Good day, ladies and gentlemen, and welcome to the Tesla Motors Fourth Quarter 2014 Financial Results Q&A Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. I'd like to turn the call over to your host, Mr. Jeff Evanson. Please go ahead.
Thank you, Patrick, and good afternoon, everyone. Welcome to Tesla's fourth quarter Q&A webcast. I'm joined today by Elon Musk, Tesla Chairman and CEO, JB Straubel, our CTO, and Deepak Ahuja, Tesla's CFO. We announced our financial and operational results today in a shareholder letter that's available at the same link as this webcast. 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 two. 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 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. Now, Patrick, if we could assemble the queue and have our first question, please.
If you have a question, please press star then one. Our first question comes from Andrea James with Dougherty & Company. Your line is open.
Hi, thanks for taking my questions, congratulations on the rocket launch.
Thank you.
Just quickly, can you help me get to a free cash flow figure? It looks like you're going to do $1.5 billion in CapEx, what's going to be the operating cash flow to offset that?
Yeah, Deepak here. Hi, Andrea.
Hi.
We will have significant positive operating cash flow, obviously, as our 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 shortly a warehouse line for leasing cars and that'll continue to grow and fund a big portion of our leasing funding required. Overall, we feel pretty comfortable where we are in terms of how 2015 looks from a cash burn perspective.
Maybe about $1 billion, is that about in line of cash burn?
Should be less than that.
Okay
considering that we will have a lease warehouse line, which continues to expand.
Got it. Another point, it looks like you expanded your residual value guarantee into extra markets late last year. I saw last week you're giving free home charging to folks in China. I guess my question is, it looks like you have really pretty good demand. Global wait times are increasing. Why continue to give incentives to buy the car if demand is so high?
Sorry, say that again. 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. Charging installation, given the varied regulations and challenges there, has been a difficult customer experience, and we want to overcome that by providing it directly.
Yeah, this is also something that's considered standard in China. If you buy an i3 or a Leaf or something, that's considered a standard thing. We're just matching what competitors do. I think this whole 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. It's not like there were all these extra cars we could have produced, and if only we'd had a bunch more customers in China, we could have sent those cars. We were production constrained. I wish we weren't, but we were. Look forward to getting demand constrained in the future.
Essentially, it didn't matter whether we, thinking of 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 otherwise headed to the U.S. or Europe and send it to China. 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. 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 vindicated by multiple outside assessments. Pretty sure that people in China want the best car in the world.
That's something we've got to make sure we lay the right foundation for future growth. It was essentially irrelevant to last year.
Go ahead.
That's an important point, the
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. That's pretty silly. 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. He's not a marketing guy or a sales guy. He's an engineer and he's an operations guy, and he's going to just make sure that customers in China have a fantastic experience.
Just like in other countries, those customers become our sales force, and the product sales grow by word of mouth.
Is this a company philosophy? Because it seems like you're putting engineers in charge of customer service even globally with Jerome. Is customer service an engineering problem?
I think if you've 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. Not everything's 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 the way that you communicate with prospective customers. It's just creative problem-solving. What you're really looking for at a high level is a creative problem-solver who just cares about getting it right. That's what we're doing. I'm confident that certainly by the end of this year that we'll be in really good shape in China. 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. Everybody lives in apartment buildings there as well, so it's not like it's super easy to get local charging. I'm confident that just as we have seen high demand in every other part of the world, that we will see it in China as well.
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? What are your thoughts about that?
Yeah, that's a good question. I've actually debated, should we keep it or shouldn't we keep it? Because it's kind of moot. The residual value guarantee sort of matches what other premium sedans see after a three-year time period. Our actual residual values are substantially above that, it never actually matters. We're not paying out residual value guarantees because the car is worth more than the residual value. It does kind of mess up our accounting, because we have to treat it like a pseudo-lease. On the other hand, if we withdrew it, would people take that as a lack of confidence in our product? They might. They might misconstrue it as such. Even though it's moot and it doesn't really matter, it's just there to provide confidence to customers.
Yeah, I think we'll probably keep it, even though it makes our financials look worse than they really are. I think it is really important because we do get some criticism about GAAP versus non-GAAP, as though when we do non-GAAP, we're actually trying to trick people into thinking something's better than it is. Actually, that's not true. I think that the way the accounting rules 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. As you can see from our gross margin, GAAP and non-GAAP are basically the same. For revenue, the difference between GAAP and non-GAAP comes down to just two things. This residual value guarantee, as we just talked about, it's moot.
