $131,000,000 negative. But if you offset that against the $155,000,000 that we received on the leasing business, we were slightly better than breakeven purely on an operations basis. And so our real cash burn in Q1 was driven by the strong CapEx spend ahead of the Model X launches the way we tend to look at the business internally. Okay. Appreciate the clarification. The other quick question I had is just on I was a little surprised by the I think you guys had obviously very good gross margins this quarter relative to some of the headwinds that you were facing. And I guess I was surprised to see that ex dev they go from 26 to 25. With some of the increases in pricing that you're putting through and some of the components that you're buying outside of the U. S. With a stronger dollar now, which where there was a little bit of a lag, I understand. I it just that seemed a bit conservative. And I don't know maybe it ties back into Rod's earlier point about mix, but I guess that was one area that I was a little surprised. Yes. No. So just to clarify, the price increase that we've announced is not going to help us in Q2 given our book of business. It's going to primarily affect us in Q3. Yes. And also in April for most of April the dollar was pretty strong. It's just trended in the last week or 10 days or so and we were continuing to deliver cars. So that strong dollar impact does roll over sequentially into Q2 for us despite the lag effect of good news from strong dollar. And as we said in the letter, we fully expect the mix impact to be offset by cost reductions that we will achieve. So it's really related to FX that we see the sequential drop. Yes. The FX was really that was a really tricky thing to deal with. We had a quite strong European sales and then the FX impact was currency. It's like, wow, okay. That's not super easy to make out that difference. Yes. And to your point and maybe this is a broader comment to make that as we look at our Q1 non GAAP loss that we have of 45,000,000 dollars a big chunk or most of it could be attributed to the dollar strength that has happened over the last 6 months. As we've indicated, our Q1 top line came down by about 3 percentage points and then we had the $22,000,000 unrealized losses. Now from currency, you combine those 2 and there's an offset in gross margin due to lower cost of parts we buy in foreign currencies. But you consider this whole mix and you can see the foreign currency change over the last 6 months can explain most of the losses we had in Q1. And yes, maybe just like that last piece is kind of interesting. I mean, how much are you able to take advantage of that natural hedge you just described, right? Because you are buying components in currencies that have also depreciated, right? Batteries are one obvious thing. I'm sure you're sourcing a lot of stuff in Mexico. Are you close to optimizing that? Or is that something that can be kind of exercised more? No. And for better or worse, one can look at it as a pro or a con depending on the situation. Basically about 60% of the car, maybe a little more than 60% is U. S. And Canada. So we may have we certainly have like lots of say European companies that supply us, but they will supply us from plants in the U. S. Or Canada or sometimes Mexico. So that's this really isn't a North American built car. Not for real. So it's like as Deepak is saying, it's slightly helpful if the dollar strengthens relative to the yen. But then since we have like quite strong European sales, this is but I think it's like 5% of our parts or something come from Europe. It's pretty low, right? So if our sales are 30% in Europe then obviously it's not as much of an offset as we would like. I actually thought it would be higher than that, but it's like because I'm looking at the names of the suppliers, but not what matters is where not the name of the supplier. If they're headquartered in Germany, but like where's the plant? So yes. Got you. Okay. Well, thank you for the helpful color there. All right. I've got to bring to another meeting. So if there are We have 2 more question askers. So if we can quickly go. Huey? Our next question will come from the line of Brad quickly talk maybe a couple of examples where you're looking to remove more costs from the car itself? I think we can all kind of appreciate there's continued scale advantages over time, but maybe if you could talk about other cost savings opportunities we should be thinking about with both the S and the X and sort of what inning we're in, in terms of achieving those savings? Thank you. Yes. A big factor is labor hours per vehicle. That has steadily improved. For and I'm grateful. It was sort of quite bad in Q4, particularly with the P85 DRAM. We've made good progress on that in Q1. We'll continue to make good progress on that through the rest of the year. So it's like labor and like direct overhead in the factory. Yes, we're focused across every line item of our COGS, so material cost reductions, freight both inbound. We spoke a little bit about outbound freight efficiencies by We had a lot of expediting. Yes. Because you know that big port strike was super unhelpful. That also hurt pretty badly. It was like the worst port strike of the 21st century. And so we're also soldiering through that. So we had like had to airfreight a ton of stuff Exactly right. While everyone else is simultaneously trying to airfreight a bunch of stuff. That's right. It costs us several $1,000,000 It costs us $1,000,000 It costs us $1,000,000 Yes. So like well so coming back on airfreight, it's really helpful. Yes, direct labor hours. The just We continue with several engineering and commercial actions on material costs. It's a long list not appropriate to go through. But yes, as a company, we are focused on Model X, but S is also certainly improving gross margin there as part of our priorities. Yes. Got it. That's great. Thank you. And our final question in the phone queue will come from the line of Tyler Frank with Robert De Beers. Please go ahead. Your line is open. Hey, this is Ben. Hey, guys. Very quickly, you mentioned the Gigafactory and then a lot of talk about stationary storage and increasing size Gigafactory. Does that change in any way that you're looking at partnerships and bringing partnerships in and maybe an update on timing there? And then, Eli, you talked about having a fleet of a couple of 100 X to get out and test. And you mentioned Model 3 showing it next March. When should we see it the Model X in its final version? Thanks guys. Well, no particular change the partnership model for the Gigafactory. I think as Zealand said, it's early days on trying to make some of those changes in direction. But largely, it's just a bigger scope of opportunity for a lot of the people we're already working with. And it is continuing to go well. We're actually beginning to hire operational people at the Gigafactory and beginning to step up on that ahead of starting to train and then ramp up production of the stationary products early next year. Anything else Ben? Well, just on the Model X when we can see that. Elon, you want to talk about Model X? I've had a number of questions from investors and Ben's question here about when you'll be able to configure Model X online, when we'll show that to the public, how that will actually deploy? Yes. Probably 3 months from now. I don't know, next subject, sorry, probably in May. So it's like this is probably July is when we'll ask people to do the configuration. And it will be very similar to the S. Like it's not going to be super there's no big surprises there. It's very similar to the S. And yes, and we certainly have a lot of customers who've been waiting a long time. So they won't probably quite need to get far. Good. We look forward to that. Yes. I think people are this is really a great car. I mean it's like because it has like such a low center of mass, I mean it handles like a sports car even though it's an SUV. The battery packs in the whole pan. And it's got an incredible acceleration because there's like basically a performance version of it like there is for the P85D. It's like the performance is just surreal. It's like nothing else that is comparable. Great. Thank you everyone for joining us this afternoon and everybody have a great night. Chewy, thanks for your help and we'll talk to you all next quarter. Bye bye. Ladies and gentlemen, this will conclude today's conference. Thank you for your participation and have a wonderful day.