Earnings Call: Q3 2014

Nov 5, 2014

Good day, ladies and gentlemen, and welcome to the Tesla Motors Third Quarter 20 14 Financial Results Call. At this time, all participants are in a listen only mode. I would now like to turn the call over to your host, Mr. Jeff Evanson. Please go ahead. Thanks, Patrick. And welcome everybody to Tesla's Q3 financial results Q and A webcast. I'm joined today by Elon Musk, Tesla's Chairman and CEO JB Straubel, our CTO and Deepak Ahuja, Tesla's CFO. We announced our Q3 results today in our quarterly shareholder letter, which is available at the same link as this webcast and a replay of the webcast will be available later today at the same link. Please note certain financial measures used on this call such as revenue and income are expressed on a non GAAP basis and have been adjusted to exclude non cash stock based compensation and interest expense and lease accounting for cars sold with a resale value guarantee. Our GAAP results and reconciliations to non GAAP measures can be found in that shareholder letter. During the course of this call, we will discuss our business outlook and probably make some forward looking statements. These statements are predictions based on management's expectations as of today. Actual events or results could differ due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. So with that, Patrick, we'd like to turn it over to Q and A, please. Our first question comes from John Murphy with Bank of America Merrill Lynch. Your line is open. Mr. Murphy, your line is open. Please check your mute button. John Murphy? John Murphy, Bank of America. Your line is open. Please check your mute button. John, why don't you hop back in the queue and we'll get back to you. And Patrick, let's take the next call. Thank you. Our next question comes from Dan Galves with Credit Suisse. Your line is open. Hey, good afternoon. Thanks. Just wondering if you can give us any additional color on how you've gotten confident in 50,000 Model S deliveries in 2015? Actually, I don't think 50 is going to be super hard, because if you look at sort of how we're exiting the year in production and demand, it's I mean, I think 50 is a seems like a pretty solid number. We don't want to sort of overreach, but I think 50 is a pretty achievable number. It's not this that's more or less a modest extrapolation for where we'll be at the end of this quarter. Okay. Can you give us any hard numbers on what you've seen in terms of order flow, either geographically or just it sounds like since the product announcements, something like that? Something like that? Well, I mean, I think what we've seen is I mean, it's difficult to extrapolate too much based on the announcement of the dual motor and autopilot, because there's some amount of people that were waiting for an all wheel drive car and that kind of thing. So that's why we're being sort of conservative. If you sort of just extrapolate it for demand since the announcement, it would be like 70,000 cars a year. But that's not the in terms of that's in terms of demand. But I think that would probably be unwise to state that as a steady state prediction. Started around 50,000. And but but it's 50,000 with high confidence. And it's I mean, just over half of those are North America. So and Europe and Asia are the remaining half. Okay, great. And just a follow-up, the leasing program with your partners, is it too early to get any sense of kind of how that's being received by the consumers? And or any estimates on kind of how much you see a leasing program like that increasing the addressable market for the car? Well, I mean, our I mean, I really try to make the point in this shareholder letter that it's not a question of demand. There are a lot of sort of articles and reports out there questioning demand. In the last quarter, all I call, I really try to emphasize it is not a question of demand. So because that sort of 70,000 order number, that's net orders, net of cancellations. That's with no advertising, no endorsements. So we don't pay anyone to pretend that they like our product. If you see our car in a movie, it's we didn't pay for it to be there. It's just there. And we have a fairly small number of stores. We in a lot of places, we don't even have service centers. So And our dual motor cars are not there in any of the stores. So Right. There's no dual motor cars for test drives. So it's so obviously there's a whole bunch of things that we could do to stimulate demand, if that were our problem. It is not our problem. But people don't quite appreciate how hard it is to manufacture something. It is really hard, okay? I have great respect for people who manufacture large numbers of complex objects because there's like several 1,000 unique parts in a car, Model S is quite a complicated car. And you have to need all of them, that whole supply chain and the whole internal production process marching at the same cadence in order to produce those cars. And we're growing our production by like 50% a year, year over year as far into the future as we can reasonably project, that's quite a big percentage growth for manufacturing a large complex object. We'd like to grow faster, of course, But it's also worth bearing on, we have got one factory. So as we in some cases, when we upgrade the factory, it's like trying to change the wheels on the bus while it's going down the freeway, okay? It's Challenging. And so that's there are things where like we need to ideally do better, which is like manufacturing growth and maybe not being perfectionist about future products and things like that. Okay. That's very clear. Thank you. Our next question comes from John Murphy with Bank of America Merrill Lynch. Your line is open. Hey, guys. Is there any ether there, John? It's John Lovallo, guys. I apologize for the screw up over here. Go ahead. Okay. First question and I missed Dan's question, so I apologize if any of this is repetitive. But the first question is, you guys have done a very good job of open sourcing your patents and kind of showing all your cards to your competitors. With that in mind, I guess the question is, I mean, would you consider providing more information to the analysts and investor community in the form of monthly sales data for 1, maybe showing the backlog again for 2 and also maybe reinstating the regional mix that you guys used to give us on a quarterly basis? No. Sorry. The last question was sort of a demand related question as well. And I mean it really took pains to emphasize demand is not our issue. Production is our issue. And being too perfectionist about future products, those are legitimate things to be concerned about, but not demand. We have more demand than we can really address. And there's a lot of things levers we could pull to increase that demand, which we are not pulling. So it's really not an issue. Part of the reason why we don't release the monthly deliveries number is just because like it varies quite a lot by region and then the