Because it's a pseudo-lease, we have to recognize the revenue over time, even though we got the cash immediately. Our cash flow is, non-GAAP is an accurate representation of our cash flow, which is what really matters. Even in non-GAAP, for leases that we do internally, they actually aren't even covered in non-GAAP.
Even though Elon receives the full cash up front, so it's aligned with our cash flows.
Exactly. It's aligned with cash flow.
Whereas in some other auto companies, the moment they sell the car to a dealership, we understand they recognize full revenue, even though a financing entity might lease that car, and so they don't have the cash flows, but they have a GAAP revenue. In some sense, our non-GAAP revenue is pretty clean, and it lines up well with our cash flow.
Yeah, this is a really important point to emphasize because a criticism might be, are we perhaps exaggerating our revenues relative to how other car companies might represent their revenues. 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. They're sending it through the laundromat, is basically what they're doing. In our case, since we are not sending it through the laundromat, it's actually more correct. Because 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. Yeah.
Even for leases that we do ourselves, we can securitize those leases whenever we want. 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. It makes more sense for us to put that capital to work with consumer leases and earn 2%-3%, is basically what it amounts to. Whenever we want to recover that capital, we can do so through a warehouse loan or securitization. Yeah.
Thank you for taking my questions.
Yeah. Our financials are better than they appear, not worse. This is really the key point. Yeah.
Thank you. Our next question comes from Brian Johnson with Barclays. Your line is open.
Yes, good evening. Want to explore a bit where you see the trajectory of CapEx and OpEx. You gave some guidance for next year, as we think ahead to the Gigafactory and as we think ahead to the model [inaudible] the Gen3 launch, how do you see those trends going over the next several years?
We're going to spend staggering amounts of money on CapEx. For a good reason and with a great ROI. It's important to not look at the CapEx in isolation, because that CapEx obviously is being done for a reason, in order to capture a substantial future revenue flow. Just thinking sort of back of the envelope. If you assume, if you make certain assumptions, I emphasize, these are just certain assumptions. I'm not saying they are true or that they will occur, I'd bet that they do occur, personally. That's just my personal opinion. If you take this year's revenue around $6 billion or thereabouts, if we're able to maintain a 50% growth rate for 10 years and achieve a 10% profitability number and have a 20 PE, our market cap would be basically the same as Apple's is today.
That's going to require on the order of $700 billion. Obviously, getting there will require some significant CapEx. I'm hopeful that we can do this without any significant dilution to the company. Maybe minor dilution, nothing serious.
How about in terms of operating expense? Do you have a target for reported margins versus kind of thinking about your remarks in the second press conference in Nevada, where margins would be if you 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?
Yeah, the operating margin.
Yeah. We could easily get to 10%-15%. Probably if we pushed it. Somewhere between 10% and 15%. When we think about gross margins, that this year will probably, by the end of the year, be somewhere around 30%. If 20 of those points go to sort of fixed costs and R&D and whatnot, and then there's at least 10 left over for profitability. We are expecting to be non-GAAP profitable.
We have been non-GAAP profitable for two years now, 2013 and 2014.
Yes. I'd like to emphasize that doesn't mean bullshit profitable. It means really profitable.
Yeah. 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. That is a key thing. The simple math of headcount requires this. We're basically a little over 10,000 people and aiming for somewhere over 75,000 cars this year. Just to get to half a million cars a year, if we do not improve our productivity per person, we would need, quote, 100,000 people. I'm not sure where we would park. Clearly there needs to be dramatic improvements in productivity, which are on the way.
Right. When you said 10%, was that 10% while still growing to the millions of cars target you talked about in 2025, or that's 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 net growth, because you just run out of ways to spend money. It's kind of like Apple. They're just running out of ways to spend money. They spend money like it's water over there, and they still can't spend enough of it.
I think for us, we are a single vehicle platform company at this point. Our engineering expenses have their ebbs and flows, so that has an impact. As we grow, we become a portfolio of vehicle platforms. Even with net growth, we can get to a very good operating margin.
Yeah. Just sort of pointing out, we're doing this, and it mentions it in the letter, there's massive infrastructure expansion going on, like really massive. Setting up service centers worldwide, creating a ubiquitous Supercharger network worldwide, just logistics across all these countries, dealing 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. Just final question, more for Deepak. When does CapEx flow into depreciation and gross margin? What kind of time frames for the CapEx in terms of depreciable lifespans are you assuming on things like Gigafactory, factory tooling, and so forth?
