Earnings Call: Q3 2012

Nov 5, 2012

Good day, ladies and gentlemen. Welcome to the Tesla Motors Third Quarter 20 12 Financial Results Q and 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jeff Evanston. Sir, you may begin. Thank you, Shannon. Good morning, everyone. Welcome to Tesla Motors' 3rd quarter 2012 financial results question and answer conference call. I'm joined today by Elon Musk, Deepak Ahuja and George Blankenship, key executives at the company to answer your questions today. We announced our financial results for the Q3 at 3:30 a. M. Pacific Time today. The shareholder letter, financial results and webcast of this Q and A session are all available at the company's Investor Relations website at ir.teslamotors.com. Today's call is for your questions, but we would like to keep the call to 45 minutes today, so ask that you be succinct in your questions. We will conduct the Q and A session live. Now during the course of this call, we may discuss our business outlook and make forward looking statements. Such statements are predictions based on management's current expectations. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent 10 Q filing with the SEC. Such forward looking statements represent our views as of today and should not be relied upon after today. We also disclaim any obligation to update these forward looking statements. And now Shannon, could we please have the first question? Our first question is from Adam Jonas of Morgan Stanley. You may begin. Thanks. Bright early morning to you guys. First question, how many vehicles are coming clean off the line with no material rework at this point? And I'm just curious, has any model really come pure off the line at all, yes, without much rework? Thanks. Sure. So we do get some costs that don't require meaningful rework. But generally, we're trying to maintain an extremely high standard quality. So if we see something that's even a minor aesthetic issue, we want to correct that. So that yes, there is it's true that right now most vehicles require some work to correct minor issues. Those issues are not something that most people would even notice, but we're trying to be as close to perfect as possible. Nonetheless, we're able to get to a production rate which is annualized at 10,000 cars a year. So I feel really good about where we are with respect to manufacturing the vehicles. Okay. Thanks, Elon. And which if you think of all the issues that were affecting the early production of the vehicle, what are the key ones that you've solved? Which ones have yet to be solved? And is the list of new problems is the list of new problems growing or meaning are there any additional new problems that you're finding or all the issues that you know in terms of either quality or supply known and that's a shrinking list now? Thanks. Yes. I mean, our biggest issue has been getting all of the parts of the vehicle on time from suppliers and at the quality at a very high quality. I think we're through those issues. There are no supplier issues that I'm aware of right now that prevent us from achieving production rate of an annualized production rate of 20,000 vehicles a year basically within the next 4 or 5 weeks. So I mean it's looking good. I'd say something couldn't crop up, but it's looking quite good. A rapid decline in just the number of correct issues that need to be corrected as vehicles come off the line. So it's getting better very quickly. So right now I feel very optimistic about where things are. And I'm not aware of any like I said, not aware of any issues in front of us getting to the 20,000 units here in annualized production volume. Okay. Thanks, Elon. Deepak, just a couple of very quick ones for you. Reservation is over 13,200 by year end. But when we look at the reservation balance on the balance sheet, should we assume that that's going to be lower? And if it is lower, can you give any kind of lower bound of that? Meaning, should it be can it still be over $100,000,000 end of year? Yes, I think it definitely will be over $100,000,000 And you're right, to the extent the Signature reservations come off, we have collected a much higher deposit on them compared to general production reservations. So there would be some adjustment in our reservations balance to account for that. Okay. And then on R and D, you gave the flat 4Q guidance at around $60,000,000 That is quite a bit higher than I think many people on the call would have expected. If you're able to explain kind of why is it running higher? And is $60,000,000 a quarter a run rate we should use going into next year? That's my last question. Thank you. Yeah, I think we should be as the letter has indicated, this is still a 19% reduction from the prior quarter and that's primarily as we have pulled out all the manufacturing related expenses. Most of our R and D headcount now is people at this point and we are focused on future product development, a bunch of actions to continue to improve our products. So I think that's a fairly reasonable rate going forward. Thank you. Thanks, Andrew. Thanks, Andrew. Our next question is from Patrick Archambault of Goldman Sachs. You may begin. Thank you. Good morning and congratulations on being on track with the benchmarks here. I guess I just wanted to follow one clarification and then a separate question just on Adam's question. So it's I mean, we can affirm that what's left in terms of