media tends to read all sorts of nonsense into deliveries. And so like we'll have like 1,000 cars reach a country 1 month and none the next month. And then people or like 100 the next month trickle in or something because those were the numbers that were registered in 1 month versus the next. No, it's like the boat arrived in January, okay? And it was and not all the cars got registered in January and some got registered in January, okay? And not all the cars got registered in January and some got registered in February. And then in March, it's back up again. And so that people read in all these things, which are they assume deliveries are a proxy for demand, which is not the case. For it is the case for it is the case for the not the case. It is the case for other car companies. But in our case, it really needs to be parsed into orders and deliveries. And then bear in mind, there are lots of things we can do to amplify orders. So it's not orders is not a true measure of demand. It is just a measure of that's the amount of stuff we need to do to meet our production and delivery number. So then so if we were at least orders people would try to read the TVs and say, Oh, demand for Tesla is growing or dropping. It's like no, we're just not pulling the levers that we could pull, because there's no point in trying to amplify demand substantially beyond our ability to produce it and deliver it. That would just make people upset. Okay. Next question is you guys have been able to negotiate around using kind of the dealer network and state franchise laws in the U. S. And I think your point is well taken that non Tesla salespeople might not be qualified to properly promote the brand and so forth. So the question is with that in mind, how do you get comfortable with selling vehicles to resellers in China that presumably don't have your best interest in mind or promoting the brand? We're not really selling to resellers anywhere in the world. So it may be possible that someone's claiming that they're a reseller Tesla that they're this is a false claim. Okay. Yes. I'm just saying because when I looked on Tmall for instance, the first two lines of cars were first two rows of cars were actually all resellers or listed as resellers at least. Okay. Well, thanks for telling us that. We will make sure that that is removed. Okay. Thanks, guys. Our next question comes from Rob Lachie with Deutsche Bank. Your line is open. A couple things. One, can you just first quantify the impact of the yen and euro for us going forward? The last time, I think you discussed that you were not really hedging the yen exposure for self purchases for example. Yes. Yes. I think maybe there are 2 aspects to the answer here. On the euro side, we are net long given our deliveries in Europe. And as the euro weakens, the effect on our revenue is immediate. As soon as we deliver cars, we have that impact. On the yen side, clearly as the yen weakens it helps us on the sale cost, but there's a fairly long lead time on sale procurement. And so the benefit of yen weakness has a lag effect for us. It comes further down as we start to procure ourselves at that lower yen and then that goes into vehicles a few months later. Okay. There's no hedging at this point on either of those exposures? That is correct. Correct. There's no there's effectively product hedging in the sense that we're delivering cars in Europe, North America and Asia and we've obviously just started delivering cars to Japan. So that does provide a natural hedge. I mean the most efficient hedge really for currency. But there are occasionally adjustments we need to make in the purchase price. And at some point in the near future, we're probably going to have to adjust the price of our car in euros upwards because of the there's been a 7% change in the exchange rates of the euro versus the dollar. So we will periodically have to make pricing adjustments if the exchange rate band gets too wide. So I think I certainly encourage anyone in Europe to purchase their car soon because we probably will have to make an adjustment there. Oh, I see. Okay. And can you please maybe just quantify or put some bookends around the what you expect to be able to deliver on Model X in 2015, just given the later launch? And I also had a question on battery costs. There are some new manufacturing processes for cathode material, for example, being developed by Umicore and Toyota and a few others that the claim is that you're going to see some pretty significant declines in some of the kind of core components of lithium cells. Is that something that's been factored into your expectations of a 30% cost reduction for these batteries over time? Sure. So with the X production, it's difficult for us to give a I mean, I'd have to give something with very big bounding numbers for ex production next year because it really depends on how well that production ramp goes. And if we encounter any issues that require correction, then we'd obviously want to slow that production ramp down. If things go really well, we'll ramp it up. I mean, we do have the advantage with the X that we have the dual motor powertrain and the chassis, so the bottom end of the car kind of sorted out with Model S. So that takes that part of the risk out of it. But with the falcon wing door and the 2nd row seats and sort of a few other things, We're adding some very new stuff to that's really not out there That never really has existed in a way that was useful. And so it's hard to say whether that what those numbers will be except I'm confident that the demand for the X will be very high once we're in production and again we'll be production limited. So because it is really a phenomenal car and I think it really addresses a different market segment that some people want an SUV and some people want a sedan. And they're about fifty-fifty in the market. So that's why we feel Carpenter produced in predicting a 50% growth in orders and deliveries. It's fairly comfortable next year and then at least a 50% growth in 2016 again and in subsequent years too. So it's The 50% was just Model S though is that right? That's correct. Yes, so it will be some number of yes, fair enough. It will be some number of greater than 50% if you include X. And I'm just reluctant to I mean, I can't communicate a greater level of certainty than I actually know. So that's why I'm reluctant to give a number. It's not because I secretly know it and I'm not telling you. And then with respect to the cathode materials, I think there's a lot of technology improvements that we'll be to apply to the battery pack and the cathode, anode, separator, electrolyte, can production, the whole works. And some of these improvements are independent of the others. But whatever we have has to work whatever we build out for the Gigafactory has to work at least at the lab level, let's say, this year. We're making monster investments in equipment. And there's a certain amount of time of a year or 2 at least from working