Good day, ladies and gentlemen, and welcome to the Tesla Motors Corporation-
Hi, Jamie. It's Jerome.
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. If anyone should require audio assistance during the conference, please press star then zero to reach an operator. As a reminder, this conference is being recorded. I would now like to turn the call over to Jeff Evanson, Head of Investor Relations. Sir, you may begin.
Thank you, Jamie, and good afternoon, everyone. Welcome to the Tesla Motors second quarter 2012 financial results Q&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 second quarter shortly after 1:00 P.M. Pacific Time today. The shareholder letter, financial results, and webcast of this Q&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&A session live, please press star one now if you would 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 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 Pichel 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 million in the quarter all Daimler revenue?
Hi, this is Deepak, John. Yeah, it is all Daimler revenue. You're right about that.
Would you say that that five, maybe call it five, maybe a little bit higher, $5 million would be a good run rate over the next six 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 million, and it'll be spread over the next six quarters, roughly.
Okay, great. In terms of Model S deliveries in the quarter, did you guys disclose how many were actually delivered?
Yeah, we delivered in the quarter 10 Model S's. We produced a few more, Our focus was primarily in providing those for our marketing activities so that we could have more ride and drive events, the Get Amped Tour that we kicked off. We really wanted to make sure we had a lot going on for our test drives.
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.
The production is ramping quite well, actually. It's stepping up. Something that perhaps people aren't totally aware of is how the production steps up. It actually steps up in a sort of geometric or exponential fashion. It's not linear. 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 quick ones in here. In terms of the powertrain units for Toyota, how many units were actually produced this quarter?
Yeah. We produced roughly 100 units in this quarter. It's a combination of battery packs and drive units, but it was in that ballpark. It's again, the start of the ramp in terms of our production, as we've indicated. We'll continue to see some growth there.
A last question, if I may. How many Roadster vehicles actually remain to be sold throughout the remainder of the year?
We have about 130-140 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.
How are you? I wanted to, in terms of the ramp, and congratulations on launching the vehicle on time and the great reviews it's been getting.
Thanks.
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 take us through what the challenges are ahead in that.
Sure, absolutely. First of all, it's worth noting that it is actually normal in the auto industry for there to be an exponential growth in production. 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 something like 97% or 98% of the components of the Model S are new. They're not in any other vehicle. You can only make cars as fast as your slowest component. 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 unhappiness. When we looked at our cash flow forecasts, whether we did a bunch more deliveries in the third quarter or basically, if you move sort of several hundred deliveries from third to fourth quarter, one way or the other, it doesn't change our cash flow point. We really need to be optimizing for our cash flow standpoint. Then on the other side, making sure that our customers are ecstatic when they get their cars.
I actually changed the production ramp to slow it down at the beginning and then ramp it up faster towards the end. I think it's the right decision. Time will tell, but I think it's a sensible decision. It's certainly what I would wish that somebody did if I was a shareholder in the company, and I am.
Okay, that makes sense. Just to follow up on your comments on the cash flow, it looks like liquidity went down by $120 million or approximately in the quarter. You have $265 of liquidity available. It seems like the cash flow point, I guess I don't understand 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. If there's any way to kind of gauge whether the cash burn will slow in the third quarter 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.
This is a planned approach, which helps us manage our cash. As we've indicated in the shareholder letter, that our expectation based on our plans is that we will achieve pretty close to a free cash flow breakeven, in Q4. In Q3, we will see a 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.
Yeah, if you move several hundred cars, from one quarter to the next, as I was saying, 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, almost a couple thousand cars a month. It just seems like why try to push product on customers that maybe is not as perfect as possible if it doesn't actually yield anything tangible?
Got you. I guess it's one more on the subject. It seems like, different than most automakers, you, I think, recognize revenue when the vehicle's delivered to the customer, not when it's shipped off the factory to a dealer. I guess what I'm getting at is you'd probably, if you're going to deliver 500 in the third quarter, you're probably going to produce quite a bit more than that. I guess, is that true? 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 500. It's always a little tricky. Essentially, if you imagine the production ramp is this quite sharp S-curve. As you pick an arbitrary point on that S-curve, on the steep portion of the 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's sort of a point we feel really confident about getting to in fourth quarter. I think it's the more relevant thing.
