Earnings Call: Q1 2015

May 6, 2015

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Tesla Motors first quarter 2015 financial results Q&A conference call. After opening remarks, we'll open the floor to your questions. Should anyone require operator assistance during today's program, you may press star then zero on your touchtone telephone for a live operator. As a reminder, today's conference may be recorded. Now, my pleasure to turn the floor over to Jeff Evanson. Sir, the floor is yours. Thank you, Huey. Good afternoon, everyone. Welcome to Tesla's first quarter Q&A webcast. I'm joined today by Elon Musk, Tesla Chairman and CEO, J.B. Straubel, our CTO, and Deepak Ahuja, Tesla's CFO. We announced our financial and operational results today in 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 as well as reconciliations between the two. Our non-GAAP measures add back deferred revenue and related expenses for cars delivered where cash has been or will very soon be collected. 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. During our call, we'll be discussing our business outlook and making other 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-K filed with the SEC. Now, Huey, if we could please have the first question. Sure thing. As a reminder, ladies and gentlemen, to queue up for a phone question, you may press star then one. Our first phone question will come from the line of Dan Galves with Credit Suisse. Please go ahead. Good afternoon. Thanks. 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? Do you have order rates today that support that level of volume in the back half? Sure. That's about right. 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 our volume essentially doubles in Q4. Depending upon how the ramp goes. I do want to emphasize, something sometimes people don't totally appreciate is that there are several thousand 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. Essentially the production ramp goes according to the unluckiest and worst-performing supplier or product of Tesla. That said, we do expect to see a significant ramp in Q4 for the X, and have, you know, something that may be as much as 2x of the quarters in Q4. As far as the demand for that, we do not see that being a problem. Obviously, there are huge advance orders for the X, and we see a steady climb in demand for the S. Okay, got it. Just to follow up, you've improved the Model S a whole lot in the last couple of years. Does that make it easier to launch Model X at a high-quality level? Does it allow you to move engineering and design resources towards Model 3 faster than you moved resources to Model X? Yeah. In the case of the X, the X ended up having a lot, being a lot more different than the S than we originally anticipated. The development took a lot longer, and we were distracted solving, you know, 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 S. I think we'll do a lot better with the X. 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 second-row seats. You know, I'm feeling pretty good about things. You know, because, but because that production ramp just scales exponentially, depending upon where that exponential curve falls across a quarter, a quarterly boundary can actually make quite a significant effect on the production and deliveries in that quarter. That's why it's like, it's easy, it's like a lot easier to predict this, like, continuous than if it's discrete with arbitrary quarterly cutoffs. So, but I really think the Model X is gonna be, it's really gonna be a great car. I just drove the latest prototype today, and it's like, wow, this is by far the best SUV. Sounds good. Thank you. Thank you. Go ahead, Huey. Next question, please. Yes, sir. Next question comes from the line of John Lovallo with Bank of America Merrill Lynch. Please go ahead. 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? How many vehicles are participating in your battery swap beta program? The amount of credits, ZEV credits we earn depends on the size of the pack. Different for what we're doing for the 60 versus 85, and now the new ones at 70. That has been varying over time, at 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%. You know, it's, like, not super material. I'm not sure what the point of your question is. Well, yeah. 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 400 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% of the dollar. They sell for, like, you know, $0.50 or sometimes less. There are not always customers for the ZEV credits. Yeah, I'm just asking about in terms of what you guys are actually earning per vehicle. Okay. Not a big deal. Yeah. As more of our production goes overseas, obviously there are no ZEV states overseas. You know, as our sales increase outside of California also Canada, those are not ZEV states. This is like the ZEV, this 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. Yeah. It's not like, you know, ten or something like that. It's hundreds of vehicles. Yeah. We've steadily increased the invitation list. We just found, like, there just is not a lot of interest in people doing pack swap. We make the invitations, and we get a very small percentage that actually take us up on the invitation. Right. No, the only point is there's a difference of 5 ZEV credits per vehicle. That was the only point. Second question would be, and 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. Yeah. I mean, let me just sort of talk more broadly about, you know, the response to the Powerwall and Powerpack, 'cause 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, you know, companies if we have industrial work. Typically, Powerpack, it's like at least 10 Powerpacks per installation. If there's 2,500 reservations, it's actually 25,000 Powerpacks. Powerwall also we suspect is probably an average of number of Powerpacks is probably 1.5 to 2 per installation. You know, 30,000 reservations is more like 50,000 or 60,000 actual Powerwalls. 