at the lab level to working in small scale production and then at least a year or 2 after that before you can go from small production to mass production. I mean, this is why we're not worried about like being blindsided by some technology of the Gigafactory is because if it doesn't work in the lab right now, no worry. There's no point in worrying about it because you can't scale in that time frame. And everyone and their mom is approaching us about technology improvements, I think literally and their mom in some cases. So yeah. JB, do you want to add to a few things? Sure. I mean, we are definitely talking to many, many different companies doing cathode technology development, anode and some of the other components, so including some of those you mentioned. And I'd be pretty shocked if there were any major improvements that were close enough to commercialization that we haven't been aware of or found out about. So a lot of those improvements are rolled into our thinking and there's great potential there. Yes. And my top advice really for anyone who says they've got some breakthrough battery technology is please send us a sample cell, okay? Don't send us PowerPoint, okay? Just send us one cell that works with all appropriate caveats, that would be great. That's really that sorts out the nonsense and the claims that aren't actually true. Yes, absolutely. Talk is a little bit Talk is super cheap. Yes. The factory industry has to have more BS in it than any industry I've ever encountered. It's insane. Yes. I think this was more related to the manufacturing process for the material as opposed to some material innovation. But yes, but anyway, I'd be surprised if there's anything out there that you guys aren't already well aware of. I was just asking whether that might be incremental to your forecast, but it sounded like most of your projection was related to logistics and location and the scale of the cell and things along those lines? Yes. I mean, to be precise about our sort of prediction was that we felt that we felt comfortable with at least a 30% improvement in cost or reduction in cost just based on the location and economies of scale. That's without taking any technology improvements into account and we will certainly do technology improvements. And I mean if we can't get to 30% without even without technology improvements, I mean, somebody should shoot us because that would be in complete defiance of economies of scale and obvious cost savings. Great. Thank you. Our next question comes from Brian Johnson with Barclays. Your line is open. And some of the just detailed numbers and accounting. Reservation so the customer deposits, the inventory and then the lease accounting. So I'll just give all 3. So for the customer deposits, it looks like they were roughly flat, down $1,000,000 quarter over quarter. That seems to be the first time they haven't increased in quite a while, if ever. What's going on there? Question 2, inventory was up from about $600,000,000 to $750,000,000 How does that relate to the production ramp and some of the issues you talked about in the factory? And then number 3, on the lease, you say you're going to continue the GAAP versus non GAAP adjustments, which would seem to imply that you must have some back end risk for that lease with a 3rd party not to be treated as a true sale. And could you maybe describe the type of lease support you've worked out with your bank partners? Deepak, do you want to add? Sure, Brian. So on the customer deposits, there's a bit of noise in those numbers. That also includes final payments that our Model S customers make just for delivery. And if you exclude that noise, our customer deposit reservations or customer deposits were actually up quarter over quarter. So we don't see any issue there. On leasing, with our banking partner, we are taking lease accounting because our customers do have the option to return the car and we have the option to buy back those cars. And so given that uncertainty at the back end, we feel it's conservative accounting to follow the lease accounting approach for GAAP. What was your second question in the middle? Can you please start? The inventory and then the lease accounting. The and can you just clarify further on your inventory question? Yes. No, your inventory was up somewhat substantially. Just trying to understand is that work in process? Is that finished goods? Kind of what drove that given if you just looked at vis a vis deliveries, you wouldn't expect that increase in inventory? Yes. There were 3 factors that contributed to it at a high level. One was raw material inventory. 2nd was work in process and third was service. Raw material inventory was high because we were expecting to produce higher volume in Q3 that we did not achieve and that's part of our inventory. Work in process is just normal increase given that our production run rate on a weekly basis is increasing. We have more inventory in the pipeline and the manufacturing process itself. And finally for our service centers, we are sending out more parts and stocking these service centers so that we can provide more timely and immediate service to our customers, not have them wait, not incur additional freight costs. So it's a sensible and the right customer thing to do. And those sort of explain pretty much the increase in inventory. Right. And what was the 3rd quarter production? Just to kind of gauge the working capital with that. 1,000 100 units, which was as we said about 2,000 units less than our plan for the Q3. Yes. I mean essentially in the Q3 we sold every car that was including cars and like showrooms and everything we basically had. So like there was just like nothing left to sell. Yes. Okay. Thanks. Our next question comes from Patrick Archambault with Goldman Sachs. Your line is open. Great. Yes. Thank you for taking my question. Just a couple for me. First on let's talk about the Model X being pushed back a little. You said, I think just based on more testing and validation, is there any kind of specific engineering challenges that you've encountered here or is this more of a precautionary approach? And I guess kind of second to that, how confident are you in the new launch date? I understand that the ramp is sort of a separate issue, but being able to get it at least the first one off the in this new time frame? Yes. I mean it's worth saying that getting making one of something is quite easy. Making lots of something consistently and that's going to last a long time is extremely hard. In fact, it is way harder to make the machine that makes the machine than it is to make the machine in the 1st place. Like the production of the car is way harder than actually I'd say the design of the car. And so we have Model X Alphas done. We were done it was done with the beta. It's like basically in product being built right now. And we could certainly it would be quite easy for us to make 1 a handful of production units that are salable and homologated and all