M&A Announcement

Jun 22, 2016

Good day, ladies and gentlemen. Welcome to the Tesla Motors Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference may be recorded. I would like to introduce your host for today's conference, Mr. Jeff Evanson, Investor Relations, Tesla Motors. Sir, you may begin. Thank you, Torea, and good morning, everyone. Welcome to Tesla's call to discuss the rationale for our offer to acquire SolarCity. I'm joined today by Elon Musk, Tesla Chairman and CEO Todd Marin, Tesla General Counsel Jaybus Straubel, our CTO and CFO, Jason Wheeler. Yesterday, we announced our offer to acquire SolarCity in filings with the SEC and through a blog post available at www.tesla.com. During our call this morning, we'll discuss our some of our business outlook and make other forward looking statements. These are based on our predictions and expectations as of today. Actual events or results could differ materially due to a risk a number of risks and uncertainties, including those mentioned in our most recent Form 10 Q filed with the SEC. We're going to start today's call with some comments by Todd and then Elon, followed by Q and A. So go ahead and press star 1 now to get into the queue to ask a question. And with that, I'll pass it over to you, Todd. Good morning, everyone. Thanks, Jeff. So I just wanted to briefly touch on some of the process points and why yesterday's announcement might have looked somewhat different to people who normally see these kinds of announcements. It's actually somewhat of an easy explanation, but it is somewhat of a unique situation. So usually I know that everyone is used to seeing an announcement when there's actually a definitive agreement that's reached and not just simply an offer. And obviously in our situation, we were only announcing an offer. And then as a result, you didn't receive the same kind of information that you would receive when an agreement is reached, such as the agreement itself and detailed financial information about the combined company. The reason for that is that Ilan is a 5% stockholder in SolarCity and he's required by the securities laws to keep the market informed through a Schedule 13D filing about his plans with respect to those holdings. And because of Tesla's decision to make an offer to SolarCity and Elon's support for that decision, it was appropriate to amend his Schedule 13D to update the market even though no definitive agreement had yet been reached. It's obviously our hope to engage in a due diligence process with SolarCity and ultimately reach that agreement. And all that information that you would customarily see at that time, including the agreement itself and detailed financial information about the combined companies would be provided then. But the result of this is that this is actually a more transparent process because you're essentially seeing behind the curtains more than you would ordinarily see in a transaction because you're actually getting additional information upfront at the offer stage and getting an advanced look at the strategic business rationale for the deal. And so with that, I'll actually pass it over to Elon so that he can speak more about the strategic rationale for the deal and why we do think that combining the 2 companies makes sense here. Sure. I did touch on most of this yesterday, but I think what this call is mostly going to be about is getting into some of the detailed questions that people have. As I said yesterday, there's kind of 3 parts to and as I said at the actually Powerwall presentation last year, so just as part of why I think this is really quite an obviously correct move is that in order to solve sustainable energy question, we need a sustainable energy production, which is going to come primarily in the form of solar, overwhelmingly in the form of solar in my view. Then with combine that with stationary storage and electric vehicle and you have a complete solution to a sustainable energy future. Those are the 3 parts that are needed. And that's those are the 3 things that I think Tesla should be providing. And it just became increasingly obvious that as we're developing the Powerwall and new versions of the Powerwall, because as we integrate more of the inverter electronics and the intelligence in the Powerwall, it really you really need to take the solar panels and solar system into account when doing that. Otherwise, you duplicate a lot of hardware. That doesn't work together as well. It's more expensive. The installation cost is substantially higher since you've got to put the solar Powerwall, the solar panels. If you got an electric car, you're going to install the wall connector and at home charging system. There's potentially 3 visits. There's at least 2 visits. And then in terms of the sales process itself, when we're selling somebody the Powerwall, very often, if not almost always, they are curious about solar and want to do the same thing. So then not being able to sell them solar directly at SolarCity sorry, at the Tesla through our stores is pretty inefficient. But as you look ahead to say Model 3 and $35,000 car, well that same person, at the same moment, we could sell them roughly an equivalent amount value of solar panels and a Powerwall, effectively doubling almost doubling the sale at that time and then putting it all in at the same time. So I mean, I think the word synergy is bad, it's like that's sort of dirty word, but I think it's I think these synergies are really just common sense. Like obviously, it's more efficient to do this as an integrated system at the sale and at the installation and in terms of just general maintenance and managing the customer relationship. And yes, and I think that makes it kind of a pretty obvious thing to do. And it's quite difficult to create an integrated product if you're forced to be at an arm's length and be 2 different companies. So if we give a special deal to SolarCity and SolarCity is not part of Tesla, then why are we doing that? So we can do that if SolarCity is part of Tesla, we can't do it if SolarCity is a separate company. So it just makes things the execution, I think, a lot easier and cleaner and more effective. So I think that's why I said yesterday, I think it's really kind of a no brainer. Like if we didn't do this, it would make Tesla's execution harder and worse. And I think the tide of history very strongly supports and will be a sustainable energy future, primarily solar and virtually entirely electric vehicles. And maybe things that temporarily interrupt that type of history, but in long term it will overwhelm everything and our goal is to accelerate the advent of that future as fast as possible and this helps us accelerate it. So that's the reason. And yes, so yes, and I think there have been some questions about