Earnings Call: Q4 2014

Feb 11, 2015

Good day, ladies and gentlemen, and welcome to the Tesla Motors 4th Quarter 2014 Financial Results Q and A Conference Call. I'd like to turn the call over to your Mr. Jeff Ellenson. Please go ahead. Thank you, Patrick, and good afternoon, everyone. Welcome to Tesla's Q4 Q and A webcast. I'm joined today by Elon Musk, Tesla's Chairman and CEO JB Straubel, our CTO and Deepak Abuja, Tesla's CFO. We announced our financial and operational results today in a shareholder letter that's available at the same link as this webcast and a replay of this 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 2. Our non GAAP measures add back deferred revenue and related expenses for cars delivered where the cash has been or will soon be collected. These non GAAP results also exclude stock based comp, compensation and non cash interest expense. Revenues and costs associated with cars leased directly through us are treated the same in our GAAP and non GAAP financial information. During our call, we will 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 10 Q filed with the SEC. And now Patrick, if we could assemble the queue and have our first question please. Our first question comes from Andrea James with Dougherty and Company. Your line is open. Hi. Thanks for taking my questions and congratulations on the ROCCAT launch. So just quickly, can you help me get to a free cash flow figure? It looks like you're going to do $1,500,000,000 in CapEx, but what's going to be the operating cash flow to offset that? We will have clearly significant Deepak here. Hi, Andrea. We will have significant positive operating cash flow obviously as our business volume grows and our gross margin continues to improve. We'll also have some cash used on our direct leasing program. Our expectation is that we will establish a shop here warehouse line for leasing cars and that will continue to grow and fund a big portion of our leasing funding required. So overall, we feel pretty comfortable where we are in terms of how 2,415 looks from a cash burn perspective. So maybe about $1,000,000,000 is that about in line cash burn? It should be less than that, considering that we will have a lease house line, which continues to expand. Got it. And so then another point, it looks like you expanded your residual value guarantee into extra markets late last year. And then I saw last week you're giving free charging home charging to folks in China. So I guess my question is, it looks like you have really pretty good demand, global wait times are increases. So why continue to give incentives to buy the car if demand is so high? Sorry, incentives? Well, I think fundamentally in China, we want to make sure we are not creating any hurdles or issues that create a negative customer experience. And charging installation given the varied regulations and challenges there has been a difficult customer experience and we want to overcome that by providing it to us. Yes, but this is also something that's considered standard in China. So if you like buy an i3 or Elite or something that it considered a standard thing, so we're just matching what competitors do. But I mean, there's like the whole the source of the China thing has been blown way out of proportion. We didn't execute super well on China last year, but it didn't really matter. I think people don't quite get that like it's not like there was all these extra cars we could have produced. And if only we'd had a bunch more customers in China, we could have set those cars. We had we were production constrained. So I wish we weren't, but we were. And look forward to getting demand constrained in the future. So I mean essentially it didn't matter whether we into the company as a whole, whether we sold a lot of cars in China or a small number of cars in China, we would simply have had to steal volume that would have had otherwise headed to the U. S. Or Europe and send it to China. So it wasn't a high priority for the company because it wasn't a constraining factor. Now obviously in the long term, we do want to succeed in China and make sure we're doing a good job. And I think just like the rest of the world, China wants to have the best products and we think the Model S is the best car in the world and that's indicated by multiple outside assessments. Pretty sure that people in China want the best car in the world. So that's something we've got to make sure we lay the right foundation for future growth. But it was essentially irrelevant to last year. Okay. That's important point B. And the biggest issue, which we're still fighting to address is this perception that it is difficult to charge your car in China. This is false. It is not difficult to charge your car in China. Unfortunately, this sounds kind of brain dead, our sales team was telling people that it was difficult to charge in China, even though this is not true. Like that's pretty silly. And so I put the guy who was in charge of the supercharger rollout in China, who's doing an awesome job, an engineer, basically, he's not a salesperson, in charge of China to make sure that charging is super easy and excellent. There's not a marketing guy or sales guy, he's like he's an engineer and he's an operations guy and he's going to just make sure that people have the customers are trying to have a fantastic experience. And then just like in other countries, those customers become our sales force and the product sales grow by word-of-mouth. So is this a company philosophy because it seems like you're putting engineers in charge of customer service even globally with Jerome. I mean is customer service an engineering problem? I think if you got people that are good at creative problem solving then they will be good at creative problem solving. I tend to view, I guess, it's my own bias, but most things, since I'm an engineer, I kind of view things as an engineering problem. But not everything is an engineering problem, but I think it's like you've got to design a system and sometimes those systems are in the form of a car or it's a charging thing or it's a way that you communicate with prospective customers. It just created problem solving. So I think what you're really looking for at a high level is a creative problem solver. Who just cares about getting it right. And so that's what we're doing. Yeah, and I'm confident that certainly by the end of this year that we'll be in really good shape in China. And yes, I'm pretty optimistic about it. I don't think there's some sort of unique missing issue in China. If you look at say our sales in Hong Kong, our sales in Hong Kong are excellent, but we don't have that misperception of charging issue in Hong Kong. And we're losing the part in buildings there as well. So it's not like it's super easy to get local charging. So I'm confident that just as we've we have seen high demand in every