To answer your first question, when assets are put to use for production and delivery of cars, that's when depreciation kicks off. A lot of our spend this year is on production capacity expansion and Model X tooling. Those assets will start depreciating when Model X starts producing. The Gigafactory assets clearly would be depreciated when we start producing cells that are being used for production and our revenue growth. The depreciation life depends on the kind of asset. It can vary from five 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 in our expected life of use to come up with those figures.
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, if you look at the German manufacturers, they don't seem to have any problem with 50/50 JV structures or with local partners and not having control and selling through franchises. 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, probably some amount of local R&D as well, in the future in China. It's not going to make a ton of sense in the long term to be building a huge number of cars in California and shipping them to China. Right now, we're still at the early stages, so it's difficult to say exactly what happens in the future. Our goals in the short term in 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're not going through dealers anywhere in the world. Our activities in China are currently 100% Tesla-owned.
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 eight months since you opened up the patents to competitors to use. Any takers of any significant technology? I'm not aware of any. Are you surprised there hasn't been more? Is it just a function of, is it hubris and pride, 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, that actually manufacturers are currently trying to use our patents. Just important to remember the design cycle. From the point at which you can use intellectual property, you've got to incorporate it into the design. That design, you've got to do detailed engineering and design, you've got to tool things up, and then you've got to go to production. Probably the first time you'd see companies, anyone using our IP, would be about three years after we announced.
Okay. Finally, Elon, just you mentioned, I think you said staggering amounts or obscene 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. You yourself and your enterprise have done that quite successfully. Any heuristics you can kind of leave us with as people kind of contemplate more cash burn with being necessary to fund great things and great projects that will ultimately pay off? Any kind of rules of thumb of minimum levels of liquidity or the kind of things you'd look at to decide whether you'd need to refill the capital tank? Thanks.
We don't have any plans for raising money right now. 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.
Yeah, I feel generally pretty good about it, getting to that level with only minor to moderate dilution. I think the only reason to raise money really is, and understand, we really don't have any plans to raise money, but the only reason I can imagine we would do it really is just to have a bigger cash cushion. That would be 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. The question is, if demand is as strong as you guys are saying, really, the issue's on the supply side, why wouldn't you raise prices in all regions to at least offset the FX headwinds? 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 it will also support the residual values for your current owners. It sounds like a win-win all around. Can you address that, please?
Well, I actually kind of think our car is expensive as it is. It's really not a cheap car. For a huge number of our customers, it's the most expensive car they've ever bought. They didn't think they'd ever buy a car that costs $100,000. I'm reluctant to raise that price as we start running into sort of fundamental affordability limits. As it is, we are expecting to have significant positive cash flow in the latter half of the year. Yeah, there'll be sort of a short-term dip, but we're going to be quite positive at the end of the year, then going into 2016, even more so.
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.
Yeah.
Just to be clear on that, when you say you're going to be cash flow positive by the end of the year, that's after CapEx?
Yeah, that is our expectation. I think we've got to have focus on the long term. This is a short-term issue in terms of timing of CapEx versus revenue.
To answer your question, yes, even in the face of significant CapEx, we expect to be cash flow positive in Q4.
In Q4, okay.
It'll happen somewhere in late Q3, but it'll be reflected most clearly in Q4.
It's linked with the volume production of Model X.
Yeah, exactly. We've got to get Model X, because we had a ton of CapEx related to Model X.
Exactly.
We've also invested in a bunch of things that actually are volume numbers that are really better associated with Model 3. Our quarter-billion-dollar paint shop upgrade is intended to be able to handle 10,000 cars a week.
Okay, thanks. The next question is, there's been a lot of discussions about persistent drivetrain issues. We've heard everything from different customers, from persistent humming noises to complete failures. The question is, how pervasive is the drivetrain issue? What is the cost to replace a drivetrain? I was a little surprised to see that the warranty reserves would not move up quarter-over-quarter.
Yeah. I think there's a lot of noise on the forums, but it's not quite as bad as people have made. For most people, they don't experience any drivetrain issues at all. There was a period of time, basically for a month or two 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. That caused the spline to wear out and strip the spline on the drive unit on the motor. That particularly affected [Sport], and unfortunately, it happened to coincide with when a whole batch of cars headed for Norway. Unfortunately, it disproportionately affected Norwegian customers, which we've taken great pain to try to address.