like does this sort of really increase our debt position or a bank balance sheet. It really doesn't. I think Green Country will take a close look at SolarCity. What really matters is the recourse debt, obviously, the non recourse debt is not what matters. And the cash flows generating that that's supposed to be will generate it covers what's required with the recourse debt. So they are headed to cash flow positive situation for the next 3 to 6 months at the outside. And that's where the company has been steering itself, reducing their growth rate to some degree to achieve that cash flow positive position, but they're very clearly on their way to getting there in short order. So it actually we expect it to be a net cash generator, not a user of particularly when taking into account the dramatic reduction in the cost of sales of solar systems sold through our stores. The biggest factor in SolarCity's increasing cost per watt in Q1 was their sales cost. So as soon as you that quite a big increase in sales cost, that will go radically in other direction with sales through Tesla. And then I'd love to talk more about what's going to happen on the product side. Obviously, that would be I think that would shed a lot of light on this deal and why I think it makes total sense and really is a no brainer. But I can't talk about shareholder non public plans, except that I'm very optimistic about those plans. And that does what while to date Solacevi has not been significantly differentiated on the products side to the solar panels themselves. They certainly will be in the fairly near future. And actually if you're just looking carefully to what Solsys has been saying in its earnings calls and its announcements that I think should be also pretty clear like that. That closely is saying that there's going to be significant part differentiation. There's the SLEVA acquisition, which we think is the best technology out there for high efficiency, low class solar panels. And at the same time, very significantly improving the aesthetics of the solar panels. Like I think there's quite a radical difference between having solar panels on your roof that actually make your house look better versus ones that do not. I think this is I think it's going to be a night and day difference and the slowest lever development allows for that. So we can't go into the details of those because making future product announcements that are really exciting, obviously affect future product sales. And it's the full extent of that is not yet public information. But I do believe it fits together very well with Tesla's plans on the Powerwall and Powerpack side. Yes. So we can turn it over to questions at this point. All right. Thanks, Elon. Tereah, why don't we go to the first question, please? Certainly. Our first question comes from the line of Brian Johnson of Barclays. Your line is now open. Yes, thank you. I have about 3 questions. One for Ilan, one for Ilan, we started the General Counsel and Jason. For Todd, you talked in the letter about 2 of the directors not voting. Can you give us a sense, because this will come out in the proxy eventually, two companies? Is there actually a committee of independent directors? How independent do you consider the remaining directors? Do they have any personal ownership of SolarCity? And the other things that are likely to relate to the Board issues. So, this is Todd. When this is a little bit tracks back to what I was saying earlier about the stage of the process that we're in. But when a deal is announced, if that happens, all this stuff will come out in terms of exactly what the process was at every point. The key points now are that Elon and Antonio since they're on both boards have recused themselves from the board processes of voting on the transaction. And they've also committed to if there's a deal that the disinterested shareholders would vote on that deal with the majority of those disinterested shares determining the outcome of the vote. But beyond that, it's really too early in the process to get into all the different details. But rest assured that will all come out once there's actually a definitive agreement that's reached. At this point, it's probably more appropriate to just focus on the business rationale for why this deal makes sense. And just when you say recused from voting, does that also mean recused from discussion and not present in the room when this was brought up? No, it was recused from voting. Okay. For Jason, given your talk earlier in the year about kind of focusing on cash and even stipulating perhaps that SolarCity can reach some sort of cash breakeven by Q4. How does this change your view of the pro form a companies in terms of their cash usage and their need to potentially go back to the capital markets either debt or equity to finance the ongoing business? Yes, sure. On the Tesla side, I stick with the statements that we've made on previous earnings calls. On the SolarCity side, as Todd has laid out, we're just at the beginning of the process now. And the only information I've had access to is what's publicly available. So I don't have anything to say about the pro form a combined entity at this point. And we'll start to look at that as we get into the full due diligence now. And I guess due diligence question was probably scoped out before you did the deal. When you survey Tesla owners, what percent have solar already? What percent are in states where solar would make sense? And sort of just what are some of the basic kind of merger synergies in terms of customer overlap and customer potential that you guys look at? Well, I mean, I think the way to think about this is not to kind of look in the rearview mirror, but to look through the windshield. Like only about 1% of U. S. Homes have solar. So you have a massive addressable market that's unserved. It was at least 40,000,000 to 60,000,000 households that were solar where they could do solar if they wanted to. So if the economics were right and they liked the aesthetics and it was easy to do, then they would do it. So the future market there is really gigantic. And on the cash front, we don't expect SolarCity to have a material impact on future cash needs. Yes, I mean, it's I don't think it's going to make much of a difference really. With the positive cash flow really by the end of the year. And just final, you talked a little bit yesterday, but how does this affect the how do you make sure that your personal time between this and of course the Rocket business, given the M and A, that synergies that you're trying to get, given the sales, the service overlap, that's kind of a whole separate line of processes and kind of grunt work on the ground from launching a new model car. How do you actually get both the integration of a