Earnings Call: Q2 2012

Jul 25, 2012

Good day, ladies and gentlemen, and welcome to the Tesla Motors Incorporated Second Quarter Financial Results Question and Answer 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 be given at that time. As a reminder, this conference is being recorded. I would now like to turn the call over to Jeff Evenson, Head of Investor Relations. Sir, you may begin. Thank you, Jamie, and good afternoon, everyone. Welcome to the Tesla Motors Q2 2012 Financial Results Q and A Conference Call. I'm joined today by Elon Musk, Tesla's Chairman, CEO and Chief Product Architect and Deepak Ahuja, Tesla's Chief Financial Officer. We announced our financial results for the Q2 shortly after 1 P. M. Pacific Time today. The shareholder letter, financial results and webcast of this Q and A are all available at the company's Investor Relations website at ir.teslamotors.com. Today's call is for your questions. We will conduct the Q and A session live. 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 filed 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. Now Jamie, could we please have our first question? Our first question comes from Jesse Pytl from Jefferies. Jesse, are you there? Jesse? Jesse, your line is open. Please check your mute button. All right, Jamie. We'll come back to Jesse. Why don't we take the next question, please? The next question comes from John Lovallo from Merrill Lynch. Hey, guys. Thanks for taking the call. A few questions for you here. Starting with developmental services revenue, was that $5,000,000 in the quarter all Daimler revenue? Hi, this is Deepa Archon. Yes, it is all Daimler revenue. You're right about that. And would you say that that $5,000,000 maybe call it $5,000,000 maybe a little bit higher $1,000,000 would be a good run rate over the next 6 quarters? It's going to vary by quarter because our overall program with Daimler is based on delivery of certain milestones and there are different revenues associated with it. We have indicated that it's going to be in total close to $30,000,000 and it will be spread over the next 6 quarters shortly. Okay, great. In terms of Model S deliveries in the quarter, did you guys disclose how many were actually delivered? Yes. We delivered in the quarter 10 Model S's. We produced a few more and our focus was primarily in providing those for our marketing activities so that we could have more Ride and Drive events, the Get Am Tour that we kicked off. So we really wanted to make sure we had a lot going on for our test rides. Yes. And actually if I can probably preempt a question that if you weren't going to ask it, somebody probably would. We've made a total of 40 production vehicles so far. Okay. And the production is ramping quite well actually. So we're it's stepping up. It's only a pass to people on totally aware of is like in terms of how the production steps up. It actually steps up in a sort of geometric or exponential fashion. It's not linear. So we'll see quite a dramatic increase in the production rate in the coming months. That's helpful. Thank you. If I could just sneak a couple of quick ones in here. In terms of the powertrain units for Toyota, how many units were actually produced this quarter? Yes. We produced roughly 100 units in this quarter, and it's a combination of battery packs and 5 units, but it wasn't that ballpark. It's again the start of the ramp in terms of our production as we've indicated and we'll continue to see some growth there. Great. And last question if I may. How many Roadster vehicles actually remain to be sold throughout the remainder of the year? So we have about 140 130 to 140 vehicles left to sell, and we expect to have those sold out by end of the year. Great. Thanks very much guys. Thanks, John. Thanks. The next question comes from Dan Galves from Deutsche Bank. Good afternoon, guys. Thanks for taking my questions. Hi, Dan. I just wondered how are you? So I wanted to in terms of the ramp and congratulations on launching the vehicle on time and the great reviews it's been getting. Wondering if you could talk about what are the key challenges that you've seen or what are the key challenges to come in terms of making this exponential jump in production rate at some point in the quarter, whether it's making last minute tweaks in the vehicle or supplier issues or the process at Fremont, if you could just kind of take us through what the challenges are ahead in that? Sure, absolutely. Well, I mean, first of all, it's worth noting that it is actually normal the auto industry for there to be an exponential growth in production. So this is not unusual. Ours is maybe going over a slightly longer period of time than is normally the case for gasoline cars because in our case we've got probably something like 97% or 98% of the components of the Model S are new. They're not in any other vehicle. And you can only make cars as fast as your slowest component. And we want to make very sure that every car that comes off the line is as close to perfect as possible. In fact, I'm personally inspecting the cars whenever I can. I think it makes sense to take that approach and ensure that when customers receive car, it is as close to flawless as possible and only grow the production ramp to the degree we're able to maintain an exceptional quality standard rather than to sort of rush into things and then have a great deal of customer happiness. And when we looked at our cash flow forecasts, whether we did whether we did a bunch more deliveries in the 3rd quarter or if basically you move sort of several hundred deliveries from 3rd to 4th quarter one way or the other, it doesn't change our cash flow point. And we really need to be optimizing for our cash flow point from a cash flow standpoint. And then on the other side, making sure that our customers are ecstatic when they get their cars. And so I actually changed the production ramp to slow it down at the beginning and then ramp it up faster towards the end. And I think it's the right decision. Time will tell, but I think that's I think it's a sensible decision. It's only what I would wish that somebody did if I was a shareholder in the company and I am. Okay. That makes sense. And just to follow-up on your comments on the cash flow. It looks like liquidity went down by 120,000,000 dollars or approximately in the quarter. You have $265,000,000 of liquidity available. It seems like the cash flow point, I guess I don't understand what you're talking what you mean by the cash flow point doesn't change. It would seem like the longer it takes until you get to the higher production rate, the lower your cash balances would go. So if there's any way to kind of gauge whether the cash burn will slow in the Q3 and if you have a targeted year end level you could provide to us that would be helpful. Dan, I think if this is a managed slowdown, then you can manage cash and that's what we have done. We've deliberately upfront planned to do 500 units. The worst thing you can do is plan for 1,000 and then deliver 500, that's when you have the excess cash burn, right? So this is a planned approach, which helps us manage our cash. And as we've indicated in the shareholder letter that our expectation based on our plans is that we will achieve pretty close to free cash flow breakeven in Q4. And in Q3, we will see burn, I would say, roughly along the same lines as Q2, maybe slightly higher. But considering all of that and given our cash resources, we feel pretty comfortable that we have sufficient liquidity to get to profitability next year. Yes. And if you move several 100 cars for one quarter to the next, I was saying, it just it actually does not change our cash flow point. That's actually driven more by working capital requirements at the end of the year when you're producing thousands of cars or almost a couple of 1000 cars a month. So it just it seems like why optimize for why try to push product on customers that maybe not as it's not as perfect as possible if it doesn't actually yield anything tangible. Got you. Got you. I guess one