Essentially, what amounts to fix that issue, for example, is just you've got to pull the drive unit and then send it to get remanufactured, where we replace the rotor and yeah.
Yeah. This is JB. Maybe to the warranty reserve question, we've actually improved quite a lot in our efficiency at repairing the drive unit. It might be swapped for a given customer, but that unit doesn't get trashed. It gets repaired. 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.
There was a differential clunk that was causing a differential clunk, which can actually be fixed with a two-part shim in the service center. We were able to figure out a service center fix to address that without even dropping the drive unit.
Yeah.
Okay. Sorry, go ahead.
All the new units being built today, of course, get all these fixes proactively.
Yeah.
As we learn, the new product improves.
That's helpful. Finally, Elon, I just wanted to ask you about your comment about GAAP profitability not being reached until 2020. 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. 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%-60% too high because the GAAP component of that non-GAAP number would need to be eliminated. 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?
Sure. I think people read too much into that, in my comment, because I was asked when do I think Tesla will have full-year GAAP profitability. You get into the sort of residual value guarantee question, like do we continue doing that or do we not continue doing that, because half of cars are financed, right? That basically chops our revenue in half in a lot of cases.
Leasing as well.
Leasing. It's like leasing and residual value guarantee on half the cars that would basically massively affect the revenue recognition. Is it just on a quarter basis, or is it full year? I think that's why I said, okay, well, probably 2020, it's a full year and it's GAAP. What that actually means is that Tesla's free cash flow is incredible in 2020. It's able to overwhelm even the non-GAAP stuff. I think people didn't understand that what I said was an extremely optimistic, not pessimistic statement.
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 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. Maybe one of the questions we get a lot is if we extend that to the Gen3 and your 2017 timeframe, can you just talk about-
Right
the work you're doing there and how confident you are in getting to that timeline?
Yeah. That's a fair criticism. Implied criticism. This feels a bit like Zeno's paradox here. We're sort of halfway there at any given point. Really, the X design is done, so it's just a question of tooling and supply chain at this point. Making sure, as we do the ramp up on X, that our quality is excellent. We want to make sure people have a really great experience. We don't want to have them have any sort of issues or problems. At this point, like I said, it's just tooling and supply chain, and we're trying to make that go as fast as possible. We're highly confident of delivering our first customer cars this summer. Spooling up to significant volume in Q4.
Now, with respect to Model 3, we don't want the delays that affected the X to affect the Model 3. We're being quite conscientious about this. There are things that we could do with the Model 3 platform that are really adventurous, but would put the schedule at risk. What we're going to do is we're going to have something that's going to be an amazing car, but it won't be the most adventurous version of the Model 3 to begin with. We will then have the more different versions of Model 3 on the Model 3 platform following the initial version so that we can stay on track for Model 3. We got quite adventurous with the X, and that would be too risky given the Gigafactory and everything sort of has to happen on time.
We're not going to go super crazy with the design of the initial version of the 3. I do feel confident that we can make that happen in the second half of 2017.
Great
as long as we stick to those principles.
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. Does that disrupt demand at all, and how do you do 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. It's tough for us to announce way in advance that there's going to be some new version of the car, because then we're worried about starving near-term sales while people wait to see what it is. It's a real tricky thing. It's difficult to forecast the exact demand since we haven't told people about the car. We really have to guess. Like, "Okay, how many people want the P85D?" We have no idea. It turns out a lot. It turns out really a lot.
It was like, "Oh, we have too much demand for the P85D." Now we've got to figure out how to do that and then how many people are going to pick the next-gen seats. As it turns out, also a lot. We couldn't make enough seats. I'd love to figure out how to be less stupid about this in the future. Yeah.
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-
Yeah
as we announce something new or an innovative new feature. That's definitely, I think, a lesson we learned.
Yeah. Agreed.
Great. 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. Are you guys at a position where you can start bidding on those RFPs or entering those RFPs? Just give us an update there. Thanks, guys.
You mean for stationary storage?
Yeah, stationary storage.
Yeah. For basically direct battery packs, we're bidding on a lot of RFPs already. Do you want to elaborate on that, JB?
