Good day, ladies and gentlemen. Welcome to the Tesla Motors Third Quarter 2012 Financial Results Q&A Conference Call. At this time, all participants on a listen-only mode. Later, we will commence the question and answer session and instructions will follow at that time. If you require any assistance during the call, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jeff Evanson. Sir, you may begin.
Thank you, Shannon. Good morning, everyone. Welcome to Tesla Motors' Third 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 third quarter at 3:30 A.M. Pacific Time today. The shareholder letter, financial results, and webcast of this Q&A session are all available at the company's investor relations website at ir.teslamotors.com. Today's call is for your questions, we would like to keep the call to 45 minutes today, ask that you be succinct in your questions. We will conduct the Q&A session live, please press star one now if you'd like to ask a question. 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. 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? I'm just curious, has any model really come pure off the line at all, without much rework? Thanks.
Sure. We do get some cars that don't require meaningful rework. Generally, we're trying to maintain an extremely high standard of quality. If we see something that's even a minor aesthetic issue, we want to correct that. It's true that right now, most vehicles require some work to correct minor issues. A lot of these 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. Yeah, I feel really good about where we are with respect to manufacturing the vehicles.
Okay, thanks, Elon. 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? Is the list of new problems growing? Meaning, are there any additional new problems that you're finding, or are all the issues that you know in terms of either quality or supply, known and that's a shrinking list now? Thanks.
Yeah. Our biggest issue has been getting all of the parts of the vehicle on time from suppliers and 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 an annualized production rate of 20,000 vehicles a year, basically within the next four or five weeks. It's looking good. That's not to say something couldn't crop up, it's looking quite good. A rapid decline in just the number of issues that need to be corrected as vehicles come off the line. It's getting better very quickly. Right now, I feel very optimistic about where things are. I'm not aware of any issues in front of us getting to the 20,000 units a year annualized production volume.
Okay. Thanks, Elon. Deepak, just a couple of very quick ones for you. Signature reservations over 13,200 by year-end. When we look at the reservation balance on the balance sheet, should we assume that that's going to be lower? If it is lower, can you give any kind of lower bound of that? Meaning, can it still be over $100 million end of year?
Yeah, I think it definitely will be over $100 million. You're right, to the extent that Signature reservations come off, we have collected a much higher deposit on them compared to general production reservations. There would be some adjustment in our reservations balance to account for that.
Okay. On R&D, you gave the flat Q4 guidance at around $60 million. That is quite a bit higher than I think many people on the call would have expected. If you're able to explain why is it running higher, and is $60 million 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&D headcount now is steeper at this point, and we are focused on future product development, a bunch of actions to continue to improve our products. I think that's a fairly reasonable rate going forward. Thank you.
Thank you.
Thanks, Adam.
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. Thanks. I guess I just wanted to follow one clarification and then a separate question just on Adam's question. 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. Right now we're able to build cars at the 10,000 unit a year rate with the parts we need. Like I said, as of today, I don't know of any parts that would prevent us from getting to the 20,000 unit a year level in four or five weeks. It looks like it's, I wouldn't say plain sailing, but it looks like it's solid sailing in that direction.
Something always could come up, I'm not aware of any obstacles to that, just to getting there right now. Touch wood, it's looking quite good. Great. I should say, 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 phrase of going through the Valley of Death, I feel as though we are through that valley at this point. Great. Thank you. Then maybe one for Deepak. Just 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&D point, transitioned to the X, but then there's also, I assume, some early engineering done for the Model 3.
How should we think about sort of the lumpiness of your R&D and capital spending patterns as we kind of look out to the next 18 months or so?
I think what I would prefer to do then is that in the next earnings call, provide a far more sense of the trends we would have on our R&D expenses for 2013. I think broadly speaking, the factors that affect R&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. It's our continued improvements in manufacturing and design that we will be focused on.
There will be some degree of lumpiness, but nothing that'll be as significant as we saw in 2012 because all the manufacturing expenses are no longer in R&D, it will continue to stay that way.
Just to clarify what may have been interpreted by Deepak's statements is the left-hand drive European version has very little work left to do to it. In fact, we have two EU-approved vehicles in the EU right now doing the initial marketing. We just started marketing in the EU. The real incremental R&D is with respect to, as Deepak mentioned, the right-hand drive version of the EU version, which also would apply to Japan and Hong Kong and a few other places. There are a few other variants of the Model S that we'll come out with next year that I think are going to be pretty exciting.