other part of the world that we'll see it in China as well. And just to the point that thank you for the clarity on China. Just to my point on the residual value guarantee, is that something that you plan on keeping and why keep it and what are your thoughts about that? Yes, that's a good question. I've actually debated like should we keep it or shouldn't we keep it because it's kind of moot. The residual value guarantee is sort of matches what other premiums have been and see after kind of a 3 year time period, but our actual residual values are substantially above that. So it never actually matters. We're not like paying out residual value YINTs because the car is worth more than the residual value. And it does kind of mess up our accounting because we have to create it like a pseudo lease. That's on the other hand, if we would screw it, then does that mean would that people take that as a lack of confidence in our product? I think they might, they might misconstrue it as such. So even though it's moot and it doesn't really matter, it's just there to provide confidence to customers. Yes, so I think we'll probably keep it even though it makes our financials the course and they really are. In fact, I think it's really important because we do get some criticism about their GAAP versus non GAAP. It's like when we do non GAAP we're actually trying to trick people into thinking something is better than it is. But actually it's not true. I don't I think that the way the triangles currently work don't give a correct picture. We're trying to give a more correct picture with non GAAP, not a less correct picture. And the difference between and as you can see from our gross margin, GAAP and non GAAP are basically the same. So when we for revenue, the difference between non GAAP and non GAAP is just that it comes down to just 2 things, this residual value guarantee, where we as we just talked about it's moot. But because of the SITO lease, we have to recognize the revenue over time, even though we've got the cash immediately. So our cash flow is with non GAAP is an accurate representation of our cash flow, which is like what really matters. And yes, so and then even in non GAAP, we don't for leases that we do internally, they actually aren't even covered in non GAAP. And then we received the full cash upfront, so it's aligned with our cash flow. Exactly, exactly. It's under cash flow. Right. Whereas in some other auto companies, the moment they sell the car to a dealership, we understand they recognize full revenue. I think the financing entity might lease that car and so they don't have the cash flows, but they have a GAAP revenue. So in some sense, our non GAAP revenue is pretty clean and it lines up well with our cash flow. Yes, this is really important because really important point to emphasize because like, Christmas might be, are we perhaps exaggerating our revenues relative to how other car companies might represent the revenues. And what Deepak just said is a very good point. What the other car companies will do is they will sell the cars to the dealer groups, but then they will then turn around and lease finance those same cars. So they're sending it through the laundromat is basically what they're doing. In our case, since we are not sending it through laundromat, it's much it's actually more correct. If we do a lease, it's all internal and we're not trying to sort of send it through some third party where actually the risk is still assumed by the parent car company. So yes, and then even for leases that we do ourselves, we can securitize those leases whenever we want. So we can take those leases, bundle them, put them into a securitization program or just get a warehouse loan to recover the capital. The reason we're using our existing capital is just basically common sense because we've got a big bank balance that's earning like 0.1% or basically nothing, actually minus whatever the inflation rate is. And so it makes more sense for us to put that capital to work with consumer leases and earn 2% to 3%. That's basically what it amounted to. But whenever we want to recover that capital, we can do so through warehouse cyber securitization. Yeah. Thank you for taking my questions. Yeah. So our financials are better than they appear, not worse. This is really the key point. Thank you. Our next question comes from Brian Johnson with Barclays. Your line is open. Yes. Good evening. I want to explore a bit where you see the trajectory of CapEx and OpEx. You gave some guidance for next year, but as we kind of think to the Gigafactory and as we think ahead to the model, excuse me, the Gen 3 launch, how do you see those trends going over the next several years? We're going to spend staggering amounts of money on CapEx. I mean for a good reason and with a great ROI and it's important to not look at the CapEx in isolation because there's like that CapEx obviously is being done for a reason in order to capture a substantial future revenue flow. But I mean, I'm just saying the sort of back of the envelope. Just if you assume if you make certain assumptions that I emphasize these are just certain assumptions. I'm not saying they're true or that they will occur, but I bet that they do occur personally. That's just my personal opinion. I mean if you take this year's revenue around $6,000,000,000 or thereabouts And if we're able to maintain a 50% growth rate for 10 years and achieve a 10% profitability number and have 20 PE, our market cap would be basically the same as Apple is today. Now that's going to require a bit on the order of $700,000,000 Obviously, getting there will require some significant CapEx. But I'm hopeful that we can do this without any significant dilution to the company. So maybe minor dilution, but nothing serious. And how about in terms of operating expense? And do you have a target for reported margins versus kind of thinking about your remarks in the 2nd press conference and where margins would be if you'd stop growing? Is there a difference between the margins on a non GAAP basis we'd actually see versus what they would be if you weren't making those kind of investments? You mean profit margin as opposed to gross margin? Yes, the operating margin. Yes. I mean we could easily get to 10% to 15%. I mean probably if we push if we so it's somewhere between 10% and 15%. Because I mean we're talking about gross margin that this year will probably by the end of the year be somewhere around 30%. So then if 20 of those points go to sort of fixed costs and R and D and whatnot and then at least 10 left over for profitability. And we are expecting to be non GAAP profitable. And we have been non GAAP profitable for 2 years now, 2013 2014. Yes. And I'd like to emphasize that doesn't mean bullshit profitable, it means really profitable. It's difficult to parse your question Brian in terms of separating OpEx