I don't want to go into a super amount of detail on this, you're correct. Of course, there's a lot of interest and a lot of utilities out working in the space, we're talking to almost all of them. It's early-stage stuff, a lot of these projects are very far out since the procurement cycle for utilities is so long. This is a business that's certainly gaining an increasing amount of our attention.
Yeah. We're going to unveil the sort of the Tesla home battery or consumer battery that will be for use in people's houses or businesses fairly soon. We have the design done. It should start going into production probably in about six months or so. We'll figure out a date to have the sort of the product unveiling, it's probably in the next month or two. It's really great. I'm really excited about it.
Thanks, guys.
Our next question comes from Ryan Brinkman with J.P. Morgan. 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 1,400 deliveries that were pushed into 1Q?
Well, actually, maybe it's better if I said it's like, there are a bunch of things that coincided, because we had a whole bunch of expedited shipping. Because even to make those numbers, we had massive overtime, massive expedited shipping. The Euro was also falling and if those things hadn't occurred, it would be somewhere in the order of 28%. Maybe, yeah. Somewhere around there.
Okay. That's helpful. 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 one? I'm curious why the deliveries are expected to be flat in 1Q versus 4Q, given that they should benefit from the pushout of those holiday deliveries, and why production is forecast down sequentially too, given that the full year has got it up so much. Sort of 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. Just to clarify about the estimated 20%, that's 20% excluding ZEV credits. If you added ZEV credits on top, that would be, I don't know, 29% or 30% or something like that. Yeah, in terms of the production from Q4 to Q1 being relatively flat, there's a couple of reasons for that. There are actually two fewer weeks of production in Q1 versus Q4. One is because we wanted to, and certainly so, gave people the first week of January off because they've been working over Christmas and New Year's and Thanksgiving in a lot of cases. They just give people a break. We didn't operate the factory the first week of January. Also, you have time to do some equipment upgrades. There's also one fewer production week in Q1. It's basically minus two weeks.
In Q1, we are focused on productivity improvement and laying the groundwork for higher volume in the remainder of the year. Obviously, if you do the math, it does mean there's going to be a fairly big scale-up as you get towards the end of the year.
We had over 10,000 orders on hand, so it's not a demand issue that we're delivering the guidance number. We have a lot of cars in transit as we are, again, adjusting our global mix of deliveries.
Okay, thanks.
A lot of cars in transit. It's kind of crazy.
Thank you.
Our next question comes from Patrick Archambault with Goldman Sachs. Your line is open.
Thank you. Good evening. I just wanted to follow up, actually, just on some of the comments you made about being less adventurous for the Model 3, 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 maybe put in place for a later model upgrade?
We can't tell you that. Come on. With the X, we had the Falcon Wing door, which is the first double-actuating gull-wing door, basically, or we call it a Falcon Wing door. Getting that right and making sure it works really well and isn't a gimmick, but is a fundamental improvement in utility and aesthetics for the car is extremely difficult. There's a reason other people haven't done this. The second row on the Model X, the second-row seats on the Model X are a piece of sculptural beauty. They're amazing. They're the nicest second-row seats you've ever seen in any car, ever. That actually might have been harder than the door. There were some other things about the X that people don't know about yet. Those weren't driving the schedule, it was really second-row seats and the door.
Going to Model 3, I think we want to have, particularly at super high volume, something that for this feature, we lose a year of production. 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. Innovate in more, I don't know, "Oh my God" directions on that platform with future iterations, where we can then put aside any schedule and volume concerns.
Understood. Certainly looking forward to seeing the X. Is there going to be any sort of advanced showing of it at any auto shows or anything, some of the more advanced prototypes ahead of the launch that we should be looking forward to?
There are these sort of different features that I mentioned being intentionally obtuse, we're not going to show it until it gets delivered.
Interesting. Okay. Switching gears a little bit back on China, just on orders. I understand that deliveries have been significantly impacted by a number of the issues that you've described, 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 to address some of the concerns, whether they were justified or not. How have you seen the Model S order book track, pre- and sort of post those issues?
Tom's only been in charge for a short period of time, the trend is positive already. I think we see it improving every week. There's some elementary things that we were missing before, like maps and directions. The car didn't have maps and directions in China, which is kind of important. Now it does. We don't have the onboard music player working, which we will have soon. There's a lot of functionality that's just getting added over the air software updates that are pretty helpful. Yeah, the trend is positive. I don't have any significant concerns about it right now.