If you were to present value the cash flows and move the stuff around, it actually doesn't change the effective market cap of the company if one is doing the analysis correctly. I think it's probable we'll do that, but it's not certain. Even if one way or the other, it's not going to make much of a difference.
Okay. Appreciate it.
Good point, Elon. 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 three days. It's not that dramatically different.
Okay, great. Thanks for all the helpful color on that. Appreciate it.
Absolutely. One thing I wanted to reemphasize, if people recall, one of the things that I've been really emphatic about, those things are that in 2013, we'll produce at least 20,000 units, and that our gross margin will exceed 25%. I also said that we'd start deliveries no later than July. Those are the three things that I said that I was highly confident we would do. There are other things that are sort of nice-to-haves and you'd like to do, and maybe this will happen, but those are the important ones. It's worth noting that we started deliveries in June, so we're ahead of July. I think we're going to exceed 20,000 units next year and exceed a 25% gross margin. Those are things that I think you should really hold me and Tesla to.
That's a flat portion of the rest of it.
That's the thing that really matters. Yes, absolutely. Yeah.
I agree. Thanks, Elon.
All right.
The next question comes from Ben Schumann from Pacific Crest Securities.
Hi, thanks guys. Elon, you talk 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 like a couple hundred little knick-knacky things. One example is the supplier who was doing the chrome plating of the door handles just couldn't meet our quality standards. There were little tiny pits in the plating that were just unacceptable for us, so we had to switch that to a different plating supplier.
Banana Leaf.
Pardon?
Banana Leaf.
Oh, right. Things like the Banana Leaf interior trim. When I was shown a sample of that, it looked good, but when I saw it in the car, it did not look good. I canned it. We're not going to deliver an option that doesn't look good. Unfortunately, that was not clear until we saw it in a car, which was late in the game. There's some sort of things like that where 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 are just built around great products or services, we have to be super focused on ensuring that we have a product that is not slightly better but substantially better. I think we have that, actually.
If you look at the reviews, that's the response we're getting.
Okay, great. Can you address how cancellations are trending now that more and more of those "finalize your order" emails are going out?
Yeah, I think overall, Ben, we are finding that cancellations as a percentage of our reservations is holding fairly steady the last few months. Clearly customers have to make that decision, but we're not seeing anything which raises any red flags in our minds.
Yeah. Quite frankly, the thing that I get bugged about is not cancellations. It's people who want their car sooner. A day does not go by when I don't get several requests from quite senior people or celebrities or whatever, saying, isn't there 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. Hopefully people can see that 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. If you need a car, you need a car. We actually need to focus our energies 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. Just one more. 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. Are they?
Well, the next best powertrains are the ones that we provide to our partners. After that, well, you fall a long way. You're at the LEAF, I suppose, which obviously has some range issues, and it's just not a fun car to drive. I say this, it sounds like I'm being critical. I actually do think that Nissan should double down on their electric vehicle investment and they just need to improve the product. It's not where it needs to be. The way to think of the Model S is really not from the standpoint of how does it compare to other electric cars. That's not really why people are buying a car.
They're buying a car because they're looking at this and 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, fit and finish, all those things are mentioned against which you would evaluate the car as a product, including taking all those characteristics and integrating them into a gestalt and saying does this, as an integrated system, work? Because sometimes you can have a mixture of ingredients that don't come together into a good product. Really, people are buying our 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-curve ramp from three Q to four Q. You're at 10 cars a week now. I guess you'll be averaging just over 40 a week in three Q, and then to ramp to an average of 375 a week in four Q to kind of make the 5,000 full-year number. 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. In order to kind of make sense of this, I think that vertical portion of the S-curve would have to happen not only pretty quickly, but really very early in the fourth quarter.
Else you'd be implying an exit rate that would be way over 375 a week, which 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. 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 third quarter or your entry rate in the fourth? Am I right to be thinking that in order to do your 5,000, that geometric switch has to be pretty damn early in four Q?
Yeah. 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, yeah-
Would that then level off, though? 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.
Okay.
If demand is looking good, why level off?
I agree 100%. That is part of the implication is that it makes the 20,000 next year really like that, at least, really, you're emphasizing that with what you're implying.