that sort of stuff. But that doesn't really move the needle. So what really matters is at what point can we get to scale production of a really high quality car and that's really in the Q3. And we've also learned the lesson in manufacturing that you have issues that are sometimes 1 out of 100. But unless you make 100 of something, you don't see it. Like you and then you think the car is it's all good, but actually it's randomly 1 out of 100 is wrong. But you don't know what necessarily which one of the 100. So then you've got to go look at all 100 cars. So that's just once you get into volume manufacturing, it's that there are just these statistically rare issues, but you really need to make a bunch of something in order to know that it's there. And we want to make sure we do that with the X. That's just really just a lesson we've learned. Financially, but of course, it's only going to matter when we're at volume production. I mean, I do think the X is going to be quite special. But it's hard to get there. And it's hard to engineer, and it's hard to produce. Okay. Yes. No, I don't think anybody obviously would fault you for making sure that it's up to your standard before putting it out there. But I guess is there something just in the design of these alphas and or the testing of these alphas that has come up that has just made you push it back? Or is it more just an abundance of caution? It's no, there's no big thing. I mean, there are a whole bunch of little things. It's really about getting the details right. And I think people will appreciate that we got the details right, but it's really about getting the details right. Yes, it's if you get all the details right, it's like the difference between a diamond with a flaw and a diamond without a flaw. And but it's damn hard to do that. That's what we're going to do. Understood. And just my second one, if I may. Getting back to the Gigafactory comment, the idea that you'll be able to produce your first jointly developed cell with Panasonic in 2016. Obviously, that's a shorter timeframe than a lot of us expected. Might it be possible just at a high level just to take us through the steps that you think need to happen to be able to achieve that deadline? Clearly, that's positive if that happens, obviously, given the importance for the Gen 3 program. Do you want to JV? Sure. I can comment on that a little bit. It is a slight pull ahead and we're a bit ahead of schedule on the Gigafactory than what we previously communicated. And some of the main reasons that are that is so important are what you alluded to, retiring risk and being ready to ramp up very quickly with Model 3. We felt it was important to go as fast as we possibly could and start some production operations in 2016. And there's a lot of steps that have to happen there. But generally getting the factory itself ready, getting the staff and the team that needs to operate the factory ready is a huge exercise. Yeah. I mean basically the pilot plant at the Gigafactory is as big as I think the next biggest or pretty close at least to the next biggest to any other lithium ion factory out there. I'm not sure which one would be bigger. Yes. The scope and scale This is the pilot plant. The scope and scale is huge. And we wanted to be prudent and make sure that we were planning far enough ahead that we could stabilize quality and stabilize sort of the infrastructure of the plant, well ahead of needing to ramp to very high volume for Model 3. Okay. I'd also just like to compliment Panasonic on being an awesome partner here that they really have been great. I mean they're going all out. Absolutely. All right. Thanks a lot guys. Our next question comes from George Galiz with Evercore ISI. Your line is open. Hi. Yes. I had a quick strategic question with respect to China. Back at Q1, I think you mentioned that you would like to do local production in China at some point in the future. And I just wanted to know what would be the catalyst for that decision? Will it be based on unit volume growth? Or is it based on a timeline that you have in mind? Perhaps you could elaborate a bit on that, particularly in the context of the recent announcements by the NDRC with respect to support for electric vehicles? Sure. Essentially, it's not going to make sense in the long term to be transporting vast numbers of cars, particularly sort of Model 3 more affordable cars across the Pacific to China is going to make a lot more sense to do local production there. So it would be really driven by running out of factory space in California and then we've got a choice. Well, the factory somewhere other than China for Chinese consumption, which doesn't make a ton of sense. Like you when you talking about a 1.5 ton to 2 ton vehicle product, it makes sense to build that where it's going to get used. And but I would expect over time for there to be factories in China as well as in Europe as well as more factories in North America. Our goal is to accelerate the advent of electric vehicles. In order to do that, we need to make a lot of cars. And then we're also sort of happy over time to support other manufacturers in making electric vehicles. And we're in pursuit of that objective and have been since creating the company. Okay, great. And I mean, the Chinese government clearly also are very interested in supporting the development of electric vehicles and particularly the development of electric vehicles domestically. Has the government approached you at all with respect to how you might be able to help some of the domestic players with electric vehicle development, particularly in light of the fact that, you've opened up your patents for others? We've had a lot of conversations with the Chinese government. They've actually been quite supportive. One of the things we're working through right now is just is getting on the electric vehicle list, which has a bunch of requirements on it. We're working with the Chinese government to try to get on that list. And so but yes, I mean, they've not made any sort of demands of Tesla or anything like that. And they know that we're quite keen on electric vehicles and helping companies wherever they may be in the world, China or otherwise. I think that's been well received. Great. Thank you. Our next question Our next question comes from Colin Langan with UBS. Any color on the warranty accrual of $14,000,000 How many vehicles was that across? I think it's coming across like something like $300,000,000 per vehicle. And is that based on the production of Model S? And should we consider that as a higher accrual going forward? Or is this a one off type of catch up accrual? Yes. Colin, Deepak here. So this is for about 30,000, I'm giving you round numbers here of cars delivered prior to Q3. And the going forward run rate for warranty accrual is slightly lower than what we did as a one time, because there were some legacy design issues that we have fixed already. We are in this continuous mode of improvement on reliability