Some had reported that orders had been coming in somewhere in the neighborhood of 100 a day, which obviously point to a pretty good annual run rate. 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 basically planned to buy large numbers of the cars and then resell them at a higher price, which is not something we allow. It gave an inflated sense of demand in the beginning. It wasn't real.
Yeah.
I don't think we were at 100 a day at any time.
Yeah.
Either. That would sound like 50,000-plus cars just in China alone demanded an 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. Non-GAAP, I was just wondering why that would be impacted.
Because we still hold title to the car, and we haven't collected full cash on the car. We don't recognize those direct lease cars even in our non-GAAP financials. Pretty simple.
Understood. Okay. Thanks a lot, guys.
As I mentioned, we can always free up that cash by securitizing our internal leases or by just getting a warehouse line facility. The important point is that, 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.
Vehicles delivered to customers is really the key metric that I focus on. We don't give people a car unless they've paid for it. They pay for it somehow, and the average price per car is pretty obvious. That's really a key number.
All right. Thank you.
Yeah.
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? Then, to get from here to 55,000, where is China now? What does it need to be? What actually are you including for the Model X this year?
Yes. I should correct, even if our sales in China were zero this year, zero, I'm still confident we could do the 55,000 cars. They won't be zero. 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 ramp goes with the X when we start up this summer. 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.
Yeah, exactly. If we're producing, I would say 800 Xs a week, several weeks is like several thousand cars.
It's just really tricky to predict it. It'd be much easier to predict next year. Assuming people like the car, that's where you'd start to see, I don't know, 30,000, 40,000 at least.
50,000. I don't know. Quote 30,000 to 50,000 Xs next year.
Okay. Clearly, up until now, as you've pointed out, you've been able to hit all these numbers without any advertising and marketing.
No endorsements and no discounts.
Right.
We haven't paid anyone to pretend that they like our car.
Right.
Which is a very important point.
No franchise dealers.
Yeah
that you might need to do, you've been able to do it without any of them.
Yeah
I'm curious about 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. 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. We won't discount the cars or anything like that. In fact, I do want to emphasize that whenever you see a celebrity or some prominent person driving our car, they all paid full retail. There was no discount. We didn't give them the car. They're buying the car and they're driving it because they really believe in the car, not because someone paid them to pretend that they do. I got to give credit for the people that have bought the car.
I do have sort of a secret weapon on the demand side that probably starts to deploy later this year for demand generation. 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. 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 Autopilot 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. Based on the business aspect of revenue for accounting, we had to defer some of that revenue-
into 2015. I think it's as simple as that.
Okay.
Yeah.
That variance was versus the 28% original objective, or what was that comparison against?
Yeah, it's part of that because, as you know, we had to figure out the accounting for it, work through the whole thing, and as we deferred a significant amount there, that had an impact to our otherwise delivered car gross margin that would have been-
It's like on the order of half a % or-
Yeah
something like that.
That's right.
Maybe half to 0.7% or something.
Yeah.
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. There's a bunch of features in it that are going to positively affect the entire fleet. Of course, we'll add more Autopilot capability.
That should be exciting.
Yeah, it's a really good release.
Okay. Thank you.
Patrick, before we go to the next questioner, 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.
Yeah. Thank you, Pat.
Okay. All right, Patrick.
By 5:30 call this, okay?
Our next question comes from Dan Galves with Credit Suisse. Your line is open.
Hey. Thanks. Good evening. 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 your max production for 2015. My sense, coming into the year around 1,000 a week is you could produce a lot more than that. I'm just getting a sense of what part of that is demand-constrained and what part is production-constrained.
We are going to try to do a little better than the 55 number. We are saying 55 plus, but we are going to try to do a little better than that. It is, as mentioned earlier, just really dependent on how the X ramp goes. If it happens later in, I don't know how long it takes to spool up, that could affect the delivered number quite significantly. When we say delivered, you've got to also factor in that there's a lot of cars on ships.
Correct. There's a gap between production and delivery time.
Yeah.
We need to consider there could be disruption during launch of Model X. When you're looking at that broad number of 55,000 over the year, there are things we need to consider through the year what happens.
The 55 is, like, a number that we're pretty comfortable with achieving on deliveries. We are, as mentioned earlier, making a conscious decision to focus on productivity this quarter, not just on ramping production.
Better for stability.
Yeah.
Production stability.