between a fast growing company like Tesla versus steady state. Clearly, we want to invest in the future, but we want to do it efficiently. And we are going to focus on being efficient with our OpEx fundamentally this year. We are, but that is a key thing. The simple math of headcount requires this. I mean, we're basically a little over 10,000 people and aiming for somewhere over 55,000 cars this year. Just to get to 500,000 cars a year, if we didn't improve our productivity for PROSIM, we would need 100, sort of call it 100,000 people. I'm not sure where we would park. So clearly there needs to be dramatic improvements in productivity, which are underway. Right. And so when you said 10%, was that 10% while still growing to the millions of cars target you talked about in 2025 or that's kind 10% when you get to that millions of cars target? Yeah, I think at some point we'll actually be able to maintain 10% profitability despite netty growth. Can you just run out of ways to spend money, it's kind of like Apple, they're not just running it? I think for us we are a single vehicle platform company at this point. So our engineering expenses have their ebbs and flows. So that has an impact. But as we grow, we become a portfolio of vehicle platforms. Even with nutty growth, we can get to a very good operating margin. Yes. And I just wanted to point out like we're doing this and Sumit mentioned in the letter, but there's massive infrastructure expansion going on like really massive like setting up service centers worldwide, setting up creating a ubiquitous supercharger network worldwide, just logistics across all these countries, going with customs and the unique elements of each country. We're massively increasing the sort of scope and scale of Tesla in order to lay a foundation for future growth. Okay, great. And just final question more for Deepak. When does CapEx flow into depreciation and gross margin, what kind of timeframes for the CapEx in terms of depreciable lifespans? Are you assuming on things like Gigafactory, factory drilling and so forth? Yes. So to answer your first question, when assets are put to use for production and delivery of cars, that's when depreciation kicks off. So a lot of our spend this year is on production capacity expansion and Model X drilling. Those assets will start depreciating and Model X It starts producing the Gigafactory assets clearly would go into would be depreciated when we start producing cells that are being used for production and our revenue growth. And the life of the depreciation life depends on the kind of asset. It can vary from 5 years for tooling to longer if it's equipment and if it's facility then it could be 15 to 30 years. We follow the generally accepted principles there and our expected life of use to come up with those. Okay, great. Okay, thanks. Thank you. Our next question comes from Adam Jonas with Morgan Stanley. Your line is open. Evening, everybody. First back to China. Do you have any concerns about your ability to pursue business in China on terms that protect your interests? What I mean is like, if you look at the German manufacturers, they don't seem to have any problem with fifty-fifty JV structures or with local partners and not having control and selling through franchises. Are you able to are those terms that you're comfortable doing business with in China? Well, I think we're definitely going to want to have local manufacturing, or some amount of local R and D as well in the future in China. It's not going to make a ton of sense in long term to be building a huge number of cars in California and shipping them to China. But right now we're still at the early stages. So it's difficult to say exactly what happens in the future. I mean our goals in the short term China are just very straightforward, which is just to build out our service and supercharger infrastructure and just get the basic foundational elements there. We're not going through dealers as we don't go through deals anywhere in the world. So our activities in China are currently 100% Tesla earned. And it sort of depends on what the evolving landscape is in China in the long term as to whether and how a JV would have to be set up. Okay. Elon, just on the patents, it's been 8 months since you opened up the patents for competitors to use. Any takers of any significant technology? I'm not aware of any. Are you surprised there hasn't been more? And is this a function of just kind of is it hubris and pride Are your competitors or is it they just don't have the kind of intellectual capabilities or software engineering depth to kind of contextualize what you have to offer? I'm quite sure that there will be and that actually manufacturers are currently trying to use our patents. But just important to remember the design cycle from the point at which you can use and flush your property, you got to incorporate into design, that design is going to get you got to do detailed engineering and design, you got to tool things up and then you got to go to production. So it's probably the first time you see companies, anyone using our IP would be about 3 years after we announced. Okay. And finally, Ylan, just you mentioned, I think you said staggering amounts or seen amounts of money on CapEx. Companies that usually have those kinds of say spending ambitions at this point in the growth phase also have a pretty developed relationship with capital markets to help fund that growth and you yourself and your enterprise has been I think done that quite successfully. Any heuristics you can kind of leave us with as people kind of contemplate more cash burn with the being necessary to fund great things and great projects that will ultimately pay off. But any kind of rules of thumb or minimum levels of liquidity or the kind of things you'd look at to decide whether you'd need to kind of refill the capital tank? Thanks. We don't have any plans for raising money right now. So the and I think we can get to that sort of crazy level that I described earlier with really minimal dilution. It's really going to be very much the overwhelming amount of it would come from operating cash flow. So yeah, feel generally pretty good about it, but getting to that level with only moderate minor to moderate dilution. I think the only reason we raise money really is and I'm not saying we really don't have any place to raise money, but the only reason I mentioned we were doing it really is just to have a bigger cash cushion that would be the in case there's a big downturn in the economy or something like that. Thanks very much. Okay. Thank you. Our next question comes from John Lovallo with Bank of America. Your line is open. Hey, guys. Thanks for taking the call. First question is cash burn continues to be pretty aggressive here. So the question is if demand is as strong as you guys are saying and really the issue is on the