more on the subject. It seems like different than most automakers, you I think recognize revenue when the vehicle is delivered to the customer, not when it's shipped off the factory to a dealer. So I guess what I'm getting at is you'd probably if you're going to deliver 500 in the Q3, you're probably going to produce quite a bit more than that. I guess, is that true? And then where do you expect inventory to be once you get to close to your targeted run rate of 5,000 a quarter? Well, I think it's probable that we will produce more than 5 100, but it's always a little tricky to essentially, if you imagine like the production ramp is this like is this quite sharp S curve and you sort of as you pick a point an arbitrary point on that S curve on the steep portion of S curve, you can actually see quite significant movement of units. It's hard to predict exactly where things will be on that steep portion of the S curve. But I'm not sure it's relevant because you get to the flat portion, the high portion of the S curve, that point is much more predictable. And that's sort of a point we feel really confident about getting to in 4th quarter. And I think it's the more relevant thing. Like if you were to present value the cash flows and move this stuff around, it actually doesn't change the effective mod cap of the company if one is doing the analysis correctly. So I think it's probable we'll do that, but it's not certain. But even if one way or the other, it's not going to make much of a difference. Okay. I appreciate it. I'll take a quick one, Elan. And Dan, to your specific question, although we recognize revenue when the customer gets the car, the gap is not much. At least in the beginning, a lot of our customers are in California. Deliveries happen immediately. And even if it is long distance, it's just a matter of couple more days or 3 days. So it's not that dramatically different. Okay, great. Thanks for all the helpful color on that. Appreciate it. Absolutely. And one thing I wanted to reemphasize, if people recall what are the things that I've been really emphatic about and those things are that in 2013 we'll produce at least 20,000 units and that we will our gross margin will exceed 25%. And then I also said that we'd start deliveries at no later than July. And those are the three things that I said we were that I was highly confident we would do. There are other things that are sort of nice to have and you'd like to do and maybe this will happen, but those are the important ones. And it's worth noting that we start deliveries in June, so we're really ahead of July. And I think we're going to exceed 20,000 units next year and exceed 25% gross margin. And those are the things that I think you should really hold me in tempo too. And that's the flat portion of it. That's the thing that really matters. Yes, absolutely. Yes. Great. Thanks a lot. All right. The next question comes from Ben Shuman from Pacific Crest Securities. Hi. Thanks guys. Elon, you talked about changing the ramp a little bit. Can you specifically address what is driving that in terms of the quality control factors that you're focusing on with that revised timeline? I mean, I can talk a little bit about it, although it's easy to get lost in the weeds because it's not as though there's any one big thing. It's a bunch of it's like a couple of 100 little knick knack y things. Like for one example is the supplier who was doing the chrome plating of the door handle. We just couldn't meet our quality standards. So, there were little tiny pits in the plating that was not acceptable for us. So, we had to switch that to a different plating supplier. There's Banana leaf. Oh, right. I think things like the Banana leaf interior trim, when I've shown a sample of that, it looked good. But when I saw it in the car, it did not look good. So I can't I'd rather we're not going to deliver an option that doesn't look good. And unfortunately, that was not clear until we saw it in a car, which was late in the game. So there's some sort of things like that we have to do last minute maneuvering. The decisions are made absolutely with respect to ensuring that the product is the best possible product. That's what we're aiming at. Great companies just built around great products or services. And so we have to be super focused on ensuring that we have a product that is not slightly better, but substantially better. And I think we have that actually. If you look at the reviews, that's the response we're getting. Okay, great. And can you address how cancellations are trending now that more and more of those finalize your order e mails are going out? Yes. I think overall, Ben, we are finding that cancellations as a percentage of our reservations have been holding fairly steady the last few months. So clearly customers have to make that decision, but we're not seeing anything which raises any red flags in our minds. Yes. Quite frankly, the thing that I get bugged about is not cancellations. The people who want their car sooner and who want a day does not go by when I don't get several requests from quite senior people or celebrities or whatever saying there's some way they could move up on the list. It's not the cancellations that are a concern. We do not have a demand problem. I mean this is hopefully people can see that this is we obviously do not have a demand problem. One of the biggest reasons people don't put down a reservation payment for a Model S is because you have to wait a year, almost, what, 10, 11 months. And if you need a car, you need a car. So, we actually need to focus RNGs heavily on the production ramp and maintaining quality and achieving gross margin. Those are really our issues. It's not demand generation. George is doing such an awesome job. I don't even have to worry about that. Okay, great. And just one more. I mean, we've seen some concept cars from other manufacturers, high performance EVs, things like that, but nothing really close to production that compares to the Model S in terms of performance characteristics, things like that. And who do you think from a competitive standpoint is closest to Tesla, especially on the powertrain side of things? And how far behind are they? Well, I mean the next best powertrains are the ones that we provide to our partners. Then after that, well, you fall a long way. Then you're at the LEAF, I suppose, I mean, which obviously has some range issues and this kind of this is not sort of a fun car to drive. So I mean, I'd say that it sounds like I mean, I actually really think that Nissan should double down on their electric vehicle investment just need to improve the product. It's not where it needs to be. But mean the way to think of the model is really not from the standpoint of like how to compare to other electric cars. That's not how that's not really how white white people are buying a car. They're buying a car because they're looking at, the sense saying, oh, it's the best car. When you look at the characteristics of the vehicle, whether it's aesthetics, safety, handling, performance, the user interface and the functionality and technology in the car, put and finished. Well, all the same dimension is against which you would evaluate the car's product, including taking all those characteristics and integrating them into Gestalt and saying this is as an integrated system work because sometimes you have a mixture of ingredients that don't come together into a good product. So really it's people are buying a car because they think it's better than buying any other car in that price range. They're selecting against cars in that price range, not electric cars. Great. Thanks. The next question comes from Adam Jonas from Morgan Stanley. Hey, guys. I'm going to go back to the point about the Model S, S curve ramp from 3Q to 4Q. So you're at 10 cars a week now. I guess you'll be averaging just over 40 a week in 3Q and then to ramp to an average of 375 a week in 4Q to kind of make the 5,000 full year number. So I totally take on board your point about the shape of the S curve and it's