challenges is really sort of fit and finish challenges kind of that are related to the assembly process rather than the availability of the right amount of components. Is that a correct interpretation? Yeah. So right now we're able to build cars at the 10,000 year to year annualized rate with the parts we need. And like I said, as of today, I don't know of any parts that are that would prevent us from getting to the €200,000 a year level in 4 or 5 weeks. So it looks like it's I wouldn't say plain sailing, but it looks like it's solid sailing in that direction. Something grows could come up, but I'm not aware of any obstacles to that to getting there right now. It's looking I mean, that's what it's looking quite good. Okay. Great. And I should say, I mean, overall, I feel Tesla's really kind of past the point of high risk. Several months ago, I said I thought that the coming several months would really be the test for Tesla and the sort of classic phase of going through the value of debt. And I feel as though we are through that valley at this point. Great. Thank you. And then maybe one for Deepak. Just in a at a high level, can you maybe just give us a little bit on the landscape of capital investments? You've clearly from an R and D point transitioned to the X, but then there's also I assume some early engineering done for the Gen 3. So how should we think about sort of the lumpiness of your R and D and capital spending patterns as we kind of look out to the next 18 months or so? Yes. I think what I would prefer to do Dan is that in the next earnings call provide far more sense of the trends we would have on our R and D expenses for 2013. But I think broadly speaking, the factors that affect R and D would be, as you said, our new product development, which includes Model X, Model S. We are going to be working on a right hand drive version, European version. There are a few other things. And it's our continued improvements in manufacturing and design that we will be focused on. So there will be some degree of lumpiness, but nothing that will be as significant as we saw in 2012 because all the manufacturing expenses are no longer in R and D and it will continue to stay that way. Yes. Again just to clarify what maybe you've mentioned over by Deepak's statements is that the left hand drive European version has very little work left to do to it. In fact, we have 2 EU approved vehicles in the EU right now doing the initial marketing. We just started marketing in the EU. So the real incremental R and D is with respect to the right hand drive version of the EU version, which also would apply to Japan and Hong Kong and a few other places. So and then there are a few other variants of the Model S that we'll come out with next year that I think is going to be pretty exciting in addition to of course really getting into the Model X and starting the initial design work of the 3rd generation mass market vehicle. Okay, very helpful. Thank you very much. Thank you. Our next question is from Amir Roslodowski of You mentioned sort of new reservations in the quarter were roughly around 2,900 with net reservations around 1700 as cancellations have crept up. I was wondering if you could give us a little bit of color in terms of what's driving sort of the cancellation activity. Do you expect it to diminish at some point? And perhaps also do you expect to transition to much more of a sort of real time sort of order slash delivery type model versus what we've seen obviously in the early stages of the launch of the vehicle with sort of a reservation type model? Sure. I can answer that maybe at a better report level and then turn it to George to add some more details. I think that the way things are going with Tesla, it will be a while before we transition to any kind of real time, meaning like you can just go in and buy a car. Given that it's that the wait list is effectively several months right now and I would expect that it would be at least for a few quarters continued new high watermarks in new reservations. I think it could be quite a while before someone can just walk in and buy a car. It could be as far as sort of 2014 before that's even possible. So I'd certainly encourage people if they're interested in the car to put down a reservation and not be under the impression that they'll just be able to at some point buy a car and just have there be no line. In fact, I often encounter this sentiment with people where they think they can just wait and then they'll just be able to go buy a car. And I think that's going to be it's going to be a long time before that's the case. George, would you like to add anything to that? Yeah, sure. I spent a lot of time in the stores, and I think here's what's happening is our increase in reservations is a combination of several things. One is we have more stores open and as we open more stores, we're getting in front of more and more and more people every day. We've seen 1,800,000 people from our stores year to date, but the last quarter was a significant increase over previous quarters because of more stores being opened and we've got 5 more opening by December 1 this year, all in high traffic, high visibility locations. And as we open up new stores, more and more people are coming in and say, I've never said, who's Tesla? And we're getting that increase in awareness in significant ways. And I think we're reaping some of the benefit of