Yep. When I say at least, I mean it will be higher.
Yeah. You don't mean 20,001. Understood. My last question is, given the enormous interest in the Model S and also the very strong interest in the Model X and what looks like the opportunity to launch the Gen3, at least according to I think some comments Franz made, maybe as early as 2015, earlier than many expected, this might accelerate some of your capital needs to give these products their full resources. 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?
Yeah. I think that there is arguably some merit to raising incremental funding, just to protect against an unforeseen event. I do want to emphasize that our cash flow projections require no funding raise at all.
Right.
If we do not raise any funding, we can reach cash flow positive with decent margin. That's not to say that there isn't some merit in raising a little bit of funding, maybe, just to increase the cushion.
Yeah.
That's something that we're debating internally, it's just something we may do. I do want to emphasize it's not something we have to do.
Right. It's a cushion, it'd be for risk management and more opportunistic to kind of fuel even greater growth opportunity. Is that how you'd pitch it?
Yeah, exactly. Let's say, in order for us to not raise any funding, arguably you'd want to spend at the optimal rate. Yeah.
Would you say that it would be more the early feedback and opportunity on the Model X that would potentially drive that opportunity? Is it the timing an opportunity on the Gen3, or is it a bit of both or all the above?
Well, I think if we were to raise a small amount of money, I emphasize that the only two things we're considering are raising zero money or a small amount.
Right.
There's not some third option. If we were to raise a small amount of money, then it would be probably half of it for cushion value and then half of it for future projects, which would be the Model X and the Gen3.
Okay. All right. Thanks.
We got to come up with a better name than Gen3, by the way. I'd like to remind that.
I'm sure you will. Get George on the case. Thanks very much.
Questions welcome.
The next question comes from Carter Driscoll from Capstone Investments.
Good afternoon, gentlemen. Just following up on the previous questions. Do you imagine you will disclose the ramp, maybe say throughout the third quarter so we can get comfortable that you're going to be at that 375 pace above in the fourth 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. Clearly, as deliveries progress, you will get a sense of it.
Right.
As customers-
There will be cars on the road.
Yeah, correct.
That will be a huge clue.
Right. We'll definitely make sure over time we are communicating how things are progressing.
Okay.
Right. I think actually people could track it by just figuring out what serial 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. 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. I'm really excited about that announcement. I think it's way cooler than anyone realizes. I think it's going to have a profound effect on how the public sees electric vehicles.
Okay.
There's going to be a few surprises there. 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. 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. For the battery warranty, we essentially merged language that Nissan was using, I think maybe the Volt is also using similar language. Which is to say that the battery is warrantied for 8 years. Any amount of miles you can really put on it. Actually, I think, depending upon which version, it's unlimited for the 300 mile version. You just won't be able, unless you torture yourself, you won't be able to put enough miles on that to matter.
Right.
I think it's like 100,000, 150,000, something like that.
I believe.
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 pack energy level will be at that point, it's going to vary depending upon what sort of environment the pack has experienced and 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 in. It will still be a very usable pack. We're expecting the packs to actually have a useful life that's somewhere around double the warranty level. People probably want to replace it sooner than that, but these really last for a long time.
Even our first generation pack in the Roadster, 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. 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, that you believe the battery pack's going to last twice what it's currently warrantied for, I'm assuming that the residual value, the price point, given there 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
Maybe the second half of next year at the soonest. We could just be all these sales, we have had many discussions about residual value. The thing that supports residual value is just to make sure that the depreciation of the battery pack essentially matches that of the rest of the car. If you own a gasoline car, after 10 years, it's on the order of 10%-15% of its original value.
Yep.
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'll be higher.
Okay.
Yeah. The other thing is, once you put a new pack into the car, it'll 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. You get huge benefits of that.
Gasoline's probably not getting cheaper in the long run. The price of gasoline is an upward-sloping sine wave.
I agree with that. Have you guys actually booked any warranty expense in anticipation of having to replace any of the batteries?
Yeah. With each car, there's a.
Oh, we've booked a warranty reserve.
Yeah
for each of the cars, that's related to the entire vehicle, not just to the battery. 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, right?