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 first week. This is crazy. We had 2,500 requests for, from companies that wanna distribute and install the Powerwall and Powerpack. We can't even respond to them. We have to, like, triage our response to those who want to be a distributor. It's, like, crazy off the hook. Yeah. It just seems to have gone super viral. On 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. If somebody wants to do a daily cycling, you know, 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. 'Cause there are people who want to go off grid on principle. Or they just wanna be independent. That's what the SolarCity comment is about. Yeah. It might also be worth noting that, you know, SolarCity doesn't yet operate in Europe and, you know, the main target application for the daily cycling battery pack 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. Yeah. SolarCity's only operating in the U.S. I mean, the Powerwall will be available from SolarCity and from other installers in both configurations. If someone's doing the daily cycling application, they're doing it because they specifically want grid independence. You know, there's some number of people who will wanna do that, and that's good. It's also pretty important to appreciate, like even for the say the power backup systems so that you always have power in a power outage. If, you know, like let's say that appeals to like 2% of households in the U.S., like 1%. Let's say 1, like that's a million households. Like does 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 right now. It's like, it's kind of a moot point. Okay, John, I hope that takes answers your questions. Huey, I guess we're ready for the next question then. Sure thing. Our next question comes from Andrea James with Dougherty & Company. Please go ahead. Your question, 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? How do we look at the 2016 ramp? Well, I mean, the sort of, the gross margin revenue obviously is gonna change with time. When it's low volume, you know, made in Fremont, it'll be, you know, relatively low margin. Once we get to, you know, Gigafactory up and running, and, you know, high volume and get the economies of scale working, you know, this is just a guess right now, but I mean, like, maybe it's somewhere around 20%. This is not like we just don't have enough information to say exactly what that would be, but probably 20% is a reasonable guess. Then, in terms of volume, I mean, we're gonna try to scale it as fast as we can, as the slowest manufacturing constraint. I mean, like it's easier to say like what's the long term without saying like exactly which quarter is it gonna be in. I don't know. 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. Yeah. How do we think about your capacity or even your costs of per kilowatt hour? It's different than a car, right? The duty load is way different for a stationary storage application. 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? Yeah. There's two applications which are quite different. One is backup power or peak up, the equivalent on a utility scale of like a peaker plant, which is a high energy application. There's the daily cycler application. They're different chemistries depending upon which one you have. The backup power chemistry is quite similar to the car, which is like a nickel cobalt aluminum cathode. The daily cycling material constituent is nickel manganese cobalt. There's quite a lot of manganese in there. They're just one's meant for, call it, you know, maybe 60 or 70 cycles per year. The other one is meant for daily cycling, daily deep cycling, so that's 365 cycles a year. You know, the daily cycler one, I mean, we expect it to be able to daily cycle for something on the order of 15 years. Obviously 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. You know, whereas the high energy pack is more like around the, maybe depending on how it's used, anywhere from 1,000-1,500 cycles. They have comparable calendar lives. Yeah. That's 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. You know, for when, like when there's a sharp increase in usage. 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 e-commerce is not happening, and people are asleep, and lights are off. That can be a huge delta. You know, depending upon the situation, it can be anywhere from like a 5 to 10x difference. Having a battery pack that can take out those, like, the sort of weird sharp peaks for 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 gonna peak shave those really troublesome days. Or you could have like a power plant that requires fuel and maintenance, and it's gotta be, or, you know, it's always gotta be maintained, and it takes time. It's not, you know, it's You can't just start it up in 3 seconds. Like, it You've gotta have a bit of notice. The high energy pack is actually very economically competitive in those sort of situations. Then the high cycling pack is really great for, you know, if you've got some sort of wind or solar situation, that's where the high cycling one is really great on the utility scale. I should say, We expect most of our stationary storage sales to be at the utility or heavy industrial scale. It's probably, just, again, just a guess 'cause early days, 5 to 10 times more, you know, more megawatt hours will be deployed at the utility and heavy industrial scale than at the consumer scale. Got it. The Powerpack would be the, you know, one that's like the heavy duty, like the big production and sales one. Not so much the Powerwall. Powerwalls is great, but it's, like I said, it's probably, you know, only 10%-20% the size of the Powerpack demand. Yeah. Maybe one point on the cost structure. You know, there's definitely a lot of commonality in the supply chain and even the manufacturing base on how we do the modules and cells for the Tesla Energy products along with the vehicle products. 