more of like a switch than a ramp if I'm not mistaken. But in order to kind of make sense of this, I think that vertical portion of the S curve would have to happen pretty not only pretty quickly, but really very early in the 4th quarter. So I also would be implying an exit rate that would be way, way over 3.75 a week, which would be you'd be implying I guess and maybe this is what you're implying that you'd be doing way over a full year clip of 20,000 a year. So is there any other way you can kind of give us an idea and if you can't I understand it, but what your exit rate might be in the Q3 or your entry rate in the 4th, am I right to be thinking that that in order to do your 5,000 that switch, that geometric switch has to be pretty damn early in 4Q? Yes. Well, I think you're essentially right about counts. We will be at a higher production rate than 20,000 a year at the end of the year. Okay. And yes. Would that then level off though? Is that kind of to fill is that something that would be then sustained in like a horizontal portion of that curve? Well, it depends on how demand is looking. Okay. If demand is looking good, why level off? I agree 100%. So that's part of the implication is that it makes the 20,000 next year really like that at least really you're emphasizing now with what you're implying? Yes. When I say at least, I mean it will be higher. Yes. You don't mean 20000 and 1. Okay. Understood. All right. And then my last question is, given the enormous interest in the Model S and also the very strong interest in the Model X and the chance that what looks like the opportunity to launch the Gen 3 at least according to I think some comments Franz made maybe as early as 20 15 earlier than many expected, this might accelerate some of your capital needs to give these products their full resources. So you throw in some uncertain economic conditions and can you see the rationale for potentially raising a bit more equity capital as sort of an insurance policy to make sure all this hard work and great work and momentum isn't unnecessarily put at too much risk due to events outside of the company's control? Yes. Actually, I think that there is arguably some merit to raising incremental funding just to protect against the unforeseen event. I do want to emphasize that our cash flow projections required no funding raised at all. So if we do not raise any funding, we can reach cash flow positive with decent margin. There's that's not to say that there isn't some merit in raising a little bit of funding maybe just to add to increase the cushion. So that's something that we're debating internally and it's something we may do. But I do want to emphasize, it's not something we have to do. Right. So it's more risk. It's a cushion. It would be for risk management and more opportunistic to kind of create to kind of fuel even greater growth opportunity. Is that how you'd pitch it? Yes, yes, exactly. In order for us to let's say in order for us to not raise any funding, we would probably spend at a suboptimal rate on future programs. Right. And so arguably you'd want to spend at the optimal rate And yes. And would you say that it would be more the early feedback and opportunity on the Model X that would potentially drive that opportunity or is it the timing and opportunity on the Gen 3 or is it a bit of both or all of the above? Well, I think if we were to raise a small amount of money, I emphasize that we're the only 2 things we're considering are raising 0 money or a small amount. Right. It's not nothing I mean, but that's not some third option. Then if we were to raise a small amount of money, then it would be probably half foot for cushion value and then half foot for future projects, which would be the Model X and the Gen 3. Okay. All right. Thanks. We're going to come up with a better name than Gen 3 by the way. I'm sure you will. Get George on the case. Thanks very much. Thanks, Joe. Welcome. The next question comes from Carter Driscoll from KapStone Investments. Good afternoon, gentlemen. I was just kind of following up on the previous questions. Do you imagine you will disclose the ramp maybe say throughout the Q3 so we can get comfortable that you're going to be at that 3.75 pace above in the 4th quarter? Or how do you expect to communicate with The Street that you're progressing along the lines that you're hoping for? I think we continue to have investor visits here. And clearly, as deliveries progress, you will get a sense of it. Right. There will be cars on the road. Yes. That's a huge clue. Right. So we'll definitely make sure over time we are communicating how things are progressing. Okay. Right. I mean I think actually people could track it by just figuring out like what's your number has cars just been delivered and there you go. Fair enough. Can you talk about your fast charging initiative and any developments there? Well, we're just finishing up some construction activity on that. We're it's looking like probably a September event, but that's contingent on finishing some construction and getting all the permits and whatnot for the superchargers. But I'm really excited about that announcement. I think it's way cooler than anyone realizes. It's going to I think it's going to have a profound effect on people's on how the public sees electric vehicles. Okay. Could you talk There's going to be a few surprises there. There's almost no one knows the full story, but there'll be some cool things there. Okay. Good enough. We'll wait for that announcement. Can you talk to us about the warranty? There's been a lot of discussion myself. I've had discussions with some of your salespeople and I don't think people fully understand the warranty side for the battery versus the vehicle itself. Could you just remind everyone what the battery and the vehicle warranty contains right now? Sure. So for the battery warranty, we essentially merged language that Nissan was using. So and I think there's I think maybe the Volt is also using similar language, so which is that the battery is warranted for 8 years and any amount of miles you can really put out actually, I think it would be depending upon which version, it's unlimited for the 300 mile range version. You just won't be able to I mean unless you torture yourself, you won't be able to put enough miles on that to matter. And I think it's like 100,000, 150,000, maybe I believe. So for the 160 mile version, you really have to be doing a lot of traveling within the city to do 100,000 miles in 8 years. In terms of where the PAC energy level will be at that point, it's going to vary depending upon what sort of environment the PAC is experiencing, what sort of driver the person's been. In much the same way that an engine after 8 years is going to depend on whether someone was driving it hard or not and what sort of environment it's full. It will still be a very usable pack. And we're expecting the packs to actually have a useful app that's somewhere around double the warranty level. But I mean, people probably want to replace it sooner than that, but it's these really last for a long time. And even our 1st generation pack in the road we've got one customer in Europe who just passed the 200,000 kilometer mark and he's not someone who drives the car slowly. He's in fact he passed the 200,000 kilometer mark in a race. Sorry to interrupt. That kind of leads to my next question is the relationship you have with Wells. And because of what you just stated, you believe the battery pack is going to last twice what is currently warrantied for. I'm assuming that the residual value, the price point given that just aren't a whole lot of comparable vehicles to be able to set what the residual value is going to be and therefore the leasing terms, but you feel comfortable that's not a sticking point if you suddenly saw people wanting to lease the vehicle even though you don't expect that to be the case for probably 12 to 18 months at a minimum? Right. I mean, exactly. So we don't need to lease a single car until maybe the second half of next year, the soonest. We