supply side, why wouldn't you raise prices in all regions to at least offset the FX headwinds? And the reason I'm asking that is if you have more demand than you can handle this won't hurt deliveries. It should also clearly benefit cash flow and investors and will also support the residual values for your current owners. So it sounds like a win win all around. So can you just address that please? Well, I mean, I actually kind of think our car is expensive as it is. It's really not a cheap car. I mean for a huge number of customers, it's the most expensive car they've ever bought. I didn't think they'd ever buy a car that costs $100,000 So I'm reluctant to raise that price and as we start running into sort of fundamentally affordable affordability limits. And I mean as it is, we are expecting to be significantly positive cash flow in kind of the latter half of the year. So I mean there'll be sort of a short term dip, but it's going to be quite positive at the end of the year and going into 2016 even more so. And I think that's completely linked to a major product launch, especially in the automotive industry. You have to invest in the CapEx for manufacturing capacity and then the cash flow comes through when you launch. But just to be clear on that, when you say you're going to be cash flow positive by the end of the that's after CapEx? That's our yes, that is our expectation. And I think we've got to have focus on the long term, right? This is a short term issue in terms of timing of CapEx versus revenue. But to answer your question, yes, even in the face of significant CapEx, we expect to be cash flow positive in Q4. In Q4, okay. I mean, it may happen somewhere in late Q3, but it will be reflected most clearly in Q4. And this will include the volume production of Model X. Yes, exactly. We've got to get Model X, because we have a ton of CapEx related to Model X. Exactly. And we've also invested in a bunch of things that actually our volume numbers that are really better associated with Model 3. So our $250,000,000 paint shop upgrade is intended to be able to handle 10,000 cars a week. Okay. Thanks. And then the next question is, there's been a lot of discussions about persistent drivetrain issues. I mean, we've heard everything from different customers from persistent humming noises to complete failures. So the question is, I mean, how pervasive is the drivetrain issue? What is the cost to replace the drivetrain? And I was a little surprised to see that the warranty reserves would not move up quarter over quarter? Yes. I think there's a lot of noise on the forums that it's not quite as bad as Google made. Certainly, I mean for most people they don't experience any drag train issue at all. There was a period of time, basically like a month or 2 about a year ago where this is kind of getting into the weeds, but the application of grease on the spline of the motor was incorrect. And that caused the spline to wear out and strip the spline on the drag unit on the motor. So the net particularly affected sports and unfortunately it happened to coincide with a when a whole batch of cars headed for Norway. So unfortunately, it disproportionately affected Norwegian customers, which we've taken great pain to try to address. Essentially what it amounts to fix that issue, for example, is just to you've got to pull the drive unit and then send it to get remanufactured where we replaced the rotor and yeah. Yeah. And maybe to the warrant this is JB. To the warranty reserve question, we've actually improved quite a lot in our efficiency at repairing the drive unit. So it might be swapped for a given customer, but that unit doesn't get trashed, it gets repaired. And the elements that need to get repaired are increasingly narrow and we're really targeting them quite directly. Even the rotor can be repaired at this point. Yes. And there was a differential clunk that was causing a differential clunk, which can actually be fixed with a 2 pot shim in the service center. So we're able to figure out the service center fix to address that without even dropping drive units. All the new units being built today, of course, get all these fixes proactively. So as we learn the new product improves. That's helpful. And then finally, Elon, I just wanted to ask you about your comment about GAAP profitability not being reached until 2020. And I know you guys say that the non GAAP way is the way to think about it. And I'm not disagreeing with that here. But what I'm suggesting is that if there's not going to be GAAP profitability until 2020 and we kind of walk down from The Street's consensus non GAAP number to a GAAP number by adding back stock comp, adding back non cash interest expense and making an assumption on the leasing. My estimates would suggest that Street estimates are 30% to 60% too high because the GAAP component of that non GAAP number would need to be eliminated. So if you guys could just help me think about if that math is incorrect and more importantly, what is the path to profitability for Tesla? I think people read too much in my comments, because I've asked when do I think Tesla will have full year GAAP profitability? And so then you get into the sort of residual value guarantee question like do we continue doing that or do we not continue doing that because like half of cars are financed, right. So that basically chops our revenue in half in a lot of cases. So leasing as well. And then leasing, so it's like leasing in Henrico Regional Bank guarantee or half the cars that would basically massively affect the revenue recognition. So and then is it just on a quarter basis or is it full year? So I think like I mean that's why I said okay we'll probably 2020 for the full year and it's GAAP. That's like what that actually means is that like TESOL's free cash flow is incredible in 2020. It's able to overwhelm even the non GAAP stuff. So people don't understand that what I said was extremely optimistic, not pessimistic stating. Okay. Thank you, guys. Our next question comes from Ben Kallo with Robert W. Baird. Your line is open. Hey, thanks for taking my question. A couple of different ones. The first kind of a lower level one. As far as the X goes and timing, could you just talk about I know you reiterated deliveries in Q3 and just your confidence level around that? And then maybe one of the questions we get a lot is if we extend that to the Gen 3 and your 2017 timeframe. Can you just talk about the work you're doing there and how confident you are in getting to that timeline? Yeah, that's fair criticism, implied criticism. I mean, this feels a bit like Zeno's paradox here, like we're sort of halfway there at any given point. But I mean really the X design is done. So it's just a question of tooling and supply chain at this point. And then making sure as we do the ramp up on X that our quality is excellent. It doesn't do any