sales and service system for solar and cars and batteries done at the same time you've got a, by your own admission, aggressive launch schedule for the Model 3? Well, I mean my intuition about screwing, but I mean, from my standpoint, this makes Tesla's future execution easier, not harder. Because it's just getting increasingly unwieldy to work with SolarCity on an arms length basis. We really need to have an integrated product. The Powerwall and the Powerpack need to be designed together with the solar system. So it's a 1 piece thing. And we really can't do that if we're 2 separate companies. We've got we've got to treat Solacevi like there are any other company, which is extremely unwieldy. So from my standpoint, this makes the execution easier, if not harder. And I think Solsys has got a great future independent of Tesla, but and obviously Tesla does. But being able to integrate things at the product level, at the consumer experience level, the utility level, the commercial level, it just it actually makes it easier, not harder. That's why we're doing this. I mean, it's like why should companies exist at all? Like what's the point of having companies? The point is that a given company is going to create a more compelling good or service for the end customer. And then so should the companies be 2 separate containers or 1 container? And if they're one container, we can make a more compelling product and work together easier. So that's the reason for it. So I think that speaks to the sort of fundamental economic goodness of the transaction. And it will be harder if we remain 2 different covenants. Okay. Thank you. Thank you. And our next question comes from Charlie Anderson of Dougherty and Company. Your line is now open. Okay. And our next question comes from the line of Brian Johnson of Barclays. Your line is now open. Well, I already asked the question. Yes, Tereah, why don't we go to the next caller, please. Let's try Charlie again. Okay. Our next question comes from the line of Charlie Anderson of Dougherty and Company. Your line is now open. Yes, good morning. Thanks for taking my questions. So I wondered if shareholders of Tesla will have a synergies number in mind when they vote and if you guys have any early look at what synergies could be and are you expecting much in the way of cost? And just thinking about the incremental cost of combining the products, What will that be? It sounds like some of the work has already been done to combine the products, but just any thoughts on that would be helpful. Sure. I mean, we can give estimates because obviously this is still the early stages. And I mean, their estimates based on kind of what stands to reason. But looking ahead, particularly to next year, selling Model 3, kind of something on the order of a $35,000 car. If we're selling Powerwalls and solar systems of comparable value, and doing so in the same sales footprint with the same person, the first order approximation, our cost of sales should drop in half as would Solar Studies correspondingly. Maybe it's not entirely in half, I think it's 30% to 40%, but it's a pretty I think a very substantial drop on SolarCity side and also a drop of a material drop on Tesla's side. You're basically selling, let's say, almost twice as much in a single transaction as you otherwise would. And then on the installation setup side, it's one crew instead of and one visit instead of 2 to 3 visits. The ongoing maintenance is kind of one point of contact and not sort of 2 or 3 points contact. And the cost of the system itself is lower because we're not duplicating hardware, the hardware level. So I think that all makes a lot of sense. Yes, so the final cost for both companies would go down materially. And yes, I think it's we're talking about like is it sort of 20% reduction, 30% reduction, 40% reduction, but it's pretty significant. And for sure better than if the companies were separate. Great. And then just another quick one from me. I wondered why now versus 2 years ago versus 2 years from now? Yes. The reason now is because we've got we're really ramping up Powerwall and Powerpack. We're developing version 2 and then we have kind of our plans for version 3, version 4 and so forth. SolarCity also is preparing to come out with the solar panels that as a consequence of the Solivo transaction a couple of years ago. That significantly improved the efficiency and the aesthetics of the roof. And I think the aesthetics matter a lot. Tesla were super sensitive to aesthetics. And I think SolarCity I think they're going to get there on their own, but I think that journey will be accelerated as part of Tesla as well. And it just sort of makes sense that like if you had our solar system that made your house look better, lowered your cost of electricity and then gave you security with against the power outage with the power back and allowed you to go potentially completely off grid, then it's kind of a no brainer, like why wouldn't you do that? Thanks so much. Thank you. Our next question comes from Stacy Cho of Albert Free. Your line is now open. Fries. Congratulations on the offer. A couple of questions. I think that people are kind of trying to digest. I think strategically, Elon, that you've made your points clear. But I think the valuation is what the market is having issues with. There are some questions about SolarCity's balance sheet and you mentioned about the debt. So how do you put that into context with the exchange ratio that you've offered, kind of not jeopardizing kind of the future of Tesla, while you make this offer? Well, I think Tesla is getting a pretty good at current share price. I mean, the Tesla doesn't decide what their company's share price of like market should be, the public market is. So we're just obviously keying off of what the public market price is, which is decided by people other than ourselves. And then there's I think a quite reasonable neither high nor low acquisition premium that is being put forward subject to further diligence. And I think it's I mean, I think every element of it is very reasonable, like slowing us out of whack about the proposal. It's sort of extremely normal to have a acquisition premium of that size. It's certainly quite a bit lower than, for example, say, Lincoln. The LinkedIn only got a $0.50 premium. Here, we're talking about a sort of low 20s to maybe 30% premium. So it's more or less in line with the average acquisition premium for any given public market company. That's like if that's extremely normal. And then just overall, these I think when people when we were down the road, not even far down the road, like next year, but particularly as you go further into the future, these numbers are going to seem like very small numbers. But I think as a combined automotive and