having been open now for about 18 months with these new design stores when we're getting a lot of traffic. And then I think next is the awards. We're getting some very, very positive awards that we're letting people know about and that's reinforcing that the car is quite extraordinary and somebody else is saying it besides us. We got a lot of press right after the June 22 start and now we've gotten more recently with Automobile Magazine, Yahoo! Autos. That's taken real positive. And then there's one other element that I'm experiencing in that we're experiencing in California specifically where we've delivered a lot of cars is that we're putting cars on the road now that people are taking other people out to dinner with. They're going to movies with, they're going to shows with, they're going to their house and people are seeing the car and going, oh my god, how do I get movies? And so our customer base that have actually received their cars are actually selling cars for us, making reservations for us. And so we've got that really big effect going on right now, which is really positive. And as far as a timeline to when people will be able to come in and buy a car right away, I don't see that anytime in the near future. In fact, that's not even the goal. The goal will always be that there's a reservation time so that we can build your car specifically for you. So I don't see that on the horizon at all at this point. And then I guess Sorry, it's actually I've yet to meet a customer who's received a car who hasn't told me immediately how many additional cars they've sold to people that they know or in some cases strangers on the street. It's really that it's spreading quite virally by word-of-mouth. I mean it's worth noting that Tesla still does not spend any money on advertising. Well, and it does seem like you folks are benefiting from this halo effect as you get vehicles on the road. Just on the flip side with respect to cancellations, however, I mean, do you expect sort of to reach a threshold at which there's less cancellation activity just given that now that you have more stores out there, perhaps it's a little bit the timeframe while there is a timeframe to wait for a car, perhaps it's compressing a bit as you start to deliver these vehicles. Just trying to understand the dynamics for net reservations there. George, go ahead. We do a lot of watching of this and analysis of it. What's happening is the refunds that are happening now were very, very expensive. We're going through the reservations that were made in 2,009, 2010, lots of changes have happened at different points in time. And by the time we get into Q1, what will happen is the waiting time between when you make your reservation and when you actually configure your car will go from 2.5 to 3 years and then down to literally a couple of months. And so, the time will just be minimal, okay? The time will be minimal and therefore there won't be a reason to be canceling. So, we see this becoming a non issue in North America as we get Great. And then lastly, if I may, when we were looking at your guidance for sort of deliveries this year, it seems as though there was a modest downtick from your prior expectations around 2,700 to 3,250 versus now according to the release around 2,500 to 3,000. Is that largely attributed to some of the supply issues that you guys had already mentioned? And should we expect this to be sort of supply issues that you guys had already mentioned? And should we expect this to be sort of now that it seems like those are behind you, is this sort of a fairly achievable target from your perspective? Just to clarify there, Amir, our guidance hasn't changed. The 2,005 100 to 3,000 deliveries is for Q4, while the 2,750 to 3,250 was the full year guidance and that includes Q3 deliveries. Got it. Thank you very much for the clarification, Deepak. Thanks, Amit. Okay. Analysts, we've consumed 20 minutes here getting through just a few of you. So let's just leave it to one question and one follow-up please. Okay, Shannon, let's have the next question please. Our next question is from Aditya Sabir of Lazard. You may begin. Great. Thank you. I wanted to better understand your prepared remarks about the gross margin target by the end of the year. So could you give us a sense of if you were to take away the cost of the ramp up and say cost of additional rework, where would the gross margin stand today? That's an interesting hypothetical. Well, I guess I would say, assuming that we were at the 20,000 unit per year production rate, which we're not quite at because the gross margin is going to be affected by the ramp. But assuming that if you fast forward 5 weeks or something like that and if you take out the short term cost issues associated with the ramp and just the things that we sort of have put on hold it was sort of known if you take out known cost down issues that we put on hold to ensure that we make the ramp we would be at the 25% gross margin level. Got it. Got it. My follow-up question was on sort of delivery mix for 4Q. So could you give us some more color as to how is the mix sort of shaping out versus your prior expectations into going into the last quarter? It's right on track, exactly what we expect. All right. Thank you. All right. Thank you. Our next question is from Aaron Chu of Maxim. You may begin. Hey, good morning, gentlemen. Appreciate the question. Wondering, I