overall. Okay. That's very helpful. And any color on you mentioned upfront that North America deliveries were higher, which I was a little surprised by because I thought you're still trying to get product out to Europe and China. So why was North America so strong if you're still trying to fill the pipeline in the other regions? For Q3 delivery, Well, our production overall was also higher than so you're talking about September here or well, either way whether you look at Q3 or September our production in Q3 this year was higher than prior year. So we were just selling those other cars in Asia and Europe. So I'm not exactly sure if I'm not sure I'll answer your question. Yes. I was just it says, I mean, Q3 deliveries, the majority of them were in North America. But I would have thought that since you're trying to build up inventory in Europe and in Asia that you would have more going to those regions? Or shouldn't most of your demand be going into where you're trying to fill up the inventory? I think there's an assumption here that we try to fill up inventory. That doesn't make sense. We don't have inventory. I guess my point is that you have orders and you have a lot of you're starting in Europe, so shouldn't there be a lot of more pent up demand and more orders in those regions where you haven't been selling before? I guess that's what I'm trying to get at. We've been selling in Europe for a while. China is new and we're only just getting going in China. We only had our first deliveries like 6 or 7 months ago. 6 months ago. So and we only have 2 stores and a small number of service centers, and we don't have supercharger infrastructure built out there. So it doesn't make sense to put a ton of cars in China in areas where we don't for example, have a service center and reasonable proximity or any superchargers. In fact, in China, what actually has made customers most upset is that we want to deliver their car unless it can reasonably be serviced or charged. And then some of them are like, well, they still want their car, but then we don't want them to have a bad experience. So we can certainly expect that the growth in China deliveries over time as we build out the infrastructure in China. Okay. And then just one last question. Is there any It's speculation about a number. Yes. I think Speculation about a number. Yes. I think, yes, we haven't communicated a specific number from their point of view. We've only talked about the project estimate total. And I think Panasonic as Elon said earlier has been very forward leaning to make the commitments and investments at the times that they need to, to keep the project moving ahead. And there have been a few announcements from them recently in the past few months about that. But yes, I mean, it's probably it's on the order of $1,500,000,000 to $2,000,000,000 from now through full production of the Gigafactory, maybe more than that. I mean and yes. Actually so maybe while we're on the Gigafactory is like I was a little bothered about some of the reports on the Gigafactory. So no question that you've asked, but I just want to make a comment on this, which is there's like a lot of press about the $1,200,000,000 tax incentive package from Nevada that Tesla got. And is this like really a good idea for Nevada? It is like a super good idea for Nevada. And that's why every member of the Nevada legislature, Democrat or Republican, even if they were the furthest corner of the state, voted in favor of the package. And it's over like 20 years. So it's not a sorry, I realize you didn't ask this question, but it kind of bugs me that like I thought we got an okay incentive package given the scale of the thing, but not some not a super huge one. And when you consider that we're talking about in terms of the output of this factory something on the order of several $1,000,000,000 per year for 20 years and growing. I mean, it's the Nevada tax incentive over the period of time that it applies is maybe a few percent of that and pales in comparison to incentives that, say, Boeing got for keeping one model of the 777 in Washington State. So anyway, sorry to go on that sidetrack there. But yes. Okay. Thank you for the clarification. Our next question comes from Andrew Fong with CLSA. Your line is open. Thank you for taking my question. Now just following up on China, could you provide perhaps a bit of a timeline on the build out of your infrastructure? And how much does China drive your expectations for next year's volume growth? And then also back to the Model X, how confident are you in delivering current Model X orders in 2015, the ones that are already placed? Well, so I wouldn't say we're strongly dependent on China for deliveries next year. In fact, I mean, I believe we even if China was not even if we did not sell in China next year, we could probably still meet our targets, so even if there was 0 China sales. We'd like to exceed the targets, but even if we had no sales in China, we could still achieve the targets we mentioned mean, I think realistically, if somebody is ordering the Model X right now and we've just changed the website to this fact, the car is going to get delivered in early 2016. So we're essentially sold out of 2015. Okay. And I guess just following up on your answer on China. I mean, we're certainly positive on your demand globally, but just trying to get a sense of perhaps how demand is trending in China and and whether you choose to allocate cards there as opposed to different regions is obviously your decision. Just trying to get a sense of where we can expect volumes to trend over the next couple of years? Well, I mean, like I said, we feel pretty confident with of at least a 50% increase next year and a 50% increase the year after. And probably even you could go out probably several years with at least a 50% over time on average increase. So but in order for us to have that we like we need to lay the groundwork in a particular region well in advance of when we need those deliveries to occur because we need to have service centers and superchargers and logistics and all that. So you can't sort of just go into a country and suddenly have instantly have service centers everywhere and chargers everywhere and all that kind of stuff. So it takes time to build these things up and to understand the nuances of the local market. And so that's so it's like what we're doing in China right now is really laying the foundation for future growth. Okay. Thank you. Patrick, I need to break in here for a second. I just want to point out to everybody, we have about 15 minutes to go and quite a few people in the queue yet. So we are going to end this call on the half hour. So let's kind of go into the speed round here of Q and A. Mike is slightly longer. Slightly Elon says slightly longer. We'll go slightly longer. Our next question comes from Andrea James with Dougherty and Company. Your line is open. Thank you for taking my questions. First, I guess, what's your maximum capacity