could also be all these sales. But we have had many discussions about residual value. The thing that supports residual value is just to make sure that the depreciation of the factory pack isn't it essentially matches that of the rest of the car. And if you put a gasoline car, sort of a gasoline car after 10 years, it's on the order of 10% to 15% of its original value. So it's depreciated almost down to nothing. Do you expect that to be comparable or do you expect the residual value to be higher? I actually think it will be higher. Okay. Yes. Because the other thing is once you put a new pack into the car, it will actually be better than new from a range standpoint. Okay. You can continue to recognize the savings versus fueling your car with gas over the next 10 years or whatever. So you get a huge benefit of that. Gasoline is probably not getting cheaper in the long run. I mean it is I mean the price of gasoline is an upward sloping sign rate. I agree with that. Have you guys actually booked any warranty expense in anticipation of having to replace any of the batteries? Yes, yes. With each car, this will be warranted. We're booking a warranty reserve for each of the cars, and that's related to the entire vehicle, not just to the battery. And just to clarify your other point with Wells Fargo, we're not offering lease financing, it's traditional retail financing. So residual values or leasing is not really an issue in our present offering with Wells Fargo. With Athlon, it is. Athlon is offering their own lease program in Europe, that's correct, for corporate clients. Yes. So we did sign our first lease more or less leasing deal in Europe. That's right. My last question before I pass on is just have you seen the mix of reservations change as 2012 has unfolded? I mean, are you still seeing a similar rate of the Signature Series versus the other range models? Or has that stayed fairly consistent? Can you talk about your expectations maybe about how that may change over time as well? Yes, absolutely. I think it's important to note that the Signature Series has been sold out for months, for several months now. And not only that the Signature Series is sold out, we have a long waiting list for people to get on the Signature Series and arguments about what place they are on the wait list. We're still done in EU too. And we're still done in EU on Signature Series as well. Right. So basically, all the reservations that we're getting now are for general production. And our customers, when they make a reservation, are basically just getting into queue for a car. They're not locking in which battery pack size they're getting. So that we will find out over time when they start to lock in this specific order. It is turning to be on the higher end than we expected, I think. But that could change. It's hard to say as you see as you get more general production where the people are going to go to sort of cost of fewer options. But certainly the trend has been that they're picking more options than we expected, yes. No, no. I was just trying to get at, given you have a fairly significant amount of your cash and reservation payments, just trying to understand how that mix has potentially shifted over time. All right. I appreciate your time. I'll pass along. Thank you. All right. Thanks. The next question comes from Amir Ryszwodelski from Barclays. Thank you very much and good afternoon folks. Hi, Amir. Hi. So just touching on the production ramp a bit more, Elon, Just want to clarify. So in the past, you had said really that 20,000 sort of production line is really focused on sort of 1 shift operating at one point in time. I mean what type of flexibility do you have to either add additional personnel over time or anything along those lines in order to meet your production targets? Yes. It's almost entirely on one shift. There are a few areas where we had some capital intensive equipment where it's on 2 shifts. But that's easily addressed to expand volume. I think in principle, we could I think, comfortably go have a production rate a rich production rate next year that's 50% greater than 20,000. I'm always hesitant to predict when in the year we'd be sort of comfortable maintaining that at a steady pace. But I think that's sort of not a super hard. I mean, look at this way, at the end of next year, I think that there's a pretty good likelihood that we're at least at the 30,000 unit a year run rate at the end of next year. I think maybe more generally, Amir, we have flexibility. And that flexibility allows us to do a lot of things, whether it's over time, add 2nd shift, we can do a lot. So I think whatever the targets, it will be what they are depending on demand, we have flexibility. Yes. I mean, but yes, it's not totally willy nilly just to be so you do need to hire a second shift. You need to get them trained and need to make sure you're maintaining the quality on the 2nd shift. You don't want to have cars that are in the 2nd shift that are worse than cars that are in the 1st shift. So it doesn't require a significant capital injection injector minuscule capital injection to increase the rate, which is great. So there's certainly upside to opportunity there. But I don't want to trivialize how it is to find good people and get them trained and make sure everything's good and you don't have like the B team on the 2nd shift. Those are very important. Certainly, certainly. I appreciate that color. And then if we're thinking about sort of the demands on your cash for the near term, I was wondering when do you expect to start paying back sort of the DOE loan? I mean, we start paying that back in December of this year. That's where we're required. We're required to be paid back in December. We will pay it back no later than December. Yes. And then it's quarterly payments thereafter. Okay. So in terms of sort of the demand on your cash, that's Q4 cash at in terms of a relatively okay position? Yes. Okay. And then lastly, if I may, we've certainly seen a number of new stores open up in terms of building sort of retail points for you folks as well as building brand awareness. How should we think about sort of the trajectory for OpEx over the course of perhaps this year in order to provide the duration of 2013. I mean what's sort of the plan at this point? Yes. I think as we've indicated in the shareholder letter, certainly our R and D expense will drop as a lot of those costs move into cost of goods sold. And on the SG and A side as we open stores and there is an acceleration there, we will see a moderate increase in our sales expenses, I would say, in the 10% to 15% range or so as we add in more stores. Yes. The stores are kicking are really kicking. But George, is there any color you'd like to add to the stores? I mean it's we're just opening the Third Street Promenade store on Santa Monica Boulevard, if people are in kind of in the L. A. Area and want to get a sense for what the latest in Tesla store technology. Yes. I think our goal with the stores the rest of this year is to try to address some new markets. One of the markets that we really haven't solidified up until now is that Northeast Carter. And our goal is to open several new stores in that Carter in order to hit one of the most densely populated areas of the country and try to do it in a sort of an accelerated way because we think there's lots and lots of potential up there. And what's really nice is we already have an embedded number of people there. I mean, the beauty of our model is that we already know where the first 12,000 cars are going. We know where customers who are interested in us live. So we can use that data to open up stores because if there's certain people there who are already with very little effort already reserving our car, think what happens if we actually do put some effort in there. And that's what we're doing this year is we're hitting the hottest spots where we have really strong demand already in order to leverage that and that word-of-mouth from customer to customer. And the way people who the people who have