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, you know, moving more material and kilowatt hours through that whole chain. Both businesses benefit each other. Yeah. I mean, you know, clearly, given the very 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, you know, in our Nevada plant to, you know, maybe 50% more than that or even higher. Because, you know, just the, it's just the sheer volume of demand here is just staggering. You know, we could easily have the entire Gigafactory just do stationary storage. Right. 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 targeted at the pack level. Okay. It's not 15%, it's 15 gigawatt hours or roughly 30%. Okay. You might add now maybe 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 wanna make that a prediction, but it's like that seems like the thing we should do, we're investigating that. It seems like the logical thing to do. We're gonna try to probably do that. Yeah, 'cause like I We're fairly confident at this point, like I said, that the entire Gigafactory output could just do stationary storage. It's like, wow, okay. Well, we need to make cars too, 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. Sorry, and then I'll get off. Thank you so much for your time. 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, 'cause, you know, we've got this whole other plant here in Fremont making cars. Cars would get the priority. Yeah, that would be the logical priority. Okay. Yeah. It, it just, I mean, it's, it really feels like, man, the stationary storage demand is just nutty. You know, like world-worldwide, it's just crazy. Great. Thank you. Julia, we actually have a question emailed in from one of the analysts that is out of the country, so I'll read those next. We'll start with the energy storage questions. Guys, do our years in R&D work in vehicle batteries contribute benefits into this Tesla Energy business? Sure. Have we drawn some learnings from the vehicle business for Tesla Energy? We've learned a lot about battery packs, I mean, obviously, and how to make them and have them 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 was regarding the Powerwall, like, cause a lot of people confused about the whole inverter issue. So there's the Powerwall does include a DC-to-DC inverter that can interface directly with the solar panel installation. If somebody has a solar panel installation, they already will have a DC-to-AC inverter for the solar panel system. No incremental DC-to-AC inverter is needed. Like, in some of the analysis we've seen, you know, on-online by some kind of-- by people who think they're experts, they don't seem to realize that there is a DC-DC inverter. We haven't been, I guess, quite clear about that, which we need to be. Like, if you already have a solar installation or you're gonna get one, you the DC-to-AC inverter is already there. That's an important point in considering the cost of the system. Oh, then the operating temperature, we've the it's actually capable of operating at a much wider band of temperature, so we've got to fix that specification that's stated on the website. Yeah, in general, most of the learnings from the car R&D and engineering carry over. Yeah. I mean, that's part of why we can do this so quickly. Anywhere the car works, the pack will work. Yeah. The car works pretty much everywhere. Yeah. In fact, it does work everywhere. The pack will work everywhere, obviously. If anything, it's quite overengineered for a battery pack that doesn't have to move and gets mounted on your wall. Yeah. I think that's going to be a great benefit, you know, for reliability and just longevity of the pack. Okay. One for Deepak. Would you be willing to provide any breakdown of 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. Of course, we are putting in the new paint shop, which is a very significant investment that will be ready in Q3. 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 Colin Langan with UBS. Please go ahead. Your line is open. Oh, 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 two different chemistries. How does that work with the Gigafactory? Does that require all separate lines? Is there any more complexity? Is it all within the same facility? You know, 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. You know, we have multiple lines operating in the Gigafactory. You know, if one line is building nickel cobalt aluminum chemistry and another is building nickel manganese cobalt, you know, that still works just fine. You know, a lot of the cell assembly and then the processes that have to happen after that are almost identical. Yeah. I mean, the, they look the same at the module and pack level. You can't really tell just by looking at them. Yeah. It's just kind of the internal chemical constituents. You can think of break down the problem, the cell is a chemical engineering problem. It's a little can of chemicals. The module and pack problem is a mechanical engineering, electrical engineering, and software engineering problem. If you have a just a small number of cells, then as an overall engineering problem, it's mostly about the cell. Once you have a lot of cells, then the intellectual property challenge or the intellectual challenge becomes more at the mechanical, electrical, and software level, which is where Tesla, the, it does quite well. That's why you don't really see, like, nobody else is, like, has a pack like ours. I mean, the cells are relatively generic, but the module and pack is not. Yeah. We've looked at pretty much every chemistry couple that could possibly be relevant for this and, you know, are confident what we're using is going to be the best. If there's something better, we can also adjust and, you know, change over time. There's a lot of flexibility. Yeah, I mean, like, I'm not sure what, like, the exact analogy would be, but, like, if you look at, like, a laptop and it's like you could say, "Whoa, a laptop's really just like an Intel CPU and some Micron DRAM chips. Like, big deal." What's any computer company actually doing? They're doing a lot. What do you view as your competitive edge? It sounds like you think it's the deal, the software and electronic integration, the competitive advantage. 