In addition to, of course, really getting into the Model X and starting the initial design work of the third-generation mass-market vehicle. Very helpful. Thank you very much.
Thank you. Our next question is from Amir Rozwadowski of Barclays. You may begin.
Thank you very much, good morning, folks.
Morning. Thanks.
Touching on sort of the new reservation activity, you mentioned sort of new reservations in the quarter were roughly around 2,900 with net reservations around 1,700 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? Perhaps also, do you expect to transition to much more of a sort of Real-time order/delivery type model versus what we've seen, obviously, in the early stages of the launch of the vehicle with a reservation-type model.
Sure. I can answer that maybe at a board level and then send it to George to add some more details. I think that the way things are going with Tesla, it'll 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 the waitlist is effectively several months right now, and I would expect there'd be, at least for a few quarters, continued new high water marks 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 2014 before that's even possible.
That's something to encourage people, if they're interested in a 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 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 people every day. We've seen 1.8 million people through our stores year to date. The last quarter was a significant increase over previous quarters because of more stores being open, and we've got five more opening by December 1st of this year, all in high-traffic, high-visibility locations. As we open up new stores, more and more people are coming in and saying, "Who's Tesla?
Right.
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 where we're getting a lot of traffic. 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 22nd start. Now we've gotten more recently with Automobile Magazine, Yahoo Autos. That's been real positive.
There's one other element 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 one of these." Our customer base that have actually received their cars are actually selling cars for us, making reservations for us. We've got that really big effect going on right now, which is really positive. 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. I don't see that on the horizon at all at this point.
I guess I was just going to-
Sorry. 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. Really, it's spreading quite virally by word of mouth. It's worth noting that Tesla still does not spend any money on advertising.
Well, Elon, 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, do you expect 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.
Sorry, George, go ahead.
Yeah. 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 expected. We're going through the reservations that were made in 2009, 2010. Lots of changes have happened at different points in time. 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 two and a half to three years, then down to literally a couple of months. The time will just be minimal. Okay? The time will be minimal, and therefore, there won't be a reason to be canceling. We see this becoming a non-issue in North America as we get into the beginning of next year. The refund count will go down a lot.
Great. Lastly, if I may, we were looking at your guidance for 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? Should we expect this to be, now that it seems like those are behind you, is this a fairly achievable target from your perspective?
Just to clarify there, Amir, our guidance hasn't changed. The 2,500-3,000 deliveries is for Q4, while the 2,750-3,250 was the full year guidance, and that includes Q3 deliveries.
Got it. Thank you very much for the clarification, Deepak.
Thanks, Amir.
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 Satghare of Lazard. You may begin.
Great. Thank you. Wanted to better understand your prepared remarks about the gross margin target by the end of the year. 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 your gross margin stand today?
That's an interesting hypothetical. Well, I guess, I would say, assuming that we're at the 20,000 unit per year production rate, which we're not quite at because gross margin's going to be affected by the ramp. Assuming that if we fast-forward five 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 have put on hold, 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. My follow-up question was on delivery mix for 4Q. Could you give us some more color as to how is the mix shaping out versus your prior expectations going into the last quarter?
It's right on track. Yeah, exactly what we expected.
All right. Thank you.
All right.
Thank you. Our next question is from Aaron Chew 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 gross or net basis were trending in October? 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. 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, there's only so much you guys can say. Maybe some general thoughts on timing, what the damages are being sought, and what implications you guys think it may be to your store strategy if they were to win. Thanks a bunch.
Sure. We always have to be a little bit cautious about commenting on ongoing lawsuits and out of respect to the judicial process. We feel really quite optimistic with respect to our legal position. We really feel strongly that we're in the right and it's worth noting that at least thus far, no injunctions have been issued. 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. Other than that, actually, 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 Capstone 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 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? Your expectations there. I have a follow-up.
Right now we're still working our way through the Signature series, which is quite a heavily optioned version of the car. We've been surprised by the level of interest in 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 or for components that are specific to the performance version of the car. We were just surprised by how many people were interested in that. Looking ahead, our option mix still looks like it's quite rich, actually. It's really looking, I'd say maybe a little better than anticipated. 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. I don't know if George or Deepak, if you want to add to that?
Yeah, 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 it was a Signature car. As we moved into general production reservations, very happy with performance and some of the other options that we weren't sure how well they'd be received, and they've been received very well. We're slightly ahead of where we thought we would be with options.
Okay. Thank you for that. Go ahead.