already gotten their car, they're like kids in a candy store with their car. They can't wait to drive it. They can't wait to take people to dinner. They can't wait to take people out. So when we put more stores in and amongst where those people are and they have a place to gather and share stories and stuff, that's what we're doing with the store growth this year. We're focusing on places where we know there's existing demand in order to leverage it more. A lot in the Northeast, we're going to open in another one down in Miami Beach. And the traffic through the stores has been incredible. I think you probably saw in the shareholder letter that year to date, we've had over 1,000,000 people go through the new design stores in North America. I mean, that's an incredible number. And they keep bringing more people, more friends and stuff like that. So the stores are really performing well. And I think by going after the Northeast Corridor, we will subsequently make a difference by the year end. I mean, I have a goal this year that in the month of December, we can have 1,000,000 people go through our stores in 1 month. I mean, it's that crazy of a number. So, yes, it's kind of thing we're shooting for. Well, George, best of luck with that. And thank you very much, gentlemen, for taking the color. You're welcome. I said earlier, I mean, I think really, Tesla is not a demand constrained company. We're production constrained, so that must be our focus, but not at the expense of quality. The next question comes from Patrick Arkin bolt from Goldman Sachs. Hi. Yes, Good evening and congratulations on the launch. I just had unfortunately a couple more questions on the ramp. I was wondering whether we could get just a little bit more color on sort of how that process is going to work? I take it, it sounds like from what you've said already so far that what's sort of holding things up in terms of or one of the things that you're sort of hitting to get to the next stage is really having to lock down decisions on certain components. And Not really decisions. It's ensuring both internal production quality and supplier quality. It's but we're not sort of we're not changing the product before change stake certainly. If there's a change, it's because we had to redesign to improve manufacturability in a few cases here and there, but that's but we're not iterating on the product the physical product. Of course, from a software standpoint, we'll continue to provide updates because Tesla is the only company that does wireless updating of the car's software and firmware. So we're going to keep as customers will get their car and then they'll just they'll find that new functionality and improvements have been uploaded overnight while the car was in their garage. So that will continue. But we're really on lockdown on any physical changes that aren't absolutely required. Got you. Okay. So yes, I understand that the software can be sort of continuous, but it sounds like that there are still some components that are being made with preproduction tooling by some of your suppliers and that I guess the process of kind of getting those finalized and with the right fit and finish is what helps you kind of accelerate. Maybe you can just give a little bit of color. Is there kind of a percentage in terms of components of the car where there's still some improvement to be made and benchmark on that that you might be able to sort of think about as a guidepost for when that acceleration will take place? Sure. I mean, there are several 1,000 unique parts in the car. Probably 97% or 98% of them are fine and there's a couple percent that needs to be addressed. But you cannot ship a car that is 98% complete. So or where there's sort of 2% of the element of the components are not of sufficiently high quality. So it's there's probably a couple dozen suppliers that where we have some challenges. We either got to fix the supplier, bring it internal or get a different supplier. These are not big things. It's very important to add. Honestly, sometimes they're the most ridiculously silly things, like it could be a piece of carpet or a bit of interior trim that doesn't have a flush condition or like there's a piece of brine molding on the dashboard, which has doesn't exactly follow where it has an intersection with another piece of pipe molding. That intersection doesn't have the right press, but so that there are these little things that are extremely annoying. But we just can't be delivering cars for people that don't have an outstanding fit and finish. But it actually does of those sort of couple dozen parts, almost all of them are like interior sort of soft trim issues. So that's not like there's some important fundamental technology thing like battery pack and powertrain is in great shape and chassis in great shape and body in paint. And obviously, we want to keep refining and making sure that the gaps and fits are as close to perfection as physics will allow. But honestly, the vexing things are a bunch of seemingly trivial interior components. And perhaps that was just because we assumed that those things wouldn't be problematic and they were more problematic than we realized. We've since beefed up our interior trim engineering group considerably and it's likely to fall in the future. Okay. Yes, that's helpful color. In the shareholder letter, you also said that you'd received all the dies. Maybe we can talk a little bit about that. Is everything pretty much proved now? And are you essentially at the stage where you're stamping all the components in house at the right specs Or is there still some importing of components while you kind of fine tune some of these remaining dies? Yes. No, we're able to stamp everything in house at this point. We're still tweaking some of the as I mentioned, the gaps and how well things shut. We really want that to be we really want to set a new industry benchmark for the accuracy of body fit. We want to be second to anyone in this regard. And I mean, actually, it's we're going to keep iterating on that to limit of what is physically possible. So again, most people won't even notice these changes, but unless they have a very discerning eye. So, but sanding is not a problem. Okay, terrific. That's all I had. Well, congratulations on getting out a what is already a great car. Thanks. Yes, I mean, I really so maybe this is a floor of my character, but I tend to be pretty perfectionist about these things. And the goal I've said for the team is that we want the car to be so accurate, you could use it as a yardstick. You can use it as a calibration device. That's how accurate you want the car to be. All right. Terrific. Thank you very much. The next question comes from Ben Kahloo from Baird. Hi, guys. Going back to the capital raise question, Bloomberg is already reporting that you guys would might do a small capital raise. Can you talk about price sensitivity since the stock's trading near where your last secondary was done and you've created significant value since then in the company. And also around timing, a lot of the questions here are focused on the ramp. So would you do a capital raise after that ramp was proved out? I think it's best we don't comment on any of these. I think as Elon said, we'll just opportunistically pursue at the right time, and I think that's probably the best way. Well, but I'd like to exclude the very immediate future. We will not be raising money in the very immediate future. Okay. And can you give me any color on what that means? No. Okay. All right. That's right. All right. Deepak I can get some color from the SEC if I gave you that. A lot and Deepak, on the can you give us any update on the leasing program here in the United States? So I think as Elon alluded, that's something we'll look into next year. We're continuing to evaluate that. And I think at this point, our focus is on the key priorities of production. Yes. I can maybe just my views on leasing long term, which is I'm a huge proponent of leasing, particularly for electric vehicles, as is the case in solar. With