'Cause in your presentation, you actually mentioned you would encourage other companies to build, you know, to enter the market as well. I think we're at the in terms of the electrical engineering, the mechanical, the software, and the overall aesthetics, and just having something that really just works and is easy for consumers and utilities and large industrial applications to just order and it just works and it's 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. You know, that's something that, you know, a lot of the sort of newer startup 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. You know, 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. I shouldn't say, like, we're, like, wedded to a particular chemistry or anything like that. We just wanna use the best chemistry. Whatever little can that contains that cathode and anode, you know, and separator and electrolyte, whatever the best constituents of that can are, we'll, you know, that's what we'll wanna use. You know, we'd love it if somebody could come up with a better internal chemistry for the cell. It's worth noting, like, nobody has sent us anything, a sample cell that's better than the cell we're producing, or something that, you know, we will produce in the Gigafactory. We'd love it if somebody would do that. They just haven't. There's, like, all these things which are big on promise and short on delivery when it comes to battery chemistry. It's just a real hard problem. You know, hardly a week goes by that there's not some alleged breakthrough in batteries. What they'll do is they'll cite the power, not the energy, or they'll forget to mention that it, you know, it only lasts for 50 cycles, or uses incredibly exotical materials. One component out of the battery pulled separately. Yeah. Exactly. It's not the full picture. 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. I'm sure there will be improvements over time. We'll implement them as soon as they are remotely production ready. Okay. Thanks, Nikolas. Just one last final question. Any color on the, on a financial question. Other expenses is up quite a bit. It was $22.3 million. What was really just driving that in the quarter? That was, essentially revaluation of, some earlier foreign currencies that we had, at the end of the quarter. The dollar was particularly strong against foreign currencies there. It's also, in most cases, unrealized losses. As the currency moves in Q2, in different directions, that could have an impact as well. A positive impact is what I mean. Okay. We should kind of consider most of 1 time in nature because of that, balance sheet effect. Yeah. 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 questions on stationary storage. First one is, it seems like utilities move quite a bit slower than other markets. 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 third parties for most of the distribution installation. If you achieved, maybe a 20% gross margin, can you pass along any thoughts on how we should be thinking in terms of SG&A is allocated? I think it's pretty early days to I mean, we're being super speculative at this point, so it's. Yeah. Yeah. Maybe one point on the distributors is we're only focusing on that approach for Powerwall in most cases. You know, with utilities, you know, 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. It didn't just start, you know, last Thursday. You know, we've built these relationships partially, you know, through vehicle infrastructure and charging, you know, questions and back and forth, Supercharging as well. You know, 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. Okay. Just a clarification on the comment about the fact that a DC-to-AC 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, you know, typically the energy to charge the battery can come from the solar panel. I think, you know, maybe one way to think of it is if the battery pack, the Powerwall, with its internal DC-to-DC converter, you know, can act much like a solar panel. You know, it can match voltage with the solar panel array. I see. It can feed power back into that. The existing inverter, you know, 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? Lastly, a question for Deepak. In the past, we were able to look at your supplemental information on leasing, where you disclose the value of the leases delivered and the value that you're booking this at on the balance sheet, which is presumably your cost. Then 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 leasings that we have done. To my knowledge, there's nothing else unusual. Okay. Seems like a pretty high margin, though, when you look at it that way. We- Anything on the mix, 70D versus 85? I mean, it's, you know, it's still pretty early to be predicting mix because you have to distinguish between, you know, what's sort of initial demand versus sustained demand. I mean, it looks like there may be gonna be comparable number of 70s versus 85s, but you know, it's just extrapolating on very little information. Yeah, I think a key point I should make before this call ends is, like, you know, we're really optimizing at this point. Going forward, we're gonna be optimizing for the operational efficiency of the company as opposed to specific quarters. This is, you know, 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. We're gonna be operating more for sort of steady state efficiency. That means the quarterly fluctuations could be a little higher. In the long term, it will be much better. That's an