good. We want to make people have a really great experience. We don't want to have them have any sort of issues or problems. So but it's really at this point, I said it's just tooling in supply chain. So and we're trying to make that go as fast as possible. So we're highly confident of delivering our 1st customer cars this summer and then just building up to significant volume in Q4. Now with respect to Model 3, we definitely we don't want the delays that affected the X to affect the Model 3 and we're really taking we've been quite conscientious about this. And I mean there are things that we could do with the Model 3 platform that are really adventurous, but would put the schedule at risk. So what we're going to do is we're going to have something that it's going to be an amazing car, but it won't be the most adventurous version of the Model 3 to begin with. But we will then have the more sort of the more kind of different version of Model 3 on the Model 3 platform following the initial version, so that we can stay on track for Model 3. We've got quite adventurous with the X And we don't want to be that would be too risky given the Gigafactory and everything sort of has to happen on time. We don't we're not going to go super crazy with the design of the initial version of the 3. So I do feel confident that we can make that happen in the second half of twenty seventeen As long as we stick to those principles. Great. And a question on innovation and releasing new features. What did you learn from the dual motor as far as timing of new releases and how that impacts demand and how you do that going forward? I know you guys are constantly innovating on the car, but does that disrupt demand at all? And how do you do that that you don't specifically do in model years big advances? This is a problem that we struggle with. It's really tricky because we basically have one car with variations. This would be much easier if we had different cars. And so it's tough for us to announce way in advance if there's going to be some new version of the car because then we're like worried about starting near term sales, while people wait to see what it is. So it's a real tricky thing. And then we also it's difficult to forecast the exact demand since we haven't told people about the car, we have to kind of really have to guess like, okay, how many people want the P85P? We have not yet. It turns out a lot, okay. It turns out a really, really a lot. So then we have too much demand for the P85B And now we're going to figure out how to do that. And then like how many people are going to pick the next gen seats? As it turns out also a lot. So we couldn't make enough seats. So I mean, I'd love to figure out how to be less stupid about this in the future. But yes. I think one thing in particular that we're working toward is to be sure that we're really ready to meet the production demand at a much higher percentage mix as we announce something new or an innovative new feature. And that's definitely I think a lesson we learned. Yes, agreed. Great. And my last one is on the storage side of the business. Can you just talk about any developments there? We've heard some utilities looking for RFPs for utility scale projects. You guys had a position where you could start bidding on those RFPs or entering those RFPs? Just give us an update there. Thanks guys. For stationary storage? Yes, stationary storage. Yes. So for like basically dry factory packs and we're betting on a lot of RFPs already. Do you want to elaborate on that, Chip? I don't want to go into super amount of detail on this, but you're correct. Of course, there's a lot of interest and a lot of utilities out working in the space and we're talking to almost all of them. It's early stage stuff and a lot of projects are very far out. The procurement cycle for utilities is so long. But this is a business that's certainly gaining an increasing amount of our attention. Yes. We're going to do I think they're really we're going to unveil the sort of the Tesla home battery or consumer battery that would be for use in people's houses or businesses fairly soon. We have the design done and it should start going to production probably in about 6 months or so. We've got a date to have the sort of the product unveiling, but it's probably in the next month or 2. It's really great. I'm really excited about it. Thanks, guys. Our next question comes from Ryan Brinkman with JPMorgan. Your line is open. Hi. Thanks for taking my question. Can you give us a sense for what you think your gross margin would have been in the quarter if not for the 1400 deliveries that were pushed into 1Q? Well, actually maybe better I said it's like I mean there are like a bunch of things that coincided because we had a whole bunch of expedited shipping because even to make those numbers we had massive over time, massive expedited shipping And then the euro was also falling. If those things hadn't occurred, I mean, it would be somewhere in the order of 28%. Maybe, yes, somewhere around there. Okay. That's helpful. And then just last question really quick. Is there any additional color you can give us on just the cadence of sales and production throughout 2015 beyond? I'm curious why the deliveries are expected to be flat in 1Q versus 4Q given that they should benefit from the push out of those holiday deliveries and why production is forecast down sequentially too given that the full year has guided up so much? And beyond 1Q, what can you tell us in terms of when you expect the implied inflection to occur in 2Q or 3Q? What the catalyst is for that, whether it's a capacity bump up again or Model X or something like that? Thanks. Yeah, absolutely. So and just to clarify about the estimated 20%, that's 20% excluding debt credits. So if you added debt credits on top of that it would be I don't know 29% or 30% or something like that. So yes, in terms of the production from Q4 to Q1 being flat, there's a couple of reasons for that. There are actually 2 fewer weeks of production in Q1 versus Q4. One is because we had to give we wanted to and certainly so gave people the 1st week of January off because have been working over Christmas and New Year's and Thanksgiving in a lot of cases. So they are just to give people a break, we didn't operate factory in the 1st week of January. And also you have a scientist equipment upgrade. And then there's also one fewer production week in Q1. So it's basically minus 2 weeks. And then in Q1, we are focused on productivity improvements and laying the groundwork for higher volume in the remainder of the year. Obviously, if you do the math, it is it doesn't mean there's going to be a fairly big scale up as you get towards the end of the year. And we had over 10,000 orders on hand, So it's not a demand issue that we're delivering. I think the guidance number, there are a lot of cars in transit