power storage and power generation company, I mean the potential is there for Tesla to be a $1,000,000,000,000 company, like market cap company. So if we play a major role in transitioning the world to a new form of energy generation and storage and transport, that's what kind of happens. So that's I think one isn't going to be worried about whether it's a few $100,000,000 one way or the other here down the road, it's not really going to make a difference. Okay. I appreciate your candor about the $1,000,000,000,000 market cap. I think that leads to the future value of SolarCity. But I guess the near term because you're not voting your shares both on Tesla and Solar City from my understanding of the comp. How do you expect the near term kind of shareholders or near term focus shareholders to kind of vote this in favor of this. I'm assuming it's a simple majority. And so it's kind of a chicken and egg thing where your future your expectation of the future is probably correct, strategically. But near term, people are having more time to digest this, not enough time to digest this and kind of looking more near term. And that's what the concern is, is getting to the finish line. So how do you see this getting to the finish line where you see shareholders on the SolarCity side being receptive to the exchange ratio, you reach a merger agreement And then further along, Tesla shareholders being receptive voting in favor of this because ultimately it's these 2 or 3 ducks, valuation of the exchange ratio and then understanding the future opportunity that will get this to the finish line on the shareholder side shareholder vote? Yes. I mean, the exchange ratio, obviously, I mean, there's some balance on the exchange ratio that if we exceed the balance of reasonableness for any party, obviously, it wouldn't happen. So, except the market cap of Sol City is decided by the market. So that's what it is what investors think it is. And then the premium you don't get to acquire companies for 0 premium. That's just not how it works. And so some reasonable premium obviously is appropriate in a situation like this, but as it always is. And we're kind of right where premiums normally are and actually lower than some recent prominent premiums paid like the LinkedIn one, which I believe was on the order of 50%. So I think that we're it's a reasonable market cap with a reasonable premium. And what can maybe quibble around the edges a little bit, but it's I don't think there's anything like out of whack there. And but at the end of this will definitely be up to the you guys who own shares, like I said, I'll recuse myself from the shareholder vote. It has to be majority of non me shareholders. And but like I said, I doing this because I think it makes things better and in the future, not worse for everyone. And so I'd really recommend voting in favor of this, because I think anyone who doesn't vote in favor of this is going to be voting against their press interests. But we will certainly abide by the shareholder vote. So if there's a bit of unhappiness, we will move forward. But I just really want to emphasize that I have zero doubt about this, 0. Arguably, we should have done it sooner. But I think doing it now is it gives us enough time to create a compelling integrated product, assuming it doesn't take forever to close, give us time to create a very compelling integrated product and bring that to significant scale next year. Okay. So when you say you have no doubt, so you believe the special committee independent Board, when they do their due diligence and reverse due diligence on both companies, that they'll reach you'll be able to reach your agreement. That seems very likely At the Board level, yes. I mean, like the Board opinion is unanimous for both companies. So I mean, there I mean, and this is something discovered that I have no idea about or it's just nobody on the board has any idea about, which is extremely unlikely, then that the board would the impact of board members would recommend in favor of completing a transaction somewhere in the price range that was mentioned, most likely. And then it would be up to shareholder vote to say, it's prudent me to say yes or no. And yes, so I think that's about as fair as one could make it. Great. Thank you very much. Congratulations again. Yes. Thanks. Yes, I mean, everybody here thinks like, hey, there's some better way to do this, like morally better way to do this or better way to do this from an execution standpoint, like let me know, but and we've tried to do this in the way that's as fair as possible and really going beyond what's legally required. And to make it as not just legally correct, but morally correct. Thank you. And our next question comes from the line of Colin Rusch of Oppenheimer and Co. Your line is now open. Thanks so much. At what point are we going to get financial details here? Clearly, there's been an awful lot of cross pollination with the boards. Former CFO of SolarCity is on the board of Tesla. JV is on the board of SolarCity. There's been a lot of sharing. To have a price here without some sort of scope of return on capital, I think would be incredibly important for us. And so when are we going to get that information? And without you're begging off the detailing on synergies, but I think getting specific about return on capital for Tesla shareholders will be essential to getting this done. When are we going to get that information? Yes, I agree. I agree. I mean, as Todd was saying, we're going to have to do this in a bit of an unwieldy way, because I'm the largest shareholder of both companies. If that wasn't the case, we could do a lot of this and then and kind of present you with like the full and final details of the proposed merger and what the but before we since I'm a large shareholder of both companies, we have to tell you at the beginning of the process, not the end. So we will certainly have all that done for you. But the reason it's not just all in a neat package is because this is sort of an odd case where we have to tell you at the start of the process before we have all the answers rather than at the end of the process. But we will get definitely get all that information and I'm confident it will be extremely compelling. Okay. And then the second question is around Solivo. So there's actually a lot going on in terms of manufacturing for solar at this point with Asian manufacturers reducing cost while in excess of what expectations have been. And certainly, there's folks that are getting around the import duties. Even with the potential savings on installation costs with the extra efficiency at Solivo, it looks like there isn't going to be that much of a cost advantage just from a raw cost perspective when you look at a price point for solar