important consideration. Also sort of, unlike other car companies, you know, 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. Our sales are always true sales. They're not sales to the channel. Whereas the other car companies their sales to the channel, so it's possible to sort of, you know, you know, 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. There's, you know, As we're shipping to Asia and Europe and, you know, across the U.S., it's fairly easy for there to be a ±5% difference in deliveries just due to logistics issues. You know, it's not a huge, huge variation, plus minus 5%, but that's kinda like the, you know, if a ship is late or early, it can affect, you know, it could be 5 cars that are affected, and then that's 5%, which we've seen in the past. That's an important thing to bear in mind. The number that's much more controllable for us is the production number. Our production predictions I think are for the vehicles are, at least for the Model S, well, not so much for a new vehicle, but for existing vehicle, our production predictions are a lot more controllable. You know, as I think people at this point realize the demand is different from production. Like, our cars are almost all ordered in advance. We really don't see any demand issue. You know, you can sort of see that by the delivery times of the cars on our website. You know, it's like sometimes people will interpret a quarterly delivery number as somehow being related to demand. This is not the case. It's usually related to, like, just that's how we 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. You know, so that's because Tesla is different from other car companies, applying the other car companies' template can lead to incorrect conclusions about Tesla. I mean, is this making sense? Yep. Elaborate further? Yeah. Makes sense. Okay. Yeah. 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, gives a better customer experience. Right. Taking all of the actions. I guess my question is more geared to trying to assess the effect on ASPs and margins as you're, you know, changing the mix a little bit. I appreciate that. Yeah. To answer your question on margins, I think there's two things that are happening. Like, the average sales price is gonna decline a little bit. Our costs are improving as well. I mean, we see that more or less netting out. you know, efficiency improvements, offset approximately the, you know, any average selling price change. Got it. If in the process we are growing the market, which we truly are by hitting the right sweet spot, then we're doing the right thing. -for the 70D. The 70D has a higher gross margin than the 60, for example, and 60 was just not hitting the market, just didn't have the right attributes that our customers liked. It was a low take rate. We've got 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 is first. Thanks. Thanks so much, guys. You know, as you look at the growth of the organization, you know, the integrity or the culture and the workforce, I know that your employees are extremely motivated. Can you talk about as you grow, how that's growing and changing and what you're doing to maintain that integrity as we go forward? Well, I mean, it is tricky as companies grow to maintain a consistent culture. I think we're doing okay, you know, as measured, you know, relative to most companies. I mean, we do need to, you know, get people to think differently and, you know, have an expectation of innovation. I mean, I think we're doing okay on that front. I think having a general mix of people that have been here, you know, for a very long time, have seen multiple programs and seen the company when it was, you know, even much smaller than today and more scrappy and had to go through, you know, even tighter financial, you know, difficult launches, things like that, really helps, you know, maintain that culture. We try and pair different managers up with new groups so that that culture sort of infuses throughout. Our growth rate this, you know, like this year personnel-wise is, you know, it's sort of, I'd say leveled off 'cause it's still fairly significant, but it's like, you know, 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. I think it's also, you know, it's pretty big improvement in productivity 'cause we'll, you know, 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. 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. The second question is really around some of the choices that you made with the battery product and why choosing 10 kW and the size, you know, 220 lbs is actually pretty hefty for a garage wall. Also the battery management system. You know, 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 gonna 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, it, some of the different, you know, revenue streams you're talking about are kind of mixed between Powerpack and Powerwall. You know, the BMS system lives inside the battery pack in both cases. You know, with the Powerpack and the more utility-sized installations, you know, there, you know, we often will have, sort of a site master computer or master controller that controls multiple Powerpacks, and that site controller is what then interfaces to, you know, the utility or maybe a commercial customer, you know, to sort of run the scheduled charge and discharge that would be appropriate for a given application. On the Powerwall, you know, it's a bit of a different situation. The BMS lives inside the battery pack, but, you know, in some cases, the inverter may be the system that's deciding, you know, how to manage energy in the overall house. You know, that can depend on, you know, which type of inverter we're using on how that works. In terms of the size, you know, we've really, for Powerwall, again, you know, 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. It's pretty key to note here that you can install multiple Powerwalls together. You know, so having, you know, 10 kilowatt hours doesn't mean that you can't very easily put in 20 or 30 or 40. In many cases, I think people will to have the backup kind of matching that they want to see. We felt 10 kWh was the lowest kind of, you know, common element. If you go smaller than that, you start to run into, you know, 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 wanna give everybody a status update here. 