Solar City, leasing has proven to be extremely effective as a way to encourage solar adoption. And it sort of seems like it shouldn't be that effective because if you told someone, hey, this system is going to pay back in 5 years, And they said, oh, 5 years, that seems like a long time. Like, do you know how long your savings account is going to take to pay you back? You'll be dead. And so, Pure seemed to be unable to do the math on that. It's like, wow, it's like excluding compounding a 20% return if it pays back in 5 years. Holy crow. Where do you get and with certainty, where do you get something like that? And yet amazingly, Solacevi had trouble getting people to act. And so then we basically arbitrage the problem to people that understand basically sophisticated people who are sophisticated in finance and are looking for yield and said, okay, well, let's go talk to people who really understand yield and take that problem away from the consumers. They don't have to think about it and they can just look at it at this like their electricity cost went down. So why is that relevant to Tesla? Because the cost of operation of the Model S is much less than the cost of operation of any other premium sedan by far. It's going to feel like you have a car for free. Particularly in places like Europe, I mean, it's like $9 $10 a gallon in Europe. You can spend a couple of $100 filling up your gas tank. And or you can spend some negligible amount recharging your car. So it really amounts to a huge effective discount on the cost of operation of the car relative to other premium sedans. And but the best way to make that apparent is through a lease. So we're going to be very big on leasing in the future. It just we just haven't needed to do that, because if there's enough demand for the car, we just tell people, well, you just got to buy the whole thing, but you just can't have leasing. If we have sufficient demand to do that, then we should turn our attention to the key thing, which is production. And then next year, we'll get to leasing. And we do have data from the Roadster that I think is that's helpful to leasing companies. And by the way, the Roadster has got really good residual value. I think it's significantly better than a Porsche actually. Well, maybe it depends on which Porsche you consider. But certainly it was better it's got much better residual value than the Porsche I bought about 5 years ago. So, the things like worth like a peanut after. I mean, it's like Holy Crow. Okay. And then my last one on deliveries. Deepak, you mentioned that there isn't much risk around timing around production deliveries. Maybe if you could just expand upon that how people are ready to accept their cars? And then also, is it safe for me to infer from your comments about the quality issues and getting to your target quality that you're not currently delivering? And then when do you expect to actually start delivering vehicles? So my comment earlier was especially in the early part, our deliveries, there's a bigger percentage of deliveries in California, which significantly reduced the gap between production and delivery. And as we go further out, there is going to be a few days, but it's not dramatically different from the traditional OEM model. That was my point. So hopefully, that's clear. And in terms of deliveries now, yes, we are making deliveries. We are also making a lot of cars for marketing and sales even in Q3 so that we continue and show as many cars to our potential customers and folks who have made reservations that are locking in their cars. So it's not as if we're not making deliveries. We're just going slow on the ramp to sort out the issues before we go up the escrow. Great. Thanks guys. I just want to make a quick comment on timing here. We have about 5 minutes left for the scheduled call. We'll add another 5 minutes on top of that. So analysts, if you could please keep your questions short and management your answers brief. Sure. We'll get through as many as we can. Thanks. Jamie, next question? The next question comes from Sanjay Srestha from Lazard Capital Markets. And guys, so the first question is on the can you talk about how are reservations sort of converting into the final order for you guys? And obviously reservation numbers doing good, but what would you say is the final order number at this point in time? Do you have 500, 5000? How should we think about that? How many people have locked in their options? Is that what you mean or 12,200 reservations net reservations, but 1,000. 1,000 and 5. George is saying, we've had about 1,000 people lock in, but we only ask them to lock in basically a few months. So we haven't gone to all the folks. We've only gone to a small percentage of people. Right. Yes. We have invited the signature reservation holders in the U. S. Only to configure. And then we went out about 10 days ago, give or take, to our first group of general production people sending out the e mails saying it's time to build your Model S. And then this week, we'll go out to the next tranche of general production U. S. And then we'll proceed from there to Canada Signature and then Canada general production. So it's not like just to be clear here, we haven't gone out to 12,000 people and said configure your car. We're doing it in sequential order based upon when they made the reservation. And we as of today, I mean, we'll be about 1,000 fully configured cars that people have finalized their options and everything on. Basically more than covering what you plan to ship in Q3 kind of a thing and then Q4 you think about that as By far, yes, by far, by far. Okay. That's all I have. Thanks guys. The next question comes from Andrea James from Dougherty and Company. Hi. Thanks for taking my question. Just quickly on the ramp. Obviously, Elon, when you chose to slow production in Q3, you had to make a decision to ramp even faster to make up for in Q4 or preserve the previous step function. So what went into that decision and why not push some of the $5,000 for this year into next year and build in some more contingency time? Well, although I never made a hard commitment that we would do 5,000 units this year, there was effectively a soft implication that we would do 5,000 units this year. It wasn't the hard one was like the $200,000 next year and $25,000,000 gross margin and the start of deliveries in no later than July. Those are the 3 hard ones and I thought those I could say relatively soft. But I still want to aspire to meet something even if it's a soft commitment, a softer commitment. And it's going to mean that we're going to have to work pretty hard over Thanksgiving and Christmas and New Year's Mulan, but we want to try to do the right thing for our investors. Okay. So it was because of sort of the commitment and not okay. And then just to go here, but there's commentary on the blogs and message boards. You have people with low reservation numbers saying, I'm not told I'm going to get my car until October or Q1. And I guess, just what do you make of that commentary? I imagine some people on your team are looking at it as well. Well, yes, sometimes things can go a little awry on the message board. Yes, I wouldn't read too much into the message boards. I think sometimes people can get the wrong information and they can sort of panic or sort of pissing the words or something like that. I mean George do you want to Yes. I monitor them. I watch them on a regular basis. I watch them on a daily basis. And I squelched one the other day where somebody came out and specifically said, I have it on good authority that there are 200 Founder Series cars and everybody is going to be pushed back. And it's just it's a blatant factual inaccuracy. And so I went and I shut it down. Kind of things happen all the time. I try to stay out of the I try to not contribute to the message boards much at all, but sometimes things just run awry. Some people they and I early on we had gone out with a more firm date whenever people were configuring their cars early on in early April May and they