know you offered a decent amount of updates on reservations. Is there any way you can offer some insight into how reservations on a grosser net basis were trending in October, and maybe even some general highlights on how they trended on a monthly basis throughout 3Q? I think we would prefer not to give specific monthly numbers, but I think George gave you a good sense earlier that given our continued store openings, the visibility of the car and the recent awards that the car has won, we've certainly seen a good uptick recently. Okay, fair enough. Well, if I may for my follow-up, wondering if you guys can offer any further insights beyond what was mentioned on the website with regard to the lawsuit. I'm sure it's a sensitive matter, so there's only so much you guys can say, but maybe some general thoughts on timing, what the damages are being sought and what implications you guys think may be to your store strategy if they were to win? Thanks so much. Sure. We would have to be a little bit cautious about commenting on ongoing lawsuits and out of respect to the judicial process. But we feel like we're really quite optimistic with respect to our legal position. We really feel strongly that we're in the right. And I mean it's worth noting that at least thus far no injunctions have been issued. So we feel optimistic that we will prevail in these cases and that we are strongly on the side of what the law intended to occur. So but other than that, no no great insight except to say that we feel reasonably optimistic about where we are. Thanks, Aaron. Thank you. Our next question is from Carter Driscoll of KapStone Investments. You may begin. Good morning, gentlemen. First question is trying to get a little closer to an ASP figure. Could you talk about what the maybe the average option package size or range has been so far for the Signature Series and how you see that potentially playing out as your mix shift changes? Should that stay similar range as a percentage of the base model? What are your expectations there? And then I have a follow-up. Yes. Well, right now, we're still working our way through the signature series, which is quite a heavily optioned version of the car. Although, I mean, we've been surprised by the level of interest in sort of the performance version of the car that has actually taken us a bit by surprise and has actually caused us some slight challenges in meeting the production ramp for components that are specific to the performance version of the car. We were just surprised by how many people were interested in that. And looking ahead, our option mix still looks like it's quite rich actually. So it's really looking I'd say maybe a little better than anticipated. But I mean, obviously, that could change. We don't have a crystal ball as to how things will go long term. But it's been better than I expected in terms of the number of things that people are interested in having on the car. I don't know if George or Deepak, if you want to add to that. Yeah. I think go ahead, George. Yeah. I agree with that. One of the options that has been most favorably received has been performance. The signature version of the car, as Elon said, was highly optioned and there really weren't a lot of options on that car specifically because of the signature car. As we moved into general production reservations, very happy with performance and some of the other options that we weren't sure what they'd be received and they've been received very, very well. So we're slightly ahead of where we thought we would be with options. Okay. Thank you for that. We have had a lot of customers really ask for more options. So we'll try to roll out a few more extras that people can buy if they'd like and maybe a few that people can retroactively add to their car. Okay. Thank you for the color. And then just my quick follow-up is, I think you had talked just a few weeks ago about potentially reaching cash flow breaking by the end of November. I think in your written commentary, you think it's closer to the end of the year. If you could talk about whether that was the expediting cost, supplier issues, what changed that date by approximately a month and why you're confident that it will be December now? Well, we haven't really changed the date by a month. So I think we actually expect that to occur as we previously expected it. But things can shift around by a week or 2, but not really much more than that. And I think actually it will be as expected. Okay. All right. So just to reinforce that point, Carter, that there is no change in that sense. It's pretty consistent with what we see. Thanks. I appreciate it. Thanks, Carter. Thank you. Our next question is from John Lovallo of Merrill Lynch. You may begin. Hey, guys. Thanks for taking the call. First question is, if we think about the Daimler contract and just kind of shift in timing, I mean, can you just talk about maybe what were the drivers of that shift? Sorry, Difei, go ahead. Yes. It was really not something significant. We were sorting out some of the technical specifications or the milestones and that was required for us to make sure we were doing revenue recognition correctly. And those issues are all pretty much behind us. Yes. Essentially, the project is proceeding actually at the expected pace. We're just being conservative about the revenue recognition and we want to make sure we don't run the risk of a