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. 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? 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 kinda might be behind that you would highlight? I think we'll, you know, we'll pass on sort of answering super detailed questions about the X ramp. 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. You know, for the S, we had quite a long ramp from, we had like six months from the very first deliveries to significant volume. We're trying to compress that to maybe like two months or three months for at most, like cut that in half or more for the X. We wanna make sure we're really delivering a product that has been thoroughly validated, in, you know, hot and cold weather and through, you know, millions of miles of travel and everything. You know, it would be easy for us to kinda, you know, do some initial deliveries in August. That would be pretty easy. We don't wanna have like we have had door handle issues, like people are aware of that with the S. We don't wanna have, you know, falcon wing door issues with the X. We wanna iron everything out, make sure it's good, and then deliver at high volume. Effectively we would create like a captive fleet, and iron out the issues with that captive fleet. It's quite big, several hundred vehicles, basically. Maybe that addresses your release calendar question. Just make sure that those several hundred vehicles really work well in all circumstances before we start delivering cars en masse. 'Cause we're gonna go from, you know, smaller cars to like 1,000 a week pretty fast. Okay. Just a second question in the interest of time, and then a final question. Apple has kind of still unofficially perhaps 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? If Apple were to get into the electric car business, 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. No, we're not really seeing, you know, significant attrition of engineers to Apple, for anything, car or otherwise. Actually, anyone can like figure this out by just going on LinkedIn. LinkedIn can produce statistics on what the relative flow of people is from one company to another. I think it's like something like 5, you know, if you look at like the trailing 12 months, I think Tesla's recruited 5 times as many people from Apple as Apple's recruited from Tesla. It's like some fairly high number. Mm-hmm. Thanks very much. All right. Our next phone question will come from Brian Johnson with Barclays. Please go ahead. Yeah. I just really want to ask about the balance between stationary and automotive. You know, 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 help, Elon, on web-based payments. You know, it just, you know, 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, you know, Sergio Marchionne pointed out there's a lot of, value-destroying capital spent in the legacy industry. You know, is it conceivable that instead of, say, being 6, 70/30 auto batteries, it could go the other way? It's possible. I mean, this is We're 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. We know like right now, the thing we should work on is trying to increase our production ramp, not trying to increase demand. That's kinda like the only thing we know for sure right now. Then if you look really long term, you can say, well, what's the total energy cons- You know, 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. Assume full electrification of transport, electrification of all heating and cooling, and then the current, you know, 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 global macro calculations. Ultimately we think things will get there. It could take, you know, a long time, but that's kind of where we think things will end up. Yeah. That's where we get to like the kind of 2 billion Powerpack 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. You know, 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 auto, than say, mass market or mass affluent automotive? It might. I mean, I'd, it'd be nice to get like maybe a couple of quarters of experience, you know, after making the big announcement to really, you know, before we Like our degree of uncertainty will diminish quite substantially with each passing month. You know, certainly a year from now we're gonna have like a really, I think, a really good idea of it. It's like super speculative at this point. We just felt like, man, there's just no way we can meet the demand that we're seeing right now, we've got to scale stationary storage as fast as possible. 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, you know, quite a bit of advance work on Model 3, this just doesn't amount to a lot of CapEx. Yeah, just to clarify, Model 3 spend in the initial stages is more engineering spend. It's like basically design studio. Exactly. You know, like very early engineering prototypes. Correct. It's just not very cash intensive. Yeah, CapEx comes at a later stage when you have all the designs finalized, you're kicking off tooling. Yeah. We are in the early stages, as to be expected at this point in time. Yeah. Okay, thanks. Well, Brian, you might wanna ask the follow-up. Does this impact our Model 3 timing? I'll throw that out. Well, go ahead. Well, I mean, we are hoping to show off the Model 3 in approximately March of next year. Again, you know, don't super hold me to that month, but that's, you know, that's our aspiration. And, you know, be in production with the Model 3, you know, in the, I mean, I'd like to say mid, but probably closer to late 2017 timeframe. Late 2017 is probably more realistic. Okay. 