Athlon is offering their own lease program in Europe, that's correct, for corporate clients.
Yeah. We did sign our first Model S leasing deal in Europe.
That is right.
My last question before I pass on is just, have you seen the mix of reservations change as 2012 has unfolded? 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?
Yeah, absolutely. I think it's important to note that the Signature Series has been sold out for several months now. Not only is the Signature Series 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 sold out in Q2.
We're sold out in EU on Signature Series as well.
Basically, all the reservations that we're getting now are for general production. Our customers, when they make a reservation, are basically just getting in the queue.
Right
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 their specific order.
It is tending to be on the higher end than we expected, I think. That could change. It's hard to say as you get more clear in this general production, whether people are going to go to sort of choose fewer options. Typically, the trend has been that they're picking more options than we expected.
No, I was just trying to get at, given you have a fairly significant amount of your cash in 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 Rozwadowski from Barclays.
Thank you very much, and good afternoon, folks.
Hey. Hi, Amir.
Hi. Just touching on the production ramp a bit more, Elon. Just want to clarify, in the past, you had said really that 20,000 sort of production line is really focused on sort of one shift operating at one point in time. What type of flexibility do you have to either add additional personnel, overtime, or anything along those lines in order to meet your production targets?
Yeah. It's almost entirely on one shift. There are a few areas where we had some capital-intensive equipment where it's on two shifts. That's easily addressed to expand volume. I think, in principle, we could comfortably have a production rate next year that's 50% greater than 20,000. I hesitate to predict when in the year we'd be sort of comfortable maintaining that at a steady pace. Let me put it 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. The flexibility allows us to do a lot of things. It's overtime, add second shift. We can do a lot. I think whatever the targets, it'll be what they are. Depending on demand, we have flexibility.
It's not totally willy-nilly. You do need to hire a second shift. You need to get them trained, and you need to make sure you're maintaining the quality on the second shift. You don't want to have cars that are made on the second shift that are worse than cars made on the first shift. It doesn't require a significant capital injection. In fact, there's a minuscule capital injection to increase the rate, which is great. There's certainly an upside opportunity there. I don't want to trivialize how easy it is to do that, to find good people and get them trained and make sure everything's good and you don't have the B team on the second shift. Those are very important.
If thinking about the demands on your cash for the near term, I was wondering, when do you expect to start paying back the DOE loan?
We start paying that back in December of this year.
We're required to be paid back in December. We'll pay it back no later than December. We'll start paying it back no later than December.
Yeah. Then it's quarterly payments thereafter.
Okay. In terms of the demands on your cash, that's factored into your expectations for where you will end Q4 cash at in terms of a relatively okay position.
Yes. Absolutely.
Okay. Then lastly, if I may, we've certainly seen a number of new stores open up in terms of building retail points for you folks, as well as building brand awareness. How should we think about the trajectory for OpEx over the course of perhaps this year, and over the duration of 2013? I mean, what's the plan at this point?
Yeah, I think, as we've indicated in the shareholder letter, certainly our R&D expense will drop as a lot of those costs move into cost of goods sold. On the SG&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%-15% range or so as we add in more stores.
Yeah. The stores are really kicking butt. George, is there any color you'd like to add to the stores? I mean, we're just opening the Third Street Promenade store in Santa Monica Boulevard, if people are in the L.A. area and want to get a sense for the latest in Tesla store technology.
Yeah, 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 corridor. Our goal is to open several new stores in that corridor in order to hit one of the most densely populated areas of the country and try to do it in an accelerated way, because we think there's lots and lots of potential up there. What's really nice is we already have an embedded number of people there. 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.
We can use that data to open up stores, because if there's certain people there who are, with very little effort, already reserving our car, think what happens if we actually do put some effort in there. 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. 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. 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 another one down in Miami Beach. 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 million people go through the new design stores in North America. That's an incredible number. They keep bringing more people, more friends and stuff like that. The stores are really performing well, and I think by going after the northeast corridor, we will substantially make a difference by year-end. I have a goal this year that in the month of December, we can have 1 million people go through our stores in one month. It's that crazy of a number. That's the kind of thing we're shooting for.
Well, George, best of luck with that. Thank you very much, gentlemen, for including the color.