on the new final assembly line? Have you guys talked about that How do we think about it? Well, first of all, the final assembly line is just one factory. So it's I mean, we did oversize the final assembly line, because if we're going to make a new final assembly line, then we want to have that be have significant growth potential. So I think we feel safe in saying it's not going to be a growth constraint in the next few years by the final assembly line. The big thing in the first half of next year is going to be the new body line creating the sort of the skeleton of the car and the exterior body panels and all that, which is intended to be a step change technology improvement from our current body line and allow for a much greater volume as well as exceptional precision in the way the car is made. And we're aiming with the new body line for a level of precision that no car in the world has. You can practically you should be able to practically use the car our car as a yardstick with the new body line that's getting made. And yes, so Okay. Cool. And then I guess a philosophical one on the Model X. I guess, so forgive me if this is sacrilege, but it's not clear to me that the Model X is really necessary, but just hearing out. So your long term vision has always been bigger than the Model S platform with these higher cost vehicles being a bridge to coming down market. And so you sort of in my view, you've conceived of and promised the X before you really realized that the S has served as that bridge in some ways with the capital raises. And so I guess my question just to put it in the form of a question, how important is the Model X to where you want to be in like 2020? And how do you think about what the Model X brings to the product portfolio? Sure. That's a great question. And you're right. The Model X isn't necessary to get to the Model 3, which has been the goal of company all along. The Gigafactory is certainly needed for the Model 3. And the Gigafactory is going to take us like about 2.5 3 years to build and get to serious production. So we're kind of making the Model X in the meantime. And but it will serve the purpose of generating great cash flow to support the Model 3. And obviously, we'd reduce the dilution and the amount of capital that we need to raise for investors for the Model 3 because it should generate a lot of positive cash flow. And mean I just I think the Model X is going to be something special. I mean it's sort of readily an expensive car, but it is really going to be something special. I think gives us an opportunity to bring an amazing car to market that isn't there at all. It's something that should exist. Okay. Okay. Patrick, next question? Our next question comes from Ryan Brinkman with JPMorgan. Your line is open. Hi. Thanks for taking my question. It's really on direct leases as it relates to cash flow. It looks like you invested about $35,000,000 there to directly lease 347 vehicles in 3Q. What you're doing now is of course very small in relation to your $2,400,000,000 of cash. But I guess what I'm wondering is we should be potentially modeling a lot more going forward. You refer in the letter to I think 3000 to 3,500 leased cars in 4Q, but also that a large portion of them will be through the bank partner lease program. So can you help with what large portion means? And how should we think about modeling direct leases going forward? Could this grow to become material? Or will it be phased out with the bank partner program? I think we will continue doing some degree of pref leasing. It gives us flexibility and allows us to be in states where our banking partners cannot be there. I suspect we'll probably double from Q3 going into Q4 or direct leasing. So it's still not going to be a big part of the capital required in relation to the cash we have. We always have the option to go and get some bank warehouse lines to fund. But we don't want to do it while there's no need and why pay interest expense on that when there's no need to at this time? Yes. Got it. Makes sense. Yes, exactly. And then last question. Just curious on what extent the Model X and Model 3 are being developed in parallel? Or is there some work on the 3 that maybe accelerates once you can take resources, shift them from the X after it launches? I guess what I'm trying to figure out is if the timing on the launch of the X reads through in any way at all to the timing of the launch of your more mass market vehicle? Thanks. Well, the development of the small motor actually, we've got a big and small motor, a big and small drive unit. And for like the performance 85, the dual motor car, there's a big the standard sort of sport big motor in the rear and the smaller motor and drive unit in the front. And that's more than drive unit in a lot of ways is a precursor for the Model 3, because it represents a significant improvement cost in sort of in steady state power, a number of other factors. It's basically it's just like a 2nd generation motor essentially. And that's a good pathfinder for the 3 on the powertrain side. And then obviously, the Gigafactory is very much being geared towards the Model 3 pack needs. And then for the rest of the Model 3, it really depends on we could obviously like one easy thing to do would be to just make slightly sort of 20% smaller Model S. And then that would be an easy thing to do, but I think we might be able to do a few more interesting things than just that. Great. Thanks for the color. Our next question comes from Adam Jonas with Morgan Stanley. Your line is open. Hey, thanks. Just two quick questions here. Elon, in a world of completely automated driving going a bit out in the future here, what do you think will define a successful automobile company? Why would people buy a Tesla if their hands are never actually touching a steering wheel or if their feet never actually make contact with an accelerator pedal? Well, that's pretty far in the future. Even for you? Well, our definition of far is other people's definition of not that far. But yes, I mean, it just it seemed like in the long term that there will be that you feel won't be driving cars or maybe there'll be like some auxiliary steering thing that pops out only in an emergency that looks more like a Nintendo controller or PlayStation controller or something like that. But we're still pretty far from that in Tesla terms. And it has to be approved by regulators and everything. So before such things are really mainstream, it's and approved by regulators, it's probably no sooner than 7 years from now and could be up to 10, I think. Because you have to have that car that's capable of doing that and the regulators need to sort of see that it's really working as promised for a few years before they approve it. And but I think it's quite likely that Tesla will be the leader in making cars like that. Yes, JV, anything you want to add? Well, I think people will still care about many of the same things that they care about today, value