panels coming into the U. S. That SolarCity would buy. Can you talk a little bit about you're begging off some of the product details here, But what you're expecting Tesla to be able to bring to that engineering process to improve that cost trajectory? Because by the time you get that Solivo factory up and running, there's going to be, I think, at least a $0.15 cost disadvantage for their target cost at this point. And I think there's something that needs to get done there to make that a compelling compelling offering. Sure. So at Tesla, we're putting a lot of effort into becoming the world's best manufacturer. And I really mean that. That's like I'm highly confident we will be the world's best manufacturer. Just as we said, we will build the world's best car, we did that. At SpaceX, I said we would build the world's best rocket, we did that. We're going to be the world's best manufacturer, not by a small margin, but by a margin that people don't even think is possible. I believe in taking a first principles physics based approach to analysis. And my analysis of the situation is that dramatic improvements are possible on the automotive side and on the photovoltaic side. An important advantage of the Slivo technology is that it has significantly higher efficiency than the very low cost Chinese panels. So on the same surface area of roof, you can get as much as a third more power. And then aesthetically speaking, the CIVO panels look better. They look a lot better. And if it's done right, we can make your roof look better with solar panels than without. This is a night and day difference. And if you've got a let's say somebody's got a $400,000 house, if you make the roof look ugly, then arguably you've made that house worth 5% less or some non zero percent less valuable. On the other hand, if you make the roof look beautiful, made it the house more valuable. And maybe that's plus 5% or some non 0 plus percent in the value of the house. If it is something on the order of 5%, then the value delta there is, call it, dollars 40,000 or I think it's only like 2% or 3% and it's only $20,000 It's like it's you have quite a big value delta. So being able to have higher power that looks great and I think at costs that are at least as good, if not better than what's coming from anywhere else in the world, that's obviously a winning outcome. And that's the outcome that we will pursue. And I think we'll get there. Okay. I'll follow-up on that. I think my question was more around the process technology at Solivo than the ultimate. So you're going to explain the fundamentals of the process technology and we're going to get the cost out. I think there are a variety of detailed questions I can come back with you with. But my follow-up question on that is just fundamentally SolarCity is a specialty construction and specialty finance entity at its heart. And so as you look at Tesla being a value added manufacturer of a variety of products and a technology company moving into what we see as a fundamentally different business, where are you seeing the synergies come back to Tesla other than the sales side? Is there something to do on that specialty finance expertise that you would be bringing in house? And the actual boots on the ground, the footprint of SolarCity is incredibly important to actually closing sales and delivering things versus the footprint of Tesla's customer base, which is very different than the concentrated footprint at SolarCity. How are you seeing the value come back to Tesla other than just in the cost of customer acquisition? Yes. I mean, I think the biggest asset that we'd be acquiring is the are the installers, the installation team of SolarCity. And a lot of people trained in doing the permitting and the paperwork and all the complexities that exist in municipalities throughout the country and outstanding how to deal with 37 different roof types and having efficient logistics infrastructure for doing the installations. And then I think there's some strengths in the Cell City sales side that we can take advantage of. And yes, so but I really don't I do want to emphasize like I think the SLEVO technology is going to make quite a big difference. And I don't see any fundamental cost issues that prevent it from being atorlowercostperwatt than any other panel in the world. Okay. Thanks. I spent time in the Salt City Slovo, pilot plant in the Bay Area. And so I'm not as familiar with this. And my observation is there are dramatic improvements where it's like there's not some physical thing that's preventing it from being super competitive, right? It's actually relatively straightforward manufacturing process. Okay. Thanks a lot. All right. Elon and Todd, it's Jeff. I've had a number of people emailing in questions about process here, possible timeline. Todd or Elon, if you want to speak to kind of a recap of who needs to vote, who's recused and how and when diligence disclosure and the shareholder votes might happen? That might be helpful. Sure. I can take that if you want. So on the Tesla side, the board has approved going forward with the offer, which is why we made the announcement that an offer was made. Elon and Antonio being directors on both boards recuse themselves from the vote on that. We're now in a stage where we've delivered the offer to SolarCity. SolarCity will set up their board process on their end and decide how to do this so that it's done, as Elon said, not only legally but more correctly, I'm sure. And then we'll move into a diligence phase very quickly. Hopefully diligence can take place promptly, so in the next 2, 3 weeks and we can get to a place where everything makes sense that there's a signed merger agreement. And at that point everyone would receive the merger agreement, as well as the typical disclosures that would be provided at that time, combined financials, proxy statements and everything, and we've moved to a shareholder vote. We're now getting a little bit further out, so it's harder to with certainty. But the hope would be that there would be a shareholder vote on each side in the next few months. Thank you. And our next question comes from the line of Joseph Spak of RBC Capital Markets. Your line is now open. Thanks. So I guess I just wanted to get your sense on how much of a play you think the Solar City bet is on lower storage costs? Meaning, we've seen some proposed changes to net metering laws And if that sort of continues or there's more of that, does how long does the business model work? Like do you need to see the falling storage costs forward to work? And is your confidence in that the reason to go forward with the deal? Yes. The storage costs are going to drop really dramatically with each passing year. And I think I mean, depending on with exclusion of certain