were configuring in April May configuring their cars. And our system kicked out a date There was sort of a projection and then we sort of left that there was a placeholder and some of those people have thought that was a firm date and it never really was. And so we're correcting that. But you really I watch the boards all the time. You can't go by what's on the boards. You just can't go by what's on the boards. Yes. It's yes, exactly. I don't know how else to describe it. Right. I think I'd just sort of judge things by what's your number of cars are being delivered and that will give some sense of whether we're how we're tracking to actual deliveries. I think it's And you'll see that number rise quite dramatically. And then I think we'll see some of this activity on the Board just die down because in the absence of information, I mean, you can get rampant speculation. That's just not based on anything. And while I yes, let's see, Jeff will not say anything about short color. Restrain your belt. I think we are one of the most surest held stocks on the stock market. And there's certainly a few words means motive and opportunity to say things that are negative and untrue. I'm not saying that they are, but there's means, motive, an opportunity to do so. I think that's helpful. Thank you. One final. What leads you to say you'll have 20,000 reservations by the end of this year? And George, you have talked about a little bit, but I was just wondering, yes, what gets you there? Well, I don't think we've said that we will have 20,000 reservations by the end of the year. But we might have that. I wouldn't say it's out of the it's not out of the question. But I think inclusive of deliveries, I think that's very likely. I would order it's likely, Pejal, I'll take the very away. Inclusive of deliveries, I think it's likely that we would have a cumulative essentially 20,000 sales. I think there's a pretty good chance of that. What does 2013 sold out mean then? I actually think that we're that 2013 is likely to be production constrained again. I don't think it's going to be demand constrained. So you're saying that you'll over the course of 2013, you'll have more reservations or more demand than you can produce cars. That's what you mean when you say it will be sold out? I think that's yes. I think that we will I think that we will sell more cars than we can there will be more orders for cars than we are reasonably able to produce at high quality next year. We will not have inventory. We will not have inventory. And so you're not saying though that you'll get to the end of 2012 and you'll be sold out on 2013. You're just saying over the course of 2013, you expect to be sold out. Is that kind of what you meant by that? Yes. I think the way to look at this is that we never plan to have inventory. And what will happen is demand we have a plan in place with stores and marketing, etcetera, to get up to a demand rate by month that will always stay ahead of production. And we can adjust production depending upon where demand goes. And what will happen is, we don't expect to have 20,000 reservations on an ongoing basis because that's way too far out. We will have our goal is to have 3 to 4 months of active reservations at any given point in time ahead of production, whatever the production rate is. So the idea is to get a run rate of reservations that's 3 to 4 months ahead of whatever its production rate is, so that we never have the expensive inventory, we never have any of those things. We just have a run rate of 3 to 4 months of ongoing reservation. That's fundamental to our retail model. Right. Right. And so that model continues. And we always expect that pipeline to be there ahead. In fact, we don't want it to be too long because that's a detractor for more reservation. Right. I mean that's as we get closer to being able to deliver cars faster, our reservation demand will be stronger because people it will be more predictable and people will be able to say, okay, my I have a lease that's coming up in 3 or 4 months, now is the time to reserve. And what will happen is refunds another thing that happens is that refunds at that point go almost to nothing because someone will reserve a car and literally go right into the configuration process within the next 30 days. They'll configure their car and then we'll deliver it in another couple of months. And so that's the business model and that's why it works so perfectly. Super clear. Thank you. I appreciate that. The next question comes from Michael Lu from Needham. Thanks and good afternoon. With regard to the ongoing nationwide tour, how much incremental demand has that generated? Well, the tour is going really well. And what's happened is, I think our July our end of June July demand has been has increased from a couple of reasons. One is, the news we're delivering cars. One is because of the incredible reviews that we've gotten on the cars. And I think the third is that we're putting a lot of people behind the wheel for the first time and they're getting out of the car and saying incredible things. They're then going home and telling their friends and coming back and getting their friends involved. So we're seeing incremental demand because of the tour, but I want to keep a focus on the fact that the tour is really designed for our reservation holders that currently have reservations. We haven't actually gone out and started having lots of test drive slots available for new customers. So again, that's another opportunity for us in another 2 or 3 in another month or so when we actually take the test drive cars we have and the ones we're building now and we go out and we say, okay, now we've gone out, we've done 5,000, 6000 test drives of reservation holders. And then we start actually giving people who don't have reservations test drives for the first time. And that's part of the kick that we will get on new reservations. Yes. This is actually an important point that George has just made. We're the test drives all these test drives, I mean almost all of them are just for existing customers, right? We've not been trying we actually essentially we could generate more sales if we wanted to, right? We could throw the rate faster, but there's not much point in growing the rate faster if we're 9 or 10 months Yes, we're not if it was 9 or 10 months before you get the car, there's just not much point really in trying to add additional orders. And we have an incredibly loyal base. I mean, we have an incredibly loyal customer base. And if you look at the people who have already received their cars and you look at the videos they're putting together and posting and the people they're talking to, we are getting incremental reservations already from the cars we have out there, from the people who are driving them and going to dinner or going to show or whatever with other people who are then calling us and saying, I need to have one like Steve. I want to call like Nancy's. And so we're getting incremental from having the cars we have out there already. When that starts escalating and we start doing new test drives with people who don't have reservations, that's Yes. This is basically essentially, we're seeing demand acceleration without trying. If we tried, it would be if we really tried hard, it would be more than this. Well, I think another thing to point out and we don't we haven't you don't have the visibility into where all of our cars are. Here's something to think about on the demand side is we have the Gdav test drive tour, which has the marketing cars out there that are doing test drives. We don't have a Model S at all in Europe or Asia. We don't have their own insurer. We don't have anything at all in either one of those major markets and we're sold out in Signature and EU. And so we're not doing anything outside of North America. And yet we're we've got the backlog we have now. So as we go into the at the end of Q3 and into Q4, we're going to start transitioning those markets to Model S and at that point trying in Europe and Asia for the first time. Right. I