and performance of the platform, range, efficiency, the detail and fit and finish of the interior, maybe even more so than previously since they can really focus on those things. I think there'll be some amount of car sharing for sure. But I think there's like a limit to the whole sharing thing. So I mean there's an important role for sharing, but it's just it's not most things don't get shared. Like I mean people could easily share their or their clothes or their bicycle or something like that. And they do a little bit with like Airbnb or something like that, but mostly not. Thanks. When you take all houses, you could hot bunk it and all houses could be triple housing inventory. Thanks, Elon. Just as a follow-up, a couple of months ago, I believe you said something like our share price is kind of high right now. Obviously, the stock has pulled back a bit. But given the very high ambitions of the company, which would require, I think to use your words, monster CapEx to carry out, Could you update us on your latest posture for potentially seeking additional funding from the capital markets to help seize the growth opportunities that you have? Or are you more in a kind of we're in a self funded status mode for now? Thanks very much. So we don't see any near term need to raise money. We're spending a lot to increase production capability of the asset to maybe be able to make more of them and make them more efficiently to obviously to build the X and to get the Gigafactory and sort of the long lead stuff on the 3 going. But it's so far it doesn't look like we're going to need to raise capital. And maybe not at all until the 3. But I should say, if there's something we could think of to spend money without being wasteful, which is quite hard, then we would do so. But right now, we're spending money about as fast as we can think of intelligent ways to spend money and not always being intelligent about it, of course. Yes. Thanks, guys. Our next question comes from Ben Kallo with Robert Baird. Your line is open. Thanks. I have a quick one and then a longer one. The quick one is on your production run rate at this point per week where are you guys at kind of on a steady state basis if that makes sense? Well, we're on I guess we're sort of I don't know if you should answer this question. No. I think we have complexities of production with the locomotor ramp. So trying to give a number which is sort of indicative of anything on average probably doesn't make it's not relevant. Well, yes, let's just say that achieving 50,000 units of the Model S next year is going to be no problem. That's a better longer term approach. Yes. And things do vary a little bit from week to week. And obviously, if there are like holiday weeks and that kind of things, then there are fewer cars made. But to say, we feel like no problem to do some 2,000 Model S's next year. Got it. And then my bigger question is, Elon, over the past few calls and hate to bring up demand again, but just to get this out here, you estimate by region how big markets were. Could you give us an update as I guess you guys' assessment evolves over time as well, China, North America, Europe? And then specifically in China, we hear a lot of different types of rumors about delivery issues in that market. So just maybe give us an update on how big you think the market is for the S right now in each of those regions? Well, I mean, the right now is not it's as I was saying earlier, like, in China, we need to have more service centers. We need to have more superchargers. There are some local charging nuances that need to be sorted out. Delivery experience hasn't been always as good as we'd like it. And so before one tries to scale up and put a ton of cars into the market, the infrastructure needs to be there. The Tesla infrastructure needs to be there to support it. So we're trying not to we're building that infrastructure very quickly. And in fact, I've seen the our China team is building it up faster than any region that Telstra's gone into before. I think our China team is executing quite well in that regard. But still there's a rate you can always just add at a certain rate and do it right. So how big do you think the market can be? Well, like I said, we feel very confident of 50,000 Model S amount of 50,000 Model S vehicles a year, it's probably more than that. But that's the number we're confident of. And there are obviously also macroeconomic factors of how is the given economy doing that we don't control. So it's difficult to make these predictions without also knowing what the macroeconomic climate is going to be in each of these countries. But except to say we think about 2,000 next year is a pretty good number even if the economy isn't great in certain parts of the world. Great. Thanks, guys. Our next question comes from Carter Driscoll with MOB. Your line is open. Thank you for taking my questions. A couple of just very quick ones. In terms of the feature sets and the updates outside of the dual motor drive that you recently introduced, has there been anything that you've gotten really positive customer feedback, say, over the past 12 months that maybe you decided to incorporate in the Model X, anything that surprised either negatively or positively? And then just a quick follow-up. So I'm sorry. Are you asking sorry. Any of the incremental improvements you've made to the Model S over say the past 12 months that have really gotten positive customer feedback that you maybe were or were not going to incorporate in the acts that have surprised? Well, I mean there are a few things that are important like the we've made a pretty big improvement to the seat comfort. That's important particularly the next generation seats that they can order with the P85D. Those are a huge improvement. The sun visor, I mean, there's like all these silly things that have been fixed. The SunAdvisor by the way will be offered to all existing Model S owners as well. So it's because I think the sun visor we came out with in the beginning was not great. But this one is actually bigger and probably blocks the sun. It's got a great mirror. And importantly, the Strident sticker that is normally on sun visors has been minimized and moved to the left and no longer also increased the warning in French. That sticker drives me crazy. So it's a way better sun visor. And but there's a sort of steady stream of improvements. I mean Jerome is there anything you want to think maybe? Oh, yes, wipers. Yes. We've also improved the wipers. I mean cars are such a complex system. All these things have to be Oh, yes. So the charge for door is now actuated. So with the cars going out, it will actually it will actuate open and close. So you don't forget to close your charge port door and then drive off with the charge port door open. So it just sounds like steady state incremental improvements, nothing that really stands out. In terms of what you're talking about in terms of reducing the number of options on the Model S