You're welcome. As I said earlier, I think really, Tesla is not a demand-constrained company. We're production-constrained, that must be our focus. Not at the expense of quality.
The next question comes from Patrick Archambault from Goldman Sachs.
Hi, yes. Good evening. Congratulations on the launch. I just had unfortunately a couple more questions on the ramp.
Oh.
I was wondering whether we could get just a little bit more color on how that process is going to work. I take it it sounds like from what you've said already so far that what's holding things up in terms of, or one of the things that you're hitting to get to the next stage is really having to lock down decisions on certain components.
Not really decisions. It's ensuring both internal production quality and supplier quality. We're not changing the product for change sakes, certainly. If there's a change, it's because we had to redesign to improve manufacturability in a few cases here and there, 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's the only company that does wireless updating of software and firmware. We're going to keep, as customers will get their car and then they'll find that new functionality and improvements have been uploaded overnight while the car was in their garage. That will continue, but we're really on lockdown on any physical changes that aren't absolutely required.
Got you. Okay. Yeah, I understand that the software piece can be sort of continuous, but it sounds like that there are still some components that are being made with pre-production 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 a percentage in terms of components of the car where there's still some improvement to be made and a benchmark on that you might be able to sort of think about as a guidepost for when that acceleration will take place?
Sure. There are several thousand unique parts in the car. Probably 97% or 98% of them are fine, and there's a couple percent that need to be addressed, but you cannot ship a car that is 98% complete. Or where there's sort of 2% of the components are not of sufficiently high quality. There's probably a couple dozen suppliers where we have some challenges and we either got to fix the supplier, bring it internal, or get a different supplier.
Okay.
These are not big things. It's very important to have. 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 there's a piece of bright molding on the dashboard, where it has an intersection with another piece of bright molding, that intersection doesn't have the right press fit. There are these little things that are extremely annoying. We just can't be delivering cars that don't have an outstanding fit and finish. Of those couple dozen parts, almost all of them are interior, sort of soft trim issues.
It's not like there's some important fundamental technology thing. Our battery pack and powertrain is in great shape, and chassis is in great shape, and body and paint and Obviously, we want to keep refining and make sure that the gaps and fits are as close to perfection as physics will allow. Honestly, the vexing things are a bunch of seemingly trivial interior components. 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 evolve in the future.
Okay. Yeah, that's helpful color. In the shareholder letter, you also said that you'd received all the dies.
Yeah.
Maybe we can talk a little bit about that. Is everything pretty much proved now? 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 fine-tune some of these remaining dies?
Yeah, no, we're able to stamp everything in-house at this point. We're still tweaking some of the estimation, the gaps, and how well things shut. We really want to set a new industry benchmark for the accuracy of body fit. We don't want to be second to anyone in this regard. Actually, we're going to keep iterating on that to the limit of what is physically possible. Again, most people won't even notice these changes, unless they have a very discerning eye. Stamping's not a problem.
Okay, terrific. That's all I had. Well, congratulations on getting out what is already a great car.
Thanks. Yeah, maybe this is a flaw in my character, but I tend to be pretty perfectionist about these things, the goal actually for the team is 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 Kallo from Baird.
Hi, guys. Going back to the capital raise question. Bloomberg is already reporting that you guys might do a small capital raise. Can you talk about your last secondary was done, and you've created significant value since then in the company. Also around timing, a lot of the questions here are focused on the ramp. 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, I'd like to exclude the very immediate future. We will not be raising money in the very immediate future.
Okay. Can you give me any color on what that means?
No.
Okay. All right, let's try. All right, Deepak-
You might get some color from the SEC if I gave you that.
Elon, Deepak, can you give us any update on the leasing program here in the U.S.?
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.
Yeah. Can I maybe just give 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 SolarCity, leasing has proven to be extremely effective as a way to encourage solar adoption. 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 five years," and they say, "Oh, five years, that seems like a long time." Well, do you know how long your savings account's going to take to pay you back? You'll be dead. People seem to be unable to do the math on that. It's like, wow, excluding compounding, a 20% return if it's paid back in five years. Holy crow. Where do you get something like that?