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. To stationary storage, not necessarily touching Fremont. Yeah. It would just be built actually just right there. Not even go to Fremont really. It would just be built at the kind of Reno factory or Sparks. Technically, it's Sparks. The Nevada factory. Ship from there to customers. Yeah, starting Q1 next year, that's our plan for all the stationary or all the Tesla Energy products. Okay. Thank you. Sir, our next question will come from Ryan Brinkman with JP Morgan. Please go ahead, your line is now open. Hi. Thanks for squeezing me in. I have a two-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. 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. 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. We'll take those actions to make sure we have a solid balance sheet. I think things are looking pretty good for Q4. Like it's hard to predict full quarter exactly, 'cause you know, the whole quarterly boundary and where does the sort of exponential ramp of production fall exactly on the, on that start of Q4 boundary. It's, I think it's extremely likely that there's, that cash flow is really good at the end of Q4. Okay. That's great to hear. Yeah. Thank you. Yeah. You're welcome. Thank you, sir. Our next phone question will come from the line of Trip Chowdhry with Global Equities 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 Powerwalls. Does that customer have to buy 2 inverters or 1 inverter is sufficient for as many Powerwalls the customer buys? Yeah. It's basically whatever the capability of that inverter is. Typically, the inverter would be capable of handling one inverter probably capable of handling, you know, depending on the situation, up to maybe four or five Powerwalls. The second question I had was regarding the dual motor tour you had in 10 cities, and that was, our research indicated that a very successful event with the reservations and orders really skyrocketing. I think it was only in Canada and the U.S.A. Wondering if you could expand that tour to other continents? Yeah, absolutely. I mean, we just did a big thing in Europe, through Germany. There actually, I think there's like quite a big tour happening from Slovenia, I think, through most of Europe. There's actually quite a lot to happen. Actually, I mean, our sales in Europe lately have been pretty great. I mean, like, yeah, you know, really strong. We did the tour in Germany too. Yeah too. Sorry. with your motor. Yeah. 30, 35 days been a big hit in Europe. Yeah. If I can ask one last question. I was at your Lathrop factory the other day, and there was some interesting construction happening behind it with huge metallic frames being installed. What kind of production could be happening there? It seems like the factory size has increased by almost 40%. What is happening there? Any thoughts you can share with us? That's all for me. Yeah. We're establishing a big casting foundry and machining facility there. That's intended to support activity in Fremont. That's what's happening in Lathrop, primarily. Sir, our next phone question will come from the line of Patrick Archambault 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 fourth quarter cash flow guidance. Does that, 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. Okay Quite frankly, our operations should be looked at without the impact of leasing. That's a purer measure of operations. Which is a lower threshold, I get it. That's a unique or a distinct decision we've made to be in that business. Yeah, no, it's- Rod, do you wanna explain about. Hold on a second, Pat. Yeah. Deepak, do you wanna explain about the classification of cash inflows? Sure within the statement of cash flow? Yeah. If you look at our Q1 cash flows, for example, we received $155 million from our either the warehouse line or our banking partners related to our leasing business. That cash flow does not show up as an offset in our cash flow from operations. It shows up in our financing activities. Our cash flow from operations shows up $131 million negative, if you offset that against the $155 million that we received on the leasing business, we were slightly better than break even purely on an operations basis. 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, I was a little surprised by the, you know, I think you guys had, you know, obviously very good gross margins this quarter relative to some of the headwinds that you were facing. I guess I was surprised to see that ex-ZEV, they go from 26 to 25. You know, with some of the increases in pricing that you're putting through and some of the, you know, components that you're buying outside of the U.S., you know, with a stronger dollar now, which where there was a little bit of a lag, I understand. You know, 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. Yeah. No. Just to clarify, the price increase that we've announced, it's not gonna help us in Q2, given our book of business. It's gonna primarily affect us in Q3. Yeah. Also in April, for most of April, the dollar was pretty strong. It's just strengthened in the last week or 10 days or so, and we were continuing to deliver cars. That strong dollar impact does roll over sequentially into Q2 for us, despite the lag effect of our good news from a strong dollar. As we said in the letter, I know, we fully expect the mix impact to be offset by cost reductions that we will achieve. It's really related to FX that we see the sequential drop. Yeah. That was a really tricky thing to deal with. 'Cause you know, we had like quite strong European sales. Yeah The FX impact was, you know, quite significant. Like, you know, if you've got a car that is like, let's say $0.25 gross margin, and you see a $0.20 change in currency, it's like, wow, okay. That's not super easy to make up that difference. Yeah. 