as we are again adjusting our global mix of deliveries. Okay. A lot of cars in transit is kind of crazy. Thank you. Our next question comes from Patrick Parshenbaum with Goldman Sachs. Your line is open. Thank you. Yes, good evening. I just wanted to follow-up actually just on some of the comments you made about being less adventurous for the X relative for the Model 3 excuse me relative to the X and playing it a little bit safer. Can you just give us a sense of what some of these characteristics and features are that you might have at one point been considering for the initial version that may be put in place for a later model upgrade? We can't tell you that. I mean, come on. So yes, with the X we had the Falcon Wing door, which is the first sort of double actuating gull wing door basically what we call it, outgoing door. Getting that right and making sure it works really well and isn't a gimmick, but it is a fundamental improvement in utility and aesthetics for the cars is extremely difficult. There's a reason that other people haven't done this. Then the 2nd row on the Model X is like it is the 2nd row seats on the Model S are the sculptural beauty, they're amazing. They're the nicest second gross these you've ever seen in any car ever. That actually might have been harder than the door. And there were some other things about the X that people don't know about yet, But those weren't driving schedule, which will be second row seats and end of the door. So then going to Model 3, we want to I think we want to have particularly at super high volume, something that I expect for this feature we lose a year of production. That's where it would make more sense to just go with something that we know people are going to love that's going to be incredibly beautiful and functional and an amazing car. And then innovate in more, I don't know, a la carte directions on that platform with future iterations where we're not we can then put aside any schedule and volume consent. Understood. Certainly looking forward to seeing the ex. Have you guys said when is there going to be any sort of advanced sort of showing of it at any auto shows or anything some of the more advanced prototype ahead of the launch that we should be looking forward to? Yes, because there are these sort of different features that I mentioned, even being sort of intentionally up to, we're not going to show it until it gets delivered. Interesting. Okay. Okay. Switching gears a little bit back on China, just on orders. Now I understand that deliveries have been significantly impacted by a number of the issues that you've described. But how have orders been trending in China, especially now that you've made some replacements on the management side, you seem to have a solution well in hand that's being implemented, address some of the concerns whether they were justified or not. How have you seen kind of the Model S order book track pre and sort of post those issues? Well, Tom has only been in charge for a short period of time, but the trend is positive already. So I think we see it improving every week. And there's some like elementary things that we were missing before like maps and directions. So the car didn't have maps and directions in China, which is kind of important. So now it does. And we don't have like the onboard music fair working, which we will have soon. There's a lot of functionality that's getting added over the software that are pretty helpful. So yes, the trend is positive. I don't have any significant concerns about it right now. I mean, it had been some had reported that orders had been coming in somewhere in the neighborhood of 100 today, and which obviously point to a pretty good annual run rate. And is that sort of at least the order of magnitude that you were trending at and that you can get back to in the shorter term? The problem last year was that we had a whole bunch of speculators that are based on time to buy large numbers of the cars and then resell them at a higher price, which is not something we allow. So that it gave like an inflated sense of demand in the beginning. It wasn't real. I don't think we were at 100 a day at any time either. I mean that would sound like 50,000 plus cars just in China alone demanded in annualized rate. I don't know what the source is. Okay. No, that's helpful color though. Last one for me is just more of an accounting clarification. I think in one of the pages you talk about direct leasing impacting, I guess reducing sorry both non GAAP and GAAP profitability. I think we understand why it reduces GAAP profitability. We've actually addressed that a lot in this call. But non GAAP, I was just wondering why that would be impacted? Yes, because we still hold title for the car and we haven't collected full cash on the car. And so we don't recognize those direct lease cars even in our non GAAP financials. Pretty simple. Understood. Okay. Thanks a lot guys. Yes. But as I mentioned, we can always free up that cash by securitizing our internal leases and or by just getting warehouse on facility. So, yes, the important point is like that our I guess what I would consider our real revenue is actually higher than our non GAAP revenue because of the internal leases. Got it. Okay, great. Thanks a lot guys. And I mean, vehicles delivered to customers is really the key metric that I focus on. We don't give people a car unless they're paid for it. They paid for it somehow and the average price per car is pretty obvious. So that's really a key number. Thank you. Yes. Next question comes from Rod Lache with Deutsche Bank. Your line is open. Hi, everybody. I apologize if this has been answered. I had some phone problems here. But I was hoping you might be able to help us with what you see as the run rate of sales for Model S right now and that bridge to the 55,000. Should we look at the 40,000 deliveries or maybe it's 46,000 if you annualized what you did and add in the delayed Model D? Is that a run rate? And then to get from here to 55%, where is China now? What does it need to be? And what actually are you including for the Model X this year? Yes. So, Ashok, even if our sales in China were 0 this year, 0, I'm still confident we can do the 55,000 cars. That might be 0. So as far as what the mix is between S and X, it's really tricky. I wish I could tell you with accuracy, but it really depends on how the production goes with the X when we start up this summer. And even small changes in that ramp can have quite a dramatic effect on X production. Especially for the calendar year because it's late. Exactly. Long term makes no difference. Yes, exactly. And you could be like, if we're are producing, I would say 800x's a week and several weeks it's like several 1,000 cars. So it's just really tricky to predict it from I mean, like it's much easier to predict like next year. And assuming people like the car, that's