We've had a lot of customers really ask for more options. We will 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. Just my quick follow-up is, I think you had talked, just a few weeks ago, about potentially reaching cash flow breakeven 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 expediting costs, supplier issues, about 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. I think we actually expect that to occur as we previously expected it. Things can shift around by a week or two, but not really much more than that, and I think actually it'll be as expected.
Okay. All right. Elon-
Just to reinforce that point, Carter, that there is no change in that sense.
Okay
pretty consistent with what you see.
Yeah.
Thanks. I appreciate it.
Sure.
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 the shift in timing, can you just talk about maybe what were the drivers of that shift?
Sorry, Deepak, go ahead.
Yeah, it was really not something significant. We were sorting out some of the technical specifications for 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.
Yeah. 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 with respect to the Daimler contract. Operationally, it's proceeding as expected, but we're just being more on the conservative side here with rev rec 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.
Yeah. Just to emphasize, our actual revenue would be higher if we'd been less conservative in the recognition of that revenue.
Okay, great. That's helpful. 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 million once production began on the Model S. Am 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.
Thanks, John.
Our next question is from Elaine Kwei of Jefferies. You may begin.
Hi, everyone. Congrats on the great progress in the quarter. 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 to the 60 kilowatt and the 40 kilowatt and possibly even the future mainstream mass market Model 3 vehicles, or what's the thought there?
Sure. Well, it actually applies to the 85 kilowatt version automatically. That's just included. Then for a couple thousand dollars, 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. It tends to be more of a car that you'd want to use for travel just within a greater metropolitan area. We do expect to have the Supercharger network be used certainly by the Model X and by our third-generation vehicle, but we're thinking that you want to have a nominal range at least on the order of 200 miles of range at 55 miles an hour for the Supercharger network. That's the basic vision.
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 long-distance trips.
Okay, great. Great. Just one follow-up. Will there still be any deliveries of new Roadsters in 4Q, or is that done now? Had you always planned to also sell the pre-owned Roadsters, or was that a more recent development? Do you see yourselves also dominating that resale market for any future Model S or X or other vehicles?
Yeah, there will be a few more Roadsters. These are just ones in terms of new Roadsters in Europe and Asia. There's not very many left, so it's not going to be a huge number, just because there aren't very many left to sell. In terms of used Roadsters, yeah, we do expect to do decent business in used Roadsters that we resell to people who are interested, and then doing the same with Model S and X. I think 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 we control the value of that secondary part of the market, because we think that's very important. Yeah, we actually have a staff that's dedicated to specifically managing used Roadsters now in North America, based out of California. We think it's an important part of a business opportunity for us going forward.
Great. Thank you so much, George and Elon.
All right.
Thank you. Our next question is from Ben Schuman 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? If so, can you give some color on what the overall gross margin could be in Q4?
Yeah. Deepak, do you want to go?
Yeah. We want to be sure we are beating our numbers here, so I want to be careful. It should be relatively close. I think we want to just help give the sense that we are on the right track. As Elon said, looking beyond, we are on track to get to 25%.
Okay, great. Have you hired all the employees you need in terms of manufacturing to get to the 20,000 unit run rate? How long is it typically taking you guys to get new factory employees ramped up?
Yeah. We've hired almost all the people that we need for the 20,000 unit a year ramp. Typically, to get people on board and trained is around a two- to three-week process. Yeah, I think really everything's in place to get to that ramp rate in four or five 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 the 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 million annualized right now. If we use $25,000 gross margin per unit, you would need to do about 14,000 units per year to break even on that. Just wondering if you can give me any additional color on what's involved in that, or what I'm missing in that calculation. If you could talk about your cash break-even point going forward, as ASPs likely will come down at some point. Gross margin 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. 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, that includes some working balance sheet changes in there.
Correct.
Okay. That's helpful. 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 what's the ability of people in Europe to make reservations currently, and how many have?
Sure. We've made huge progress on homologation. As you reported, that we designed the Model S from the beginning to meet the European and American specs, in fact, the specs in Japan and Asia as much as possible to the degree that those specs weren't mutually exclusive. In fact, we have two Model S's with German plates currently driving around that we completed as part of our European media launch European spec and homologation ready for production. We could start production of those units sooner than the March, April timeframe next year. There's not really a need to do that since we can fully absorb our production with North American demand.
Rather than increase the complication of managing how much cars in Europe and in 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, then Asia shortly thereafter.
Are people able to make reservations in Europe now?
Oh, yeah. Absolutely.
Okay, great.
Yeah, George can add some more insight there. Clearly, we've seen an uptick with our recent activity since we've just begun the launch of Model S marketing activities in Europe. Overall, we have probably around 15%-20% of our reservations in Europe.