Yet amazingly, SolarCity had trouble getting people to act. We basically outreached 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 towards people who really understand yield and take that problem away from the consumers, so they don't have to think about it, and they can just look at it like their electricity cost went down." 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, it can be nine, 10 bucks a gallon in Europe. You can spend a couple hundred dollars filling up your gas tank.
You can spend some negligible amount recharging your car. It really amounts to a huge effective discount on the cost of operation of the car relative to other premium sedans. The best way to make that apparent is through a lease. We're going to be very big on leasing in the future. We just haven't needed to do that because there's enough demand for the car where we just tell people, "Oh, you just got to buy the whole thing. We just can't have leasing." If we have sufficient demand to do that, then we just turn our attention to the key thing, which is production, then next year, we'll get to leasing. We do have data from the Roadster that I think that's helpful to leasing companies. By the way, the Roadster's got really good residual value.
I think it's significantly better than a Porsche, actually. Maybe it depends on which Porsche you consider, but it certainly was better. It's got much better residual value than the Porsche I bought about five years ago. That thing's worth like a peanut after. It's like, holy crow.
My last one on deliveries. Deepak, you mentioned that there isn't much risk around timing around production deliveries. If you could just expand upon that, how people are ready to accept their cars. 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? When do you expect to actually start delivering vehicles?
My comment earlier was, especially in the early part, our deliveries, there's a bigger percentage of deliveries in California, which significantly reduces the gap between production and delivery. 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. Hopefully that's clear. In terms of deliveries now, we are making deliveries. We are also making a lot of cars for marketing and sales even in Q3, that we continue and show as many cars to our potential customers and folks who have made reservations that are locking in their cars. 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 S-curve.
Great. Thanks, guys.
I just want to make a quick comment on timing here. We have about five minutes left for the scheduled call. We'll add another five minutes on top of that. Analysts, if you could please keep your questions short, and management, your answers brief.
Oh, sure.
We'll get through as many as we can. Thanks. Jamie, next question.
The next question comes from Sanjay Shrestha from Lazard Capital Markets.
Guys, the first question is, can you talk about how are reservations converting into the final order for you guys? Obviously, the reservation number's doing good, what would you say is the final order number at this point in time? Do you have 500, 5,000? How should we think about that?
You mean how many people have locked in their options? Is that what you mean, or?
Exactly.
12,200 net reservations.
1,000.
1,000 have locked in.
George is saying we've had about 1,000 people lock in. We only asked them to lock in, basically.
Few months. We haven't gone to all the folks.
Right.
We've only gone to a small percentage of people.
Right.
Yeah.
Yeah.
We have invited the Signature reservation holders in the U.S. only.
Okay
To configure. We went out about 10 days ago, give or take, to our first group of general production people, sending out the email saying, "It's time to build your Model S." 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. Just to be clear here.
Sure
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 their reservation.
Okay.
As of today, 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. Q4.
Oh, by far, yeah. By far.
Okay. That's all I have. Thanks, guys.
The next question comes from Andrea James, from Dougherty & Company.
Hi, thanks for taking my question. Just quickly on the ramp. Obviously, Elon, when you chose the slow production in Q3, you had to make a decision to ramp even faster to make up for it in Q4, or preserve the previous step function. 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. The hard one was the 20,000 next year and the 25% gross margin, and the start of deliveries no later than July. Those are the three hard ones, and the others are, like I say, relatively soft. I still want to aspire to meet something, even if it's a softer commitment. It's going to mean that we're going to have to work pretty hard over Thanksgiving and Christmas and New Year's and all that, but we want to try to do the right thing for our investors.
Okay, it was because of the commitment and not Okay. Just, I hate 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." I guess, just what do you make of that commentary? I imagine some people on your team are looking at it as well.
Well, yeah, sometimes things can go a little awry on the message boards. Yeah, 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 assume the worst or something like that. I mean, George, do you want to?
Yeah, I monitor them. I watch them on a regular basis. I watch them on a daily basis. 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's going to be pushed back.
Right
It was a blatant factual inaccuracy.
Right.