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 a $45 million, 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 million unrealized losses from currency. You combine those two and there's an offset in gross margin due to lower cost of parts we buy in foreign currencies. 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. Yeah, maybe just like that last piece is, you know, kind of interesting. I mean, how much are you able to take advantage of that natural hedge you just described, right? 'Cause you are buying components in currencies that have also depreciated, right? You know, batteries are one obvious thing. I'm sure you're sourcing a lot of stuff in Mexico. You know, are you close to optimizing that, or is that something that can, you know, be kinda? Well- exercised more? No. You know, for better or worse, and one can look at it as a pro or con depending on the situation, like basically about 60% of the car, maybe a little more than 60%, is U.S. and Canada. you know, we may have, you know, 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. you know, that's, this really is a North American-built car. Right. Like, not, you know, for real. It's like as Deepak's saying, it's slightly helpful, you know, if the dollar strengthens relative to the yen. You know, since we have like quite strong European sales. Yeah Yeah, like 5% of our parts or something come from Europe. It's pretty low. Right. If our sales are, you know, 30% in Europe, then obviously it's just not as much an offset as one 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. Yeah what matters is where, not the name of the supplier. If their headquarters in Germany, but like where's the plant? Yeah. Gotcha. Okay. Thank you for the helpful color there. All right. I've gotta go into another meeting. We have two more question askers. If we can quickly go. Huey? Our next question will come from the line of Brad Erickson with Pacific Crest Securities. Please go ahead. Thanks for taking my question. Just a quick follow-up from the last one on the automotive gross margins, and I guess ex currency. Can you just quickly talk maybe a couple 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, you know, other cost savings opportunities we should be thinking about with both the Model S and the Model X and sort of what inning we're in in terms of achieving those savings. Thank you. Yeah. A big factor is labor hours per vehicle. That has steadily improved. It was sort of quite bad in Q4, particularly with the P85 D ramp. We've made good progress on that in Q1. We'll continue to make good progress on that through the rest of the year. It's a, like labor and like direct overhead in the factory. Yeah, we are focused across every line item of our COGS. Material cost reductions, freight, both inbound. We spoke a little bit about outbound freight efficiencies. Yeah. We had a lot of expediting. Yeah. Because you know that big port strike. Yeah super unhelpful. That also hurt pretty badly. You know, it was like the worst port strike of the 21st century. We're also soldiering through that. We had like had to air freight a ton of stuff. Exactly right. while everyone else was simultaneously trying to air freight a bunch of stuff. That's- It's like. It cost us several million dollars because of the port delay. Just air freight. Yeah. Yeah. like, well, cutting back on air freight's really helpful. Yeah, direct labor hours. We continue with several engineering. Yeah commercial actions on material costs. It's a long list, not appropriate to go through, yeah. I mean, as a company, we are focused on Model X, S is also certainly improving gross margin there as part of our priorities. Yeah. Got it. That's great. Thank you. Our final question in the phone queue will come from the line of Tyler Frank with Robert W. Baird. 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 the size of the Gigafactory. Does that change any way that you're looking at partnerships and bringing partnerships in and maybe an update on timing there? Elon, you talked about having a fleet of a couple hundred X to get out and test. You've mentioned Model 3 showing it next March. When should we see it, the Model X in its final version? Thanks, guys. No particular change to the partnership model for the Gigafactory. I think, you know, as Elon said, it's early days on trying to make some of those you know, changes in direction. You know, largely, it's just a bigger scope of opportunity for a lot of the people we're already working with. It is continuing to go well. You know, we're actually beginning to hire operational people at the Gigafactory and beginning to staff up on that ahead of, you know, starting to train and then ramp up production, you know, of the stationary products early next year. Anything else, Ben? Yeah. Just on the Model X, when we could see that? Elon, you wanna 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'll actually deploy. Probably close to three months from now. No, next, sorry, probably in May, so it's like, this is probably July, is when we'll ask people to do the configuration. You know, it'll be very similar to the S. Like, it's not gonna be super and no big surprises there. It's very similar to the S. Yeah. We certainly have a lot of customers who've been waiting a long time, so they'll be quite unique in the car. Well, good. Good, we look forward to that. I think 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 pack's in the full pan. And it's got incredible acceleration 'cause 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 is comparable. Great. Thank you, everyone. Thank you. for joining us this afternoon. Everybody, have a great night. Huey, thanks for your help. We'll talk to you all next quarter. Bye-bye. Pleasure, sir. Ladies and gentlemen, this will conclude today's conference. Thank you for your participation, and have a wonderful day.