situations like Nevada, maybe Arizona, which we're working to mitigate, but it will be ahead of the net metering situation. In New York, a reasonable deal has been arranged. And basically, this gets ahead of the net metering situation and call it roughly the 2 to 3 year timeframe. So it's certainly important for long term. And although some of the utilities will exaggerate the impact of solar on the grid, ultimately the impact of solar on the grid beyond a certain localized percentage does have an impact and you do need to buffer the power. So they have a value argument, it's just exaggerated. So it's obviously very important for the long term. And yes, it's going to work together well. I mean, this is what the world needs. This is the ultimate solution for, it's what we're talking about here, solar power, stationary storage, electric cars. This is Earth's solution. And we're going to try to make that happen as fast as possible. And the fundamental good of solstating Tesla will be measured by the degree to which we accelerate that transition. So we're trying to make it happen as fast as possible. And I think we'll have an impact on that timeframe. And then maybe just two real quick ones. If the deal is consummated, do you have you given any thought or plan to provide segmented balance sheet or cash flow just to provide a little bit more transparency on each line? And then on a technical point, so you will do that? Yes. I mean, I do think it's valuable to have transparency. So I think we want to show that transparency as much as we can. It sounds for some cases kind of like where exactly should the cost be allocated. But I just think it's it won't be great if it's like a black box that people can't figure out and then have to like somehow parse out what pieces or what. So we don't want to have an information discount to the stock because people are uncertain. So I think that's having clearer information gives people a better understanding of the value of the company and the various pieces. It will inevitably lead some people to reach conclusions that maybe you shouldn't reach or they're premature, but I do believe in transparency. And then from a technical standpoint, you talked about some greater seamlessness between the entities. Would you also consider allowing vehicle to grid support? I think we've debated this since the early days of the Roadster. I mean, even the very early Roadsters that we had would do vehicle to grid. But you do get a lot of complications with that if you backflow power through the car into the wall. Like when is the car allowed to do that? When is it not? And then how much do you allow the car battery be drawn down? And then, I think we're pretty upset if they if the lights are on in the house, but they can't drive their car because of the light, all the power in the house shuts down. So I think the right solution is to decouple it and into vehicle, stationary, battery and solar. And then obviously, we need to supplement that power at the grid level by having utility scale solar battery installations, because you don't always have enough surface area on a house or certainly for an apartment building, you don't have enough surface area. So you got to kind of ground mount the utility scale, solar battery system and feed that to the grid. But if anyone that's seen my Powerwall presentation, it's remarkable how little land you need to power the entire United States. It's crazy. Like a little corner of Texas or Utah, that's all the United States' power. And then there's like 1 pixel inside that box that I showed, which is the box of how much land area you need to power the United States, but it was like a little box. Like I said, fits into it like the little Texas Panhandle or corner of Utah. And inside that box is 1 pixel. That's the size that's the surface area of the battery packs needed to support the entire United States, 1 pixel. So anyway, we're going to try to build that as fast as we can. And I've been really going to talk to for U. S. But throughout the world. Thanks. And that video by the way is available on our Web site of Elon's presentation on the Tesla Energy Products. Elon, we are at the half hour mark here. We have 9 more questionnaires in queue. So defer to you as to determine how far along you want to go. But let's try to answer everyone's questions. And like I said, I really wouldn't encourage folks like to think about the long term, where is this all headed. And I think if you think about like the long term, there's really no question about the convergence of Tesla and SolarCity. It's really just a question of what timing is appropriate for that convergence. And the it's basically SolarCity's product roadmap and Teva's product roadmap, which obviously very significant, non public information. So I wish I could tell you about I can't. The timing is if anything, we're maybe we should have done this sooner. But I certainly don't think we're doing it too early. And then what what's the long term picture? Long term picture is a world with sustainable power generation with stationary storage to buffer that power and then electric cars. And Tesla is going to be the leader in all three. So if you believe that that's the future we're headed towards, which everything points to that being true, and really like gasoline caused, we have to look back on gasoline caused like we look back on steam engines, like a phase, it was a bit weird. And we're going to look at back on fossil fuel power generation the same way. It was a weird phase. Now we want to get out of that weird phase as soon as we can. And this is all about accelerating us getting out of idiosyncratic moment in history when we were digging up sort of Cambrian level fossils and burning them. And I think you're telling your grandchildren like, yes, you won't believe in what we used to do, just like we used to dig up the liquidized remains of dinosaurs and old plants and put them in cars and burn them to move and did the same thing with the power plants and like that sounds crazy. That's what it's going to be in the future, obviously. So yes, we're trying to have the non weird future get here as fast as possible. All right, Tareal, let's go to the next question, please. Certainly. Our next question comes from Tyler Frank of Robert Baird. Your line is now open. Hey, guys. It's actually Ben Kaila from Baird. Elon, I was just wondering, I understand working together and being cumbersome by separate entities. But could you just talk us through what the difference is of actually owning SolarCity versus maybe doing some kind of JV or some other kind of entity like that to help you guys work through some of the issues? Yes. I mean, the problem is that I think we just we hit the it's like we don't have a good basis for doing some special