Yeah. Production stability. In order to get that efficiency, we need to be building a firm foundation for future growth. If we're just helter-skelter production ramp, just trying to grow production numbers. It's really hard to get productivity and fix the foundational elements. The conscious decision this quarter to say, "Okay, we've got to improve our core productivity." We're running out of parking spaces, like for sure. Our Fremont plant's pretty big, and it's hard to park. We need to get these productivity improvements in place so we can grow our production volume without proportionately growing headcount.
Yeah, that makes a lot of sense. Just one kind of housekeeping question on the, you put the chart at the beginning of the shareholder letter with a revenue guidance for 2015. Is there anything in there for trade-in sales, for used car sales? Do you have any sort of sense of what type of drag on gross margin sale of trade-ins will be?
There is a small amount of that. I know we are just getting into that business now, our goal is certainly not to make that same kind of money on our used cars.
Yeah, the used cars also, it's like the capital. We don't have any capital in there, really.
Yeah.
Turnaround capital at all.
Yeah.
It's actually, the used car margin is actually, on an ROI basis, extremely good.
Right.
Right.
The dealers do make a lot more gross margin on used cars than new cars, and that's not our intention. The ROI is still really good for us.
Yeah. We're going to separate that out so we can see new car gross margin versus used car and service and other things.
Yeah, which brings up a good point that, as we said towards 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.
Yeah. We'll break it out so you can see clearly what's the new Model S gross margin, what's used, what's other things. Yeah.
Yeah, it's very appreciated. Thanks.
All right.
Thanks, Dan.
Our next question comes from Trip Chowdhry with Global Equities 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 for perfection, performance, and design. We don't see Apple making a $30 iPhone. I was just wondering, instead of focusing on Model 3, and we just focus on, say, Model S and Model X, but make them even better. We 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 Tesla a very competitive-
Not quite 400 miles. The Roadster's sort of more like 360, close to 400 miles with the upgrade. Capable of doing L.A. to San Francisco. The goal of Tesla from the beginning has always been to accelerate the advent of sustainable transport and to make electric cars happen much faster than would otherwise be the case. 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 Model S and the Model X are today. Even with the Model 3, though, it is sort of a mass-market premium car. It's still premium, but it's mass-market premium, and it's that $35k. It's above average price.
I think it's also not an either/or decision. We definitely will keep making the Model S and Model X better, and we'll keep improving that platform really as much as the technology will allow. We'll go in both those directions.
Perfect. Thank you.
Our next question comes from Andrew Fung with CLSA. Your line is open.
Thanks for taking my question. 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. I'd say there is 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. Any sense of when you guys may announce additional either suppliers or partners for the Gigafactory?
We want to be a little bit cautious about doing that too soon. There's obviously a lot of work going on and discussion with all of those partners, I think we want to be careful to make sure that all the agreements and decision on where that partnership is headed is very clear. We'll wait until it's really done and ready to announce.
Great. Thank you.
Next question comes from Andrea James with Dougherty & 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. 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. Yeah. I think it's okay. It's not a big thing one way or the other. Slightly economically disadvantaged to Tesla.
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 I get a 350-400-mile range Model S by, say, 2017. Are all the gains there translatable?
It's sort of difficult to put an exact timeline on it. 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, say, 2019 or 2020 or something like that. Just bear in mind, we can make the Model S go 400 miles today if we wanted to, by just increasing the pack size.
Right. I meant at the same pack cost, say, give it a $22,000 pack, would be 400-mile range in the next couple of years, but it seems it's a bit too aggressive.
The next couple of years would be too aggressive. If you go five years out, that might be the case. That's not a prediction, that's just speculation. I'd say it's not two years, but it might be five years.
Okay, 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 more pointedly, what it does to the residual value of the cars, 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'm no expert on oil business. Obviously, fracking has massively increased the available oil reserves worldwide. Fracking's also more expensive than standard oil drilling, there's sort of a cost of doing it that sets a floor on fracking. Now 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 will the supply go to match that? For sure, oil companies are going to be scaling back their investments in new oil fields massively with the low price of oil today. I would expect that it's
As it translates to the impact on demand for your vehicles, also the residual value of those vehicles.
It certainly has some effect, but I wouldn't say it's not a dramatic effect. I call it a moderate effect. It's not changing any of my projections. Let's put it that way.
Thank you.
Okay.
Thank you. This ends our Q&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.