I went, and I shut it down. Those kind of things happen all the time. I try to not contribute to the message boards much at all, but sometimes things just run awry. Some people, Early on, we had gone out with a more firm date, whenever people would configure their cars early on, in early April and May, and they were configuring, or in April and May configuring their cars. Our system kicked out a date. There was sort of a projection, and then we sort of left it there as a placeholder, and some of those people have thought that was a firm date, and it never really was. We're correcting that. 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.
Yeah, exactly.
I don't know how else to describe it.
Right. I think I just sort of judge things by what's your number of cars are being delivered, and that'll give some sense of how we're tracking to actual deliveries.
Oh, I think it-
You'll see that number rise quite dramatically. I think we'll see some of this activity on the boards just die down, because in the absence of information, you can get rampant speculation that's just not based on anything. Let's see. Jeff won't let me say anything about short sellers, but
Restrain yourself.
I think we are one of the most short-sold stocks on the stock market. There are certainly people with means, motive, and opportunity to say things that are negative and untrue. I'm not saying that they are. There's means, motive, and 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? George, you have talked about it a little bit, I was just wondering, what gets you there?
I don't think we've ever said that we will have 20,000 reservations by the end of the year. We might have that. It's not out of the question, but I think inclusive of deliveries, I think that's very likely. Or it's likely. Perhaps I'll take the vary 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 2013 is likely to be production constrained again. I don't think it's going to be demand constrained.
You're saying that 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'll be sold out.
Yes. I think that we will sell more cars than 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.
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?
Yeah.
Yeah. I think the way to look at this is that we never plan to have inventory. What will happen is we have a plan in place with stores and marketing, et cetera, 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. What will happen is we don't expect to have 20,000 reservations on an ongoing basis because that's way too far out. Our goal is to have three to four months-
Yeah
of active reservations at any given point in time ahead of production, whatever the production rate is. The idea is-
Exactly
to get a run rate of reservations that's three to four 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 three to four months of ongoing reservations.
That's fundamental to our retail model.
Right.
Right? That model continues. 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 reservations.
Right. As we get closer to being able to deliver cars faster, our reservation demand will be stronger because it'll be more predictable. People will be able to say, "Okay, I have a lease that's coming up in three or four months. Now's the time to reserve." Another thing that happens is 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, then we'll deliver it in another couple of months. 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, what's happened is, I think our end of June and July demand 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. I think the third is that we're putting a lot of people behind the wheel for the first time, they're getting out of the car and saying incredible things. They're going home telling their friends coming back and getting their friends involved. We're seeing incremental demand because of the tour, 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.
Again, that's another opportunity for us.
Right
In another month or so, when we actually take the test drive cars we have and the ones we're building now.
Right
We go out and we say, okay, now we've gone out, we've done 5,000, 6,000 test drives of reservation holders. 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.
Yeah, this is actually an important point that George has just made. The test drives, all these test drives, almost all of them are just for existing customers.
Right.
Essentially, we could generate more sales if we wanted to.
Right.
We could grow the rate faster, there's not much point in growing the rate faster.
Can't make them
nine or 10 months. Yeah. If it's nine or 10 months before you get the car, there's just not much point really in trying to add additional orders.
We have an incredibly loyal base. We have an incredibly-
Yeah
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.
Yeah.
Okay, I want a car like Steve. I want a car like Nancy's." 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.
Yeah. Potentially, if we really tried hard, it would be more than this.
I think another thing to point out, and 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 Get Out and 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.
Yeah.
We don't have a component tour. We don't have anything at all in either one of those major markets, and we're sold out in Signature in E.U. We're not doing anything outside of North America, and yet we've got the backlog we have now. As we go into the end of Q3 and into Q4, we're going to start transitioning those markets to Model S, and at that point, trying.
Yeah.
in Europe and Asia for the first time.
Right. I think any reasonable definition of trying would mean you've got at least one car in the market.
Right.
Obviously, we're not. It still surprises me that I see articles out there questioning whether there's demand for the Model S. There may be demand issues with other electric vehicles. There's certainly not a demand issue with Model S.
Okay. 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 untapped, and possibly even the Midwest.
Yeah, absolutely.
On the Get Amped Tour?
Yeah, just in terms of markets that have not been tapped. We've barely touched the greater New York area.
Yeah. We are opening more stores this year.