deal with SolarCity because there's effectively a conflict of interest. Like, ironically, conflict of interest goes away for 1 company, but it doesn't go away for 2 separate companies. So like there's not really a good rationale for just offering a special deal and only working with 1 company that I also happen to own. Just it's I don't think we have a good moral or legal basis for behaving in a special way to SolarCity unless we're it's actually one company. Got it. And then one more if I can. Could you just rank some of the things that you talked about in the order you look at as far as revenue synergies from cross selling, the technical synergies of being able to work with on both the manufacturing, the panel side as well as the battery side? And then maybe the third one, bucket being cost synergies. And then if I forgot any out there, maybe list those as well in kind of the order that you're thinking of them? Thanks. Yes. I mean, I think we'll have a more definitive answer for you once this crisis wraps up. So I mean, I forgot what I'm seeing here is anecdotal, But it's kind of the way I think about it from a gut standpoint is like 1st and foremost, do we offer what allows us to offer the most compelling product to consumers and businesses? And it seamlessly integrated product that all just works together, that's better. Like you don't want to have to have a heterogeneous systems integration problem. That's just basically where the interfaces break down. And then people are sort of pointing fingers like this didn't work, now yours thing didn't work. It's like if it's just one integrated system, there's no finger pointing, you can iron out all the bugs and it just works. And you're not wondering whether should I blame the solar company or the battery company or the who knows, it's just like that's a sort of pain in the butt to try to figure that out if you're the end customer. And I think we can guide the integrated product to be the right to just be right to be better. So that's kind of from that standpoint more than anything else. And then in addition, there's just obvious cost savings to be had if in the same store, we can sell twice as much dollar volume, like, well, at the same store, not selling quite some more stuff. And if with the installation crew, if they're now able to knock out 3 things in a single visit rather than schedule 2 or 3 separate visits, that's also way better. What can I argue like this sort of like how much better is it? It's definitely some percentage better that's material, which is kind of I mean, that's kind of like the threshold for making a decision. It's obviously going to be a lot better. If there's just if you just cut the visits down to from 2 or 3 to 1, okay, you've probably cut your transport labor and logistics costs maybe in half, something like that. And if you have a seamlessly integrated product, you're going to have less servicing costs and things are going to break down It's just the thing you'd want to buy if you're the end customer, why would you want to buy anything else? Thank you. And our next question comes from Ryan Brinkman of JPMorgan. Your line is now open. Hi, this is Samik here on behalf of Ryan. Just a quick one from us. Have you had conversations about this offer already with the largest disinterest to shareholders of Tesla? And what's your sense in terms of do they see the same value in combining the two businesses as you do? And what's your sense about how they'll vote on this? Well, everybody we want to make sure everyone heard about it at the same time. So we've not discussed it with anyone because we want to invest this one and large to hear about it at the same time. Now several apart from that, over the years, have there been has this idea been bandied about with some of our largest shareholders, institutional shareholders? Yes, I mean, there have been discussions. And I think some of them see it as like a natural thing to do. And I mean, it's interesting to sort of look at the feedback that I've received since we made the announcement yesterday. Anyone who is product focused sent me sort of a congratulatory note and like why didn't you do it sooner sort of message. And then people that are sort of more finance focused, they were like a lot more worried about it. But in the long run, the value of the company is defined by the value of its products and services. That's like real important to bear in mind like why companies exist. They shouldn't exist otherwise. And the value of the company will follow the value of the product, a company that starts making lousy products is pretty soon going to have a lousy valuation. A product that makes great products is pretty soon going to have a great valuation because that's how this is set up and it's how it should be set up. Great. Thank you. Thanks. Thanks. Thank you. And our next question comes from Patrick Archambault of Goldman Sachs. Your line is now open. Great. Yes, thanks a lot for taking my question. So look, I think a lot has been laid out about the strategic vision for this longer term. But I wanted to piggyback on one of the earlier questions and just get a sense of the possible financial sense it makes kind of in the shorter term. And correct me if I'm wrong, I don't cover Solar City. But my understanding is the storage plus solar piece of that business is actually quite small. You've had places like the Rocky Mountain Institute put out fairly detailed studies on combining solar plus storage that suggests the levelized cost of energy won't be lower than the current available price for maybe, call it, 5 to 10 years. But you guys sound very confident that this makes sense sooner. So I just wanted to get your view on that. Yes, definitely. I think the one thing is to bear in mind like it's a big world out there and there are places where the cost of energy is much higher than other places. Like for example, in Hawaii, energy costs are very high because they have to ship in all of the fuel for their power plants. So it's very expensive. And so the economics of solar plus battery make overwhelming sense for places like Hawaii and a lot of actually island nations out there and really any place that's got expensive energy costs or even moderately expensive energy costs. And it's going to make sense for many parts of Europe, many parts of the United States. And yes, so it and then over time, it's going to make sense for everywhere. Like everywhere is going to be solar battery. I mean there'll be some wind of course, so geothermal, hydro and there'll be some long tail of before the final coal plant finally stops operating, the final natural gas plant stops operating. I mean, those might last. There'll be some long tailwinds, it's going to look like an S curve as is typical for new technology