Okay, thanks for that, color. I appreciate it.
Thank you. Our next question is from Andrea James of Dougherty & 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 lock in, I think I calculate that the cancellation rate for lock-ins is about one in 10. Is that about right, and how does that compare to what you were expecting?
Yeah, I think our cancellation rates for people that we reach out to confirm a booking is in the 10%-15% range. It depends on how old some of these were. Yeah, 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. if I look-
Sorry, maybe a slight nuance in there. Actually, you said the phrase cancellations for people that have locked in. The cancellation for 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. That's where the 10%-15% cancellation occurs.
Okay.
I don't know if that nuance is important. Yeah.
That makes sense. I look at your September 25th communication on growth reservations. I look at what you're saying today. It looks like you've booked about 300 new reservations in the last five days of Q3. Does that sound about right? 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. It's in the ballpark, there's a bit of rounding.
Got it. Thank you so much.
Thank you. Our next question is from Michael Lew of Needham. You may begin.
Good morning. With regard to the Superchargers, has it yet been a factor, or 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?
Yeah, I think so. Yeah, 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's better, higher top speed. The warranty is a little bit better. I think the ability to travel long distance with the Superchargers and the fact that you'll be able to travel for free anywhere in America long distance, I think is pretty appealing. 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 five of my kids in the Model S with luggage in the front trunk, so fully loaded, all the way from L.A. to San Francisco. It was really a great road trip and with no hitches.
When we'd stop for a meal or go to the restroom, by the time we came back, the car was ready to go. I think it's really exceeded my expectations, actually, for what I was hoping it would be and how well it would function. I'm really excited about it, and I think as people use it's really going to open their eyes as to what an electric car can be like. Just not having to go to a gas station, be immersed in fumes, and pay how much money for gas, just be able to have this free long distance powered by sunlight, I think it's quite a revelation, I think.
Okay.
Yeah.
Have they also drove incremental demand or increase from OEMs, like for powertrain agreements, just given its high rate or fast charging capabilities?
With our partners with Mercedes-Benz and Toyota, they've thus far been more interested in shorter-range vehicles rather than tackling the long-range problem. While certainly, it's something we'd be happy to give access to. After you give them access to it, but I think it needs just a bit of a larger battery pack than they're currently speccing for the cars that they're getting, the RAV4 and the B-Class Mercedes-Benz.
Yeah. I guess I meant were there new inquiries since the unveiling of the Superchargers from OEMs for new platforms in the future? Let's put it this way, 10 minutes is a lot faster than eight hours.
Yeah. True. It's surprisingly that there haven't been a lot of inquiries on that front. Maybe it's just taking time to sink in. I think what's currently in the mainframe that it's going to tend to be more of a greater metropolitan area travel vehicle in the case of the RAV4 and the B-Class Mercedes-Benz. I think perhaps once they see how customers are adopting it and using the Supercharge network, their interest will peak. Like I said, I really don't think people realize just 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. One last question. How big a role it's played in driving reservations. Could you give us a sense or gauge of what % or what number of net adds in 3Q were by word of mouth?
Well.
If there's a figure out there, I don't know if you've tracked it that way.
It's essentially almost all are word of mouth or media, because really, there's no advertising that we do.
I guess I meant versus store walk-ins or someone walk into a 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 are multiple customer references. Some, they went to dinner the night before with somebody who's received a car, and 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. We don't have it down to a specific percentage or number. It's just when you look at the overall picture, you can see that where we have the most cars delivered, reservations are escalating significantly.
On that note, I guess it would also apply towards cancellation rates. It's fair to say in the areas where there are fewer vehicles on the road, you probably experience 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. I couldn't really quantify anything like that for you.
Yeah. That's probably true anecdotally. Just given that the word of mouth of the car is incredibly good. Yeah. I've not encountered anyone who's said they've tried the car and then didn't like it. It tends to be the very opposite.
All right. Thanks.
Okay. Thank you.
Mike going. 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 you meeting that target, if any? How do you view any cost reductions on the battery side as upside to the gross margin? Thanks.
Sure. Just to separate out the battery, there's the cell cost and then the battery balancer system cost. We're really not building any significant reduction in cell cost into getting to the 25% gross margin. There are a bunch of reductions associated with the pack cost, we have really good insight into those and a clear path to get those done in a fairly short period of time. 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. I should 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 Evanson for closing remarks.
Thanks, Shannon. 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 and have a wonderful day.