where you start to see, I don't know, 40,000, 30,000, 40,000 is leased, 50,000, I don't know, they call it 30,000 to 50,000 excess next year. Okay. And clearly, up until now, as you pointed out, you've been discounts. Right. To get We haven't paid anyone to pretend that they like our car. Right. And no franchise dealers and all these things that people had said that you might need to do, you've been able to do it without any of them. But I'm just curious about kind of longer term to get to the volume objectives that you are looking for this year and beyond. Are all of those in your view achievable while avoiding the franchise dealer model while holding back on advertising and marketing and while in some cases even raising prices for example in Europe to adjust for currency? Are any of those impediments to the demand objectives that you have? And would you modify the strategy in any way to achieve these volume numbers? I think we're going to be okay on the demand side for this year. I mean maybe something changes next year, but I think we'll be okay. I don't think we're going to have to do a bunch of advertising or throw in the towel with the dealers or anything like that this year. And for this campus cars or anything like that. So in fact, I do want to emphasize that whenever you see like a celebrity or some prominent person driving our car, they all paid for retail. There was no discount, we can give them a car, they're buying a car and they're driving because they really believe in the car, not because someone paid them to pretend that they did. So I'm going to give them credit for the people that have bought the car. So yes, I mean there's I think we I do have sort of secret weapon on the demand side that probably start to deploy later this year for demand generation. And we'll see how that goes. It isn't totally necessary, but I think it could be pretty interesting and a good weapon against the dealers. Okay. And just one last question I had. You mentioned in your letter that the margin was pressured half by revenue and half by cost factors. The FX part of this was pretty clear. There was a comment in there about deferred pilot revenue. Can you just explain maybe just elaborate a little bit on what you meant actually in that description of the margin variance? On that particular one, Rod, we announced several features that the autopilot functionality or hardware will deliver. Those features, although the hardware is in the car, some of them will get activated through software releases later this year. And so based on the divestiture aspect of revenue per accounting, we had to defer some of that revenue into 2015. And I think it's as simple as that. Okay. And that variance was versus the 28% original objective or is that versus what was that comparison against? That was yes, it's part of that because we had to figure out the accounting for it, work through the whole thing and it as we deferred significant amount there that had an impact to our otherwise delivered car gross margin that would have been It's like a lower 0.5% or something like that. Yes. That's right. Maybe 0.5% to but most of that deferral will be taken care of this quarter with the software release next month, which will add a bunch more functionality to the car. In fact, I'm really excited about the software release we have planned for next month. It's flash features in it that are going to positively affect the entire fleet. And then of course we'll add more and more autopilot capability. That should be fine. Yes, it seems really, really good release. Okay. Thank you. Patrick, before we go to the next question, I just want to do a time check with you, Elon. We're coming up on the hour mark. We have several more questioners in the queue. Yes. Thank you, Pat. Okay. All right, Patrick. My five thirty call, this is Ken. Our next question comes from Dan Galves with Credit Suisse. Your line is open. Thanks. Good evening. I just had a question on the delivery guidance. If you adjust that for additional in transit vehicles, I'm just trying to get a sense of whether you feel like that's your best guess on kind of your MAX production for 2015, because my sense coming into the year around 1,000 a week is you could produce a lot more than that. So I'm just getting a sense of what part of that is demand constrained and what part is production constrained? Well, we're not going to try to do a little better than the 55 number. So we're saying 55 plus, but we are going to try to do a little better than that. But it is as I mentioned earlier, it's really dependent on how the X ramp goes. That can have quite a bit if it happens later in as it's been a highlight takes a lot that could affect the delivered number quite significantly. Also like when you said delivered it's like you've got to also factoring there's like a lot of cars and ships. Correct. The gap in production and delivery time. Yes. And then we need to consider there could be disruption during launch of X. And so when you're looking at that broad number of 55,000 over the year, the things we need to consider through the year, what happens? Yes, there's a 55 is like a number that we're pretty comfortable with achieving on deliveries. And we are as initially making a conscious decision to focus on productivity this quarter, not ramping production. That's what it's like. Yes. Production stability. Yes. Production stability. In order to get that efficiency, like when you be building a firm foundation for future growth, and if we're just in a healthy scale production ramp, trying to just try to get a bunch of numbers, it's really hard to get productivity and kind of fix the foundational elements. So the conscious decision this quarter to say, okay, we've got little bit of improving our core productivity. We're running out of parking spaces like Victoria's. Our Fremont plant is pretty big and it's hard to park. So we need to get these productivity improvements in place so we can grow our production volume without proportionately growing headcount. That makes a lot of sense. And then just one kind of housekeeping question on the you put the chart at the beginning of the shareholder letter with revenue guidance for 2015. Is there anything in there for trade in sales for used car sales? And do you have any sort of sense of kind of what type of drag on gross margin sale of trade ins will be? There is a small amount of that. We are just getting into that business now and our goal is certainly not to make that same kind of money on our used cars. Yes. But the used cars also it's like the capital, we don't have any capital in there really. Yes. Turnaround capital until. Yes. So it's actually like the used car margin is actually it's on our ROI basis extremely good. Right. And the dealers do make a lot more gross margin on used cars than new cars and that's not our intention, but the ROI is