adoption. So it's like in the beginning of the S curve, people tend to under predict what's going to happen. And then it goes through an exponential growth phase, then an approximately linear growth phase. Usually people over predict what's going to happen in the steep linear portion of the growth phase. And then it it goes back into a logarithmic, so to complete the S shape. So what happened with the Internet, for example, cell phones, same thing will happen here. And I guess like within the United States, do you think like 5 years is a reasonable time frame for the economics to start to work? Yes, absolutely. On a mass scale? It's not. I mean, it just needs to be on a scale that it's like that as how the factory operate at maximum capacity. So we everything the factory is going to be operating at maximum capacity as far into the future as we can see. Like it's this is all about production. My meetings yesterday were all about guys we need to figure out how to ramp up our production of cells, batteries, obviously cars, faster. And addressing every limiting factor that we And I mentioned like this whole thing about like manufacturing a machine that builds a machine. It's like, let me tell you like order of magnitude improvements are what I think can be achieved. We'll get there right away, but by Version 3 of the machine that pulls the machine order of magnitude. That's the sort of compared to car manufacturing, you look at that and you're like, it will seem like an alien dreadnought, Like what the hell is that? And it's just like it goes online that people don't realize just how much improvement potential is possible. And I mean this is big. We're doing high school level physics necessary to figure this out. It's like not mega complicated. Just go to factory and say, do a volumetric density calculation, say what percentage of volume of the inside of this building is doing useful stuff versus is either air or not doing useful stuff, you'll be shocked at how tiny that percentage is, like low single digits. Then what is the velocity? What is the exit velocity of the product? How fast are things moving at the exit, what's the sort of mass flow of the M. Of the factory and it's like, woah, it's really low. Like the fastest car clients in the world, the car x velocity is basically grandma with a walker, that it's real slow, 0.2 meters per second. That's really, really slow. So I could do way better than that. Like the fastest person can run 10 meters per second, faster than 10 meters per second. So why is car exit velocity only 0.2 meters per second? That's ridiculous. And then why is the volumetric efficiency of a car factory in the usually it's in the mid to low single digits? I mean, that's very low. Why shouldn't it be at least volumetric density of 30% or 40%, maybe 30% seems very, very achievable. Like nobody would design a chip that had volumetric efficiency of 2% would look ridiculous and yet they design factories that way. Are these efficiencies that you are looking to put in place for your next Tesla plant? Or are these things we can see in Fremont at some stage in the near future? You'll see things moving in that direction. I mean, with Model 3, I think we're aspiring to get to version 0.5 of Alien Dreadnought level of where Alien Dreadnought level is like version 3. So you'll certainly see that directionally. Where it's most obvious is in the cell production. So I mean our engineering team has worked very closely with Panasonic to make dramatic improvements to the cell manufacturing efficiency. We think we're probably approaching 3x the efficiency of the best plant in the world. So that's pretty good. It's a lot of room for improvement. All right. Cells are going through that thing like bullets from a machine gun. In fact, the exit rate of sales will be faster than ports from machine gun. Well, we look forward to the next time you take us around. Yes. Come to the Gigafactory party, it will be an eye opener. Thank you. Our next question comes from Colin Langan of UBS. Your line is now open. Great. Thanks for taking my question. A lot of analysts that cover SolarCity are highlighting major liquidity concerns with the company. You sounded pretty confident that that was going to turn cash flow positive. I mean, what do you think they're seeing differently? And are you concerned at all that the cash burn may increase after the deal? Well, I think once the deal is done, the cash burn is likely to reduce because of reduced cost of sales and general operational efficiencies like there's a lot of things that's duplicated, that are duplicated. So we expect costs to decrease and to increase the positive cash flow from the Full City acquisition. Yes, I mean, it might take like a few months although it's coming to effect, but pretty short order, let's say 6 months after the acquisition is complete, I would expect those efficiencies to become to be there and be significant. That actually was my second question. So in terms of the time horizon in terms of delivering on goals and promises, particularly around this acquisition, you actually think the synergies would be achieved within 6 months of post closing, if you're not quick? Yes. I think from the point which it is the deal is done, yes. It should be meaningful and noticeable. But the second full quarter after the acquisition is completed. I'm highly confident that that will be the case, yes. Okay. Well, thank you for taking my question. Thank you. Our next question comes from Patrick Jobin of Credit Suisse. Your line is now open. Hi, thanks for taking the questions here. I guess a question for Elon or Todd. Why not pursue a less capital intensive model, at least in the near term and proceed more of a marketing or sales relationship between the entities, I guess, for the cross sell opportunity and installation efficiencies of the integrated systems. It seems like, I think you used the term special deals, but there seem to be the norm between entities if they're beneficial for both. I guess, are there any legal impediments to having approached some of these synergies in that fashion? I think we would certainly face them if we did that. I think yes, I mean, I still think I think morally and legally we would find it very difficult to defend a unique relationship that just favored SolarCity if we're separate companies. If we're one company, then obviously that's fine. But separate companies, we can't do that. Okay. My second question, everyone's focused on capital and cash flow here. I guess, Elon, from your perspective, would Tesla be receptive or would there be any plans to provide capital to SolarCity in the interim during the kind of pending acquisition? Obviously, I'm thinking about it more from the Solar City side, but given what we saw with Vivint and SunEdison, the