Yeah
this fall. In fact, one of our next stores will be in the New York metropolitan area. Then we'll come back with another two, and then we'll go further north from there into the Massachusetts area and down into the D.C. area.
Yeah.
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, 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.
Yeah. Actually, I think a lot of people on the call are probably from the greater New York area. So maybe.
Right
It's worth just listing the stores that we've opened in the greater New York area and the ones that perhaps will 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. We opened up in Westchester, up in Westchester County, and it's doing very well. Very nicely. 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. Having two 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. For you in Long Island, we'll be looking to open up in Roosevelt Field.
Going from one store on West 25th Street to having two in Northern Jersey, one in Westchester County and one in Long Island, it's a pretty good capture of the New York metropolitan area with those particular centers surrounding the city.
Yeah, our store in Chelsea, we got that lease because it was the only lease we could afford back in the day. It's still basically maybe version 1.5 of store technology.
Yeah.
If you want to see the latest in store technology, I'm not using that word facetiously. There really is store technology. You'd want to go to the Westchester or one of the stores that's opening up in New Jersey or Long Island. That will show you the latest and greatest in the retail experience. It just gives you some sense. We basically had, I count the store in Chelsea as like a half store. We had a half store until a few months ago in the entire greater New York area. A half store.
like I said, what's happened is when we opened up the Westchester, got that.
Right
awareness and a little bit of publicity and media, we now have two full stores.
Right.
it took the half store and made it into a full store with reservations.
Right.
not from a technology standpoint, but from a productivity standpoint.
Okay.
Thank you.
We'll take one more question. Jamie, please.
The next question comes from Jesse Pichel 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-20?
Sorry, I'm not sure what your question is, Jesse, exactly. Are you referring to our inventory turns or our 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?
Yeah, I think the way we look at it is that fundamentally, we have zero receivables. We deliver the car within a few days of production, and we get full payment. Our supplier payment terms are on average about 45 days. We tend to deliver and receive money before we have to pay to our suppliers. I think from your point of view.
Exactly
more focus is working capital usage, and our need for working capital don't increase as we ramp up production.
Yeah.
It actually helps us, in fact, from a cash flow perspective.
You asked a question, I think, which is a good one because the capital needs of a business, if a business needs to raise equity or something to build working capital as it grows, the effective return on investment for an investor 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.
Yeah, that's what I thought and why I questioned the Bloomberg article. Are you breaking out X reservations in the quarter?
No, we're putting zero attention on X reservations. It's not really a metric we want to call people's attention to. That's something that 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.
Oh, yeah. Sure.
Yeah, as George mentioned.
Yeah
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.
Yeah, I think that 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.
Yeah, that's why I was wondering if the launch in Europe and Asia is really going to increase the reservations that much, or if they're already reserving today.
Oh, no. It'll increase it massively.
Yeah. The difference, your question is appropriate in that do I think there are five people, 10 people who have bought U.S. cars that are going to take them to Europe? Yes. We have hundreds of reservations in EU, and we're getting more and more every month. That is not going to impact. That's going to impact not at all. That'll be no impact.
Yeah.
Right. I guess it's not quite as exotic as picking up your Mercedes from Stuttgart, but I guess you can give them a burger and send them on their way. You made an interesting comment, Elon, about battery pack replacements allowing the car a better range versus today.
Yeah.
You've said this before. When can we expect the next battery chemistry improvement, and what's your roadmap for that?
I think it's probably with the Gen3 that we'll see a change in the fundamental chemistry as we did with Roadster, where Roadster 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. Also a drop in cost because of the much lower cobalt content. I can't comment on the specifics of some of the technologies that I'm aware of because of confidentiality agreements. I can say I'm highly optimistic about seeing substantial reductions in cost per kilowatt hour in the three- to four-year timeframe.
Thank you, gentlemen. Congratulations on the ramp.
Thanks.
Thanks.
Thanks, Jesse.
Thanks, everyone. I apologize we didn't get to everybody today. This is going to conclude our call. We look forward to seeing many of you in the coming weeks, either at test drive events. We'll also be at several conferences, including in New York on August 7th for Needham Advanced Industrial Tech Conference, or on April 13th in Vail at Pacific Crest Global Technology Leadership Forum, or on the 14th in New York again at the J.P. Morgan 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.