still really good for us. Yeah. But we're going to separate that out, so you can see new car gross margin versus used car service and other things. Yes, which brings up a good point that as we said at the end of our shareholder letter, starting for 2015 financials, we're going to show our income statement slightly differently where automotive revenues and cost of goods sold is truly new car sales and then we have services and other section of the income statement that has all these other things including trade ins and Yeah. So we'll break it out so you can clearly like what's the new Model S gross margin, what's used, what's other things there. Yes, it's very appreciated. Thanks. All right. Thanks, Dan. Our next question comes from Trip Chowdhury with Global Equity Research. Your line is open. Thank you. Two quick questions. We see a lot of similarity between Apple and Tesla both cars both companies go perfection, performance and design. But we don't see Apple making a $30 iPhone. I was just wondering instead of focusing on Model 3 and we just focused on say Model S and Model X, but make them even better. Just focus on increasing the range to say 400 miles, 450 miles. You already have the Roadster which is at 400 miles now. I think that will make Not quite 400 miles. The roads are sort of more like 360, but close to 400 miles, yes, with the upgrade. Capable of doing LA, San Francisco, but yes. So yes, but I mean the goal it has for the beginning has always been to accelerate the advent of sustainable transport. It seems to make electric cars happen much faster than otherwise be the case. So in order to do that we have to make lots of cars and we need to make them a heck of a lot more affordable than the S and the XR today. Even with the Model 3 though, I mean it is sort of a mass market premium car. A it's not sort of it's not it's still premium, but it's a mass market premium. It's that 35 ks. It's not a it's above average price. Yes. I think it's also not an either or decision. We definitely will keep making S and X better and we'll keep improving that platform really as much as the technology will allow. So we'll go in both those directions. Perfect. Thank you. Our next question comes from Andrew Fong with CLSA. Your line is open. Thanks for taking my question. So the Gigafactory seems to be making some good progress in terms of the construction. Could you provide an update on how the development of the battery supply chain is progressing? And perhaps any notable challenges or perhaps positive surprises that have occurred with that process? Sure. I can take that one, this is JB. So far we've been pretty pleased with the supply chain developments. We're spending a lot of time visiting more and more of the supply chain partners and understanding and learning about all those different markets. That learning is progressing quickly and I think we're getting a much more clear picture of exactly how we will achieve the cost reductions we've talked about. I don't want to go into too many specifics on exactly sort of what we've learned in which places. But I'd say there is a lot maybe more incremental positivity on some of the commodities and some of the ways that I think we can secure and procure pricing on some of the larger commodity prices that go into the cell. Great. And any sense of when you guys may announce additional either suppliers or partners from the Gigafactory? We want to be a little bit cautious about doing that too soon. There's obviously a lot of work going on in discussion with all of those partners, but I think we just we want to be careful to make sure that all the agreements and decision on the where that partnership is headed is very clear. So we'll wait until it's really done and ready to announce. Great. Thank you. Next question comes from Andrea James with Dougherty and Company. Your line is open. Thanks for taking my follow ups. Why did you guys promise the Roadster 3.0 this year? It's just a long standing obligation we have. I mean it's not something that economically is a win for us, but it's just an obligation to our early adopters of Tesla. We said we'd provide a significant upgrade to the Roadster and that's what we're doing. And I think it's okay. I mean it's not a big thing one or the other, slightly economically disadvantaged to Tesla. And so if I read through on the range communication on the Roadster 3.0 and I just apply that sort of same range gain to the Model S, I guess guess I get a 350 to 400 mile range Model S by say 2017. Is that the right I mean is that kind of all the gains are translatable? It's very difficult to put an exact time on it. If you like 2017 probably not in 2017. At some point, yes. I don't know if that was 2017, so it's not 2017, but it might be 2019 or 2020 or something like that. It's more of a very much like we can make the Model S go 400 miles a day if we wanted to by just increasing the pack size. Right. I meant at the same cost I meant as the same cost same pack cost say give a $22,000 pack would be 400 mile range in the next couple of years, but it seems it's a bit too aggressive. Next couple of years would be too aggressive. Go 5 years out that might be the case. That's not a prediction, that's just speculation. But I'd say it's not 2 years, but it might be 5 years. Okay. And then just I feel like we should just generally ask you your thoughts on oil, although it's a pretty broad question. So maybe just general thoughts on oil, but then more pointedly, what it does to the residual value of the cars? And then also maybe the corresponding offset with lifting the value of the ZEV credits as more gas guzzling cars are sold? I don't know. There you go. Well, as far as oil is concerned, I mean, I'm am not an expert on oil business, but obviously fracking has massively increased the available oil reserves worldwide. Fracking is also more expensive than standard oil drilling, so that there's sort of a cost of doing it that sets a floor on fracking. It's really anyone's guess as to what happens with oil prices long term. Demand is certainly going to increase sort of like how well the supply go to match that. For sure, oil companies are going to be scaling back their investments in new oil fields massively with low price oil today. So expect that I would expect that at the But as it translates to the impact on demand for your vehicles and then also the residual value of those vehicles? It certainly has some effect, but I wouldn't say it's not a dramatic effect. I mean, it's I call it a moderate effect. And it's not changing any of my projections. Thank you. Thank you. This ends our Q and A session today. I'll turn it back to management for closing remarks. Well, thank you everyone for joining us a few hours later. Obviously, that was important to get the launch off. And so thank you and good night. Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.