to ramp production, is there is that because you're pulling things in that are not going to be in the base price? Or are there certain options you're just no longer going to offer? And does that have any effect on the blend of the ASP going forward for 2015? I think it's probably not going to have a big effect on the average sales price. But we have had to make some tough decisions on essentially having fewer versions of the Model S in order to streamline manufacturing and thus be able to ramp production better and have better control and logistics and not have like 1,000,000 variations on the Model S. So the dual motors we're not going to produce the dual motors 60 kilowatt hour car at all. And then we're not taking additional orders for the Performance 85. We're only doing the Performance 85 dual motor. And then we're canceling green and brown as colors. These are a few examples. So this helps us streamline the manufacturing and supply chain logistics and enables us to better ramp production. Okay. I realize there's a lot of people in queue. I'll get back in line. Our next question comes from Colin Rusch with Northland Capital Markets. Your line is open. Thanks so much for squeezing me in. Can you talk a little bit about expectations for OpEx spending and how we should think about incremental margins as we go forward with this 50% annual unit growth? I think you're referring more to 2015 here. I think it will be best if we wait till the next quarter's earnings call and provide better guidance on how 2015 outlook is on those elements. Yes. Actually one thing I forgot to push probably Pat as a bullet point at the top of the shareholder letter though is in terms of GAAP gross margin. Taking sort of so our GAAP gross margin in Q4 was about 29.6%. Q3, right? Yes, sorry, Q3, 29.6%. If you exclude all positive and negative one time things, it's items, it's about 27, which is that's probably the more relevant number. And that's also excluding ZEV credits, the way we report it normally. Yes, yes. So, yes, ZEV credits the way we reported normally. Yes. To be precise the 27% GAAP gross margin would be excluding all one time stuff including ZEV credits. So no ZEV credits included in the 20 7%. To make it apples to apples from our prior reporting. Right. Great. And then just a quick follow-up on the stationary energy storage. Looking at the potential need for grid tied storage and your expertise with batteries, we're looking at something that could be 5% to 10% of total grid capacity globally as well as looking at emerging markets and needing microgrid solutions. As you guys are looking at spending money, obviously, you're involved here. How big an initiative is this for the company at this point? Well, stationary storage is pretty significant in the long term. It's a vital element for going to sustainable power generation. So we're currently assuming that somewhere around 30% or so of the Gigafactory output would be aimed at stationary storage. That's a rough guess. But one way or another, the stationary storage is going to be a really huge thing that needs to be done? Yes. It's definitely a very serious effort for us. But a lot of the work and a lot of the resources are complementary to what we're trying to do on the vehicle side, reducing the cost of cells, increasing capacity of cells, improved power electronics. These things benefit all different products that we're building right now. So we have to be mindful of priorities, but there is a lot of synergy, which is part of why so aggressive. And are you guys seeing any changes on the horizon in terms of grid rules, in terms of frequency regulation, monetization? Are you doing that kind of nitty gritty market research in certain geographies at this point? We definitely are tracking a lot of different regions and it's very fragmented. But we aren't we don't really have a detailed proactive lobbying effort on this. We're talking to most of the grid operators and effort on this. We're talking to most of the grid operators and independent system operators and utilities. Right now, we're really focused on building products that meet needs that are here and now and there's plenty of opportunity there before anything actually changes. Great. Thanks a lot guys. The next question comes from James Albertan with Stifel. Your line is open. Great. Thanks for squeezing me in here and injury time and for extending the call a little bit. Really quickly, I'm sorry if I missed it. I dialed in a little bit late, but I wanted to talk about average transaction prices and then also wait times. On the ATP side, we can look at the deliveries and divide by the revenues and kind of get to a number, but wanted to see how that progression was tracking intra quarter. And if there was any decision to bring all wheel drive, dual motors and autonomous features forward versus prior expectations given the spec that a lot of your demanding at higher price points? So maybe that's another way to look at the demand question, I guess, is my theory. And then, separately, just very quickly, where are we wait times for the Model S today versus where we were sort of 3 months ago just as a proxy? Thanks. And on the average transaction prices, we're not seeing any significant changes from a content perspective as we look at Q3 prior quarters. Clearly as we go forward and the addition of fuel motor is going to improve over average transaction price. However, when we look at international markets as we talked earlier, the significant weakening of the European currencies is having an impact on our international average transaction price and it's lowering in total our average transaction price slightly. Yes. Because maybe you're dropping 7% or so. Correct. And then same thing with the Norwegian krona and the Swiss francs. They all were in the 7% to 8% and they had a significant impact. Right. So but not from a content perspective. The underlying fundamentals are good. Okay. And just the wait times? Well, it depends on which version of the car that you get. So, if the wait time and it depends on which version of the car you get and where you are in the world because, obviously, if you're not in, say the West Coast of the U. S. There's going to be a longer wait time to transport the car to wherever you are. So the wait times right now I think are anywhere from maybe 6 to 7 weeks, in the best case, to 4 months. It sounds like that's been pretty static? Yes. Yes. That's no significant change there. Very good. Thank you, gentlemen, again, and good luck in next quarter. Yes. I just wanted to add that our $0.02 EPS in the quarter was clean. It includes all the one time good news and bad news. So it's So there's no asterisk. No asterisk to that. Thanks. Very good. Thanks. This ends the Q and A session for today. I'll turn it back to Jeff Evanson for closing remarks. Okay. Thanks a lot, Patrick. Thank you everybody for joining us. And Elon and the team, thank you for being so generous with your time. Have a great day everybody.