restatement. So but with respect to the Diamond contract, so operationally it's proceeding as expected, but we're just being a little bit conservative side here with RovRec. And otherwise, our revenue would actually be higher than what we currently stated. That's a very good point that operationally the program is proceeding very well and has been. Yes. And just to emphasize our actual revenue would be higher if we've been less conservative in the recognition of that revenue. Okay, great. That's helpful. And then if I could just follow-up with maybe a quick kind of housekeeping question here. I was under the impression that the interest expense would flip to closer to $2,000,000 once production began on the Model S. Is there I incorrect on that? Or was there some kind of change? It will more in Q4. In Q3, we were still capitalizing since a lot of our assets were under construction during the quarter. Okay, great. Thanks very much, guys. Thank you. Our next question is from Elaine Kueh of Jefferies. You may begin. Hi, everyone. Congrats on the great progress in the quarter. So I think most of my questions have been touched on, but just a big picture one, what's the eventual vision for the supercharger network? Is this going to be expanded the 60 kilowatt and the 40 kilowatt and possibly even the future mainstream mass market Gen 3 vehicles? Or what's the thought there? Well, it actually applies to the 85 kilowatt version automatically that's just included. And then for a couple of $1,000 you can get the supercharger hardware added to the 60 kilowatt version. We're not currently planning on adding it to the 40 kilowatt version because we see that as the customer buying that is really buying it because they don't really make long distance trips. So it tends to be more of a car that you want to use for travel just within a greater metropolitan area. We do expect to have the supercharger network be used by the certainly by the Model X and by our 3rd generation vehicle. But we're thinking that you want to have a nominal range at least on the order of 200 miles a range at 55 miles an hour for the supercharged network. And that's the basic version. But we do expect that the vast majority of cars that we produce going forward to have access to the supercharger network. Like I said, apart from the very lowest version of the model, which is for those who just almost never take on business trips. Okay, great. Great. And just one follow-up. Do you will there still be any deliveries of new roasters in 4Q or is that done now? And were you had you always planned to also sell the pre owned roasters or was that a more recent development? And do you see yourselves also dominating that resell market for any future Model S or X or other vehicles? Yes. There will be a few more Roadsters. These are just ones in terms of new Roadsters in Europe and Asia. So there's not very many left. So it's not going to be a huge number, but just because there aren't very many left to sell. But in terms of used roasters, we do expect to do a decent business in used roasters that we resell to people who are interested and then doing the same with Model S and X. And I think we'll yes, I think that that's going to be an interesting revenue source for us in the future. George, is there anything you'd like to add to that? Yeah, all of the roadsters that are remaining that are new are in Europe and Asia and right hand drive is basically done except for a couple demos. We're putting together an actual program that actually brings back Roadsters and this will translate to Model S in the future and Model X so that we actually manage that process and so we control the value of that secondary part of the market because we think that's very important. So we actually have a staff that's dedicated to specifically managing used roadsters now in North America based out of California. So we think it's an important part of business opportunity for us going forward. Great. Thank you so much, George and Elon. Thank you. Our next question is from Ben Shunen of Pacific Crest. You may begin. Thanks, guys. Am I right understanding the halfway to 25% gross margin expectation as sort of a snapshot exiting Q4? And if so, can you give some color on what the overall gross margin could be in Q4? Yes. Jeff, Deepak's trigger? Yes. I mean, we are we want to be sure we are beating our numbers here, so I want to be careful. But it should be relatively close. And I think we want to just help give the sense that we are on the right track. And as Ivan said, long term looking beyond, we are on track to get to 25%. Okay, great. And then have you hired all the employees you need in terms of manufacturing to get to the 20,000 unit run rate? And how long is it taking you guys to get new factory employees ramped up? Yes. We've hired almost all the people that we need for the 20,000 unit a year ramp. And typically it's the skid people onboard and trained is around 2 to 3 week process. So yes, I think really things in place to get to that ramp rate in 4 or 5 weeks. Great. Thank you. All right. Thanks. Thank you. Our next question is from Dan Galves of Deutsche Bank. You may begin. Hey, good morning. Just wanted to dig into this comment on that absent cost inefficiencies, you're now at a production rate capable of generating positive operating cash flow. Just trying to keep it simple, your operating expenses excluding stock based comp are