think I think any reasonable definition of trying would mean you've got at least one car in the market. So obviously, we're not it still surprises me that I see the articles out there questioning whether there's demand for the Model S. I mean there may be demand issues with other electrical vehicles. There's certainly not demand issue with Model S. Okay. And so as I understand correctly, there'll be a slight pause and then possibly another tour, let's say, going into the Northeast market since you had mentioned that's in TAP and possibly even the Midwest? Yes, absolutely. On the Get Am tour? Yes, just in terms of markets that have not been tapped. We barely touched the Greater New York area. Yes. I mean, we are opening more stores this year, this fall. In fact, one of our next stores will be in the New York metropolitan area. And then we'll come back with another 2 and then we'll go further north from there into the Massachusetts area and down into the D. C. Area. We think that market holds lots and lots and lots of potential because we already have the number of reservations we have there without a lot of presence. When we have presence, I think my retail history tells me that there is lots and lots of untapped potential there that we are going to begin tapping starting in September. Yes. Actually, I think a lot of you on the call are probably from the Greater New York area. So maybe it's worth just listing the stores that we've opened in the Greater New York area and the ones that are perhaps we'll be opening in the next few months? Sure. For those of you in the New York area, you're probably aware we have the store on 25th Street that's been there for a while. And then we opened up in the Westchester up in Westchester County and it's doing very, very well, very, very nicely. And we see where all the reservations are coming from through each store and it's actually increased the reservation flow in the West 25th Street store. So having 2 stores in the market has helped. For those of you in North Jersey, we'll be opening up in Garden State Plaza and Short Hills Mall. And then for use over in long and for you in Long Island, we'll be looking to open up in Roosevelt Field. So going from one store on West 25th Street to having 2 in Northern Jersey, 1 in Westchester County and 1 in Long Island, it's a pretty good capture of the New York metropolitan area with those particular centers surrounding the city. Yes. And our store in Chelsea, I mean, we got that lease because it was the only lease we could afford back in the day. And it's still basically a version 1 point maybe it's version 1.5 of store technology. If you want to see the sort of latest in store technology and there is I'm not using that word facetious. I mean there really is sort of store technology. You want to go to Westchester or one of the stores that's opening up in New Jersey or Long Island. That will show the sort of the latest and greatest in the sort of retail experience. But it just gives you some sense. I mean we basically had I count this the store in Chelsea as like a half store. And we had a half store in Zillow a few months ago in the entire Greater New York area, a half store. And what's happened like I said is what's happened is when we opened up the Westchester, got that additional awareness and some a little bit of publicity and media, We now have 2 full stores. Right. Because it took the half store and made it into a full store with reservations. Right. And not from a technology standpoint, but from a productivity standpoint. Okay. I think we'll take one more question, Jamie, please. The next question comes from Jesse Pytl from Jefferies. Thank you for taking my call. I apologize for missing the earlier queue. Deepak, for modeling purposes, what is the targeted cash cycle days conversion we should be thinking about at full ramp? Can we assume sub-twenty? Sorry, I'm not sure what your question is, Jesse, exactly. Are you referring to our inventory turns or working capital needs? I'm not exactly sure. If we take days inventory, days receivable and days payable and basically add them up, how quickly can you turn into cash? Yes. I mean, I think the way we look at it is that fundamentally, we have 0 receivables. We deliver the car within a few days of production and we get full payment. But our supplier payment terms are on average about 45 days. So we tend to deliver and receive money before we have to pay to our suppliers. So I think from your point of view, our focus is working capital usage and our working capital actually doesn't our need for working capital don't increase as we ramp up production. It actually helps us get back from a cash flow perspective. I mean, you asked question, I think, which is a good one because the capital needs of the business if the business needs raise equity or something to build away capital as it grows, the effective return on investment for investors is much lower than if it's the other way around. In our case, it is the other way around. The faster we grow the business, the more cash we have available. Yes. That's what I thought and why I kind of questioned the Bloomberg article. Can you are you breaking out ex reservations in the quarter? No. We're putting 0 attention on ex reservations. So it's not really a metric we want to call people's attention to. That's something that we'll start we'll turn our attention to next year. Do you think some of the reservations for S and X are U. S. Delivery from European or Asian clients? Definitely, we have reservations. Yes, as George mentioned, our Model S reservations includes European Signature Series where we are sold out. We have reservations from all over the world for both S and X. Yes. But I think there are also some people who just can't wait and they've ordered a U. S. Car and they're just going to ship it to Europe. Yes. That's why I was kind of wondering if the launch in Europe and Asia is really going to increase the reservation that much or if they're already observing today. Oh, okay. But it will increase it massively. Yes. The difference that yes, your question is appropriate in that, do I think there are 5 people, 10 people who have bought U. S. Cars that are going to take them to Europe? Yes. But we have hundreds of reservations in EU and we're getting more and more every month. And so that is not going to impact that's going to impact not at all. That will be no impact. Yes. Right. I guess this is quite as exotic as picking up your Mercedes from Stuttgart, but I guess you can give them a burger and send them on the way. But you made an interesting comment, Elon, about battery pack replacements allowing a car the car a better range versus today. And you said this before, when can we expect the next battery chemistry improvement? And what's your roadmap for that? Well, I think it's probably with the Gen 3 that we would see a change in the fundamental chemistry as we did with Roastor. Where Roastor, we went from a cobalt cathode to a nickel cobalt aluminum cathode and effectively a 50% increase roughly a 50% increase in both gravimetric and volumetric energy density. I'm not I don't know if I folks and also a drop in cost because of the much lower cobalt content. There's I can't comment on the specifics of some of the technologies that I'm aware of because of confidentiality agreements. But I can say I'm highly optimistic about seeing substantial reductions in cost per kilowatt hour in the 3 to 4 year timeframe. Thank you, gentlemen. Congratulations on the ramp. Thanks, Justin. Thanks, everyone. I apologize we didn't get to everybody today, but this is going to conclude our call. We look forward to seeing many of you in the coming weeks either at TEST Drive events. Will also be at several conferences including in New York on August 7 for Needham's Advanced Industrial Technologies Conference or on April 13 in Vail at Pacific Crest Global Technology Leadership Forum or on 14th in New York again at the JPMorgan Auto Conference. Thank you everyone. Goodbye. Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.