running about $350,000,000 annualized right now. If we use $25,000 gross margin per unit, you would need to do about 14,000 units per year to breakeven on that. Just wondering if you can give me any additional color on kind of what's involved in that or what I'm missing in that calculation? And then if you could talk about your cash breakeven point going forward as ASPs likely will come down at some point, but gross margin will continue to looks like it continues to improve from current levels. But if you could give us any more color on that calculation? Dan, the other elements are the balance sheet items that affect including how our inventories and APs get managed and our reservations balance. So when we look at that on a combined basis from an operations perspective, we are comfortable with the message that we provided in the letter. Okay. So that includes some working balance sheet changes in there? Correct. Okay. That's helpful. And could you give us an update on where you stand in terms of homologation of the vehicle in Europe, when you expect that to launch and how what's the ability of people in Europe to make reservations currently and how many have? Sure. We've made huge progress on homologation. It should be pointed out that we designed the Model S from the beginning to meet the European and American specs and in fact the specs in Japan and Asia as much as possible to the degree of those. So those specs weren't mutually exclusive. And in fact, we have 2 model SS with German plates currently driving around that we completed as part of our European media launch recently. So, really that there's very little to do to get the European spec and homologation ready for production. We could do so sooner than the we could start production of those units sooner than kind of the March April timeframe next year. But there's not really a need to do that since we have we can fully absorb our production with North American demand and further than increase the complication of managing all purchased cars in Europe and North America. We want to stay focused on North America just for a few more months before we start to ship cars over to Europe and then Asia shortly thereafter. And are people able to make reservations in Europe now? Yes, absolutely. Okay, great. Yes. I mean, our George can add some more insight there. Clearly, we've seen an uptick with our recent activities since you've just begun the launch of Model S marketing activities in Europe. But overall, we have probably around 15%, 20% of our reservations in Europe. Okay. Thanks for that color. Appreciate it. Thank you. Our next question is from Andrea James of Dougherty and Company. You may begin. Hi, good morning. Thank you for taking my question. If I make some assumptions on how many people you're calling to log in, I think I calculate that the cancellation rate for lock ins is about 1 in 10. And so is that about right? And how does that compare to what you were expecting? Yes. I think our cancellation rates for people that we reach out to, to confirm a booking is in the 10% to 15% range. It depends on how old some of these were. So you're in the right ballpark there, Andrea. George, anything else you may want to add? No. Just that the number was completely expected to be where it is and is expected to go down as we get into Q1. Okay. Thank you. And then if I look Sorry, maybe just slightly more on that. At least you said the phrase cancellations for people that have locked in. So the cancellation of people that have actually confirmed their options is extremely low. There are very few people that cancel once they've decided what their options are going to be. The cancellations tend to occur before they've decided there. That's where the 10% to 15% cancellation occurs. Okay. But note is important, yes. That makes sense. And then if I look at your September 25 communication on gross reservations and then I look at what you're saying today, it looks like you booked about 300 new reservations in the last 5 days of Q3. Does that sound about right? And I think that's about where you'd want to be. It sounds like you got there already per day. George, I would say it's a bit of rounding there. So it's in the right it's in the ballpark, but there's a bit of rounding. Got it. Thank you so much. Thank you. Our next question is from Michael Lu of Needham. You may begin. Good morning. With regard to the superchargers, has it yet been a factor? Do you expect it to be an influencing factor in the general reservationist population and whether or not they choose, let's say, an 85 kilowatt hour model versus a 40 kilowatt hour vehicle? Yes, I think so. Yes, I think there are a lot of reasons to take the higher range car. There's certainly performance elements. It goes a little faster. Its acceleration is better at high top speed. The warranty is a little bit better. But I think the ability to travel long distance with the supercharger and the fact that you can travel really you'll be able to travel for free anywhere in America long distance I think is pretty appealing. And we've only just opened the supercharger system up to the public. And I really think it's a wonderful experience when you use it. I actually drove with all 5 of my kids in the Model S with luggage in the front trunk, fully loaded all the way from L. A. To San Francisco. And it was really a great road trip and with no hitches. And when we'd stop for a meal or go to the restroom. By the time we came back, the car was ready to go. And I think so I think it's going it's really exceeded my expectations actually for what I was hoping it would be and how well it would function. So I'm really excited about it. And I think as people use it, it's really going to open their eyes as to what an electric car could be like. And just not having to go to a gas station, be immersed in fumes and pay a whole bunch of money for gas, Just built to test this free long distance powered by sunlight, I think is it's quite a revelation I think. Okay. Have they also drove incremental demand or increase from OEMs like for powertrain agreements just given its high rate or fast charging capabilities? Well, the with our partners with Mercedes and Toyota, they've thus far been more interested in shorter range vehicles rather than tackling the long range problem. Well, certainly, it's something we'd be happy to give access to. We'd be happy to give them access to it. But I think you need just a bit of a larger battery pack than they're currently specking for the cars that they're going to the RAV4 and the B Class Mercedes. Yes. I guess I meant were there new inquiries since the unveiling of the superchargers from OEMs for like new platforms in the future? Just I mean, let's put it this way, 10 minutes is a lot faster than like 8 hours. Yes, true. Surprisingly there haven't been a lot of inquiries on that front. Maybe it's just taking time to sink in. And but I think it's currently in the main mind frame that it's more of a it's going to be more of a greater metropolitan area travel vehicle in the case of the Ford and the B Class Mercedes. And I think perhaps once they see how customers are adopting it and using the SuperCharge network, they will their interest will peak. I really don't think people realize as to how cool it is. It just works. It's one of those things where it's even better than it sounds. It's better than the marketing. Okay. And one last question. You'd highlighted the role of word-of-mouth has been in the how big role it's played in driving reservations. Could you give us a sense or gauge of what percentage or what number of net adds in 3Q were by word-of-mouth? Well, it's If there's a figure out there, I don't know if you've tracked it that way. It's essentially almost all our word-of-mouth or media because really it's our advertising that we do. So I guess I meant versus stall walk ins or something walk ins to design center. Sure. Well, George, how would you answer the question? We don't have the exact numbers of which ones were customer references because some of them were multiple customer references, they went to dinner the night before with somebody who's received a card, then they come into the store, they get more information and make a reservation. We don't track it specifically by customer, but when we start to look at geographic areas where we have the most delivered cars, those areas are really starting to escalate very quickly in reservations for more cars. So we don't have it down to a specific percentage or number, it's just when you look the overall picture, you can see that where we have the most cars delivered, reservations are escalating significantly. So on that note, I guess it would also apply towards cancellation rates. So it's fair to say in the areas where there are fewer vehicles on the road, you probably experienced more cancellations. Is that the right way to look at it? I haven't really tracked it that way. I haven't really backed into it that way. So, I couldn't really quantify anything like that for you. Yes. That's probably true anecdotally. Just given that the word-of-mouth in the car is incredibly good. So yes, it's I've not encountered anyone who's said that they tried the car then didn't like it. It tends to be the very opposite. All right. Thanks. Okay. Thank you. We have maybe time for one more quick question. Operator? Our last question is from Ben Kallo of Robert W. Baird. You may begin. Hey, guys. Thanks for taking my question. I was wondering, we get a lot of questions about the 25% gross margin. How much of battery cost reductions are built into it? Do you mean that target if any? And then how do you view any cost reductions on the battery side as upside to the gross margin? Thanks. Sure. So the just to separate out the battery, there's the cell cost and then the battery balance of system cost. And so we're really not building any significant reduction in cell cost into getting to the $0.25 gross margin. There are a bunch of reductions associated with the pack cost, but we have really good insight into those and a clear path to get those done in a fairly short period of time. So not really worried about the battery pack cost at all. In fact, I think just overall we've got a really good handle on getting to 25%. I have very high confidence of getting there. Financial point out, our goal is to exceed 25%, not to stop at that point. Okay. Thanks, Ben. Thank you. I would now like to turn the conference back over to Jeff Edinson for closing remarks. Thanks, Shannon. And thank you everyone for joining us this morning. We look forward to seeing you in the coming weeks either on a factory tour, tomorrow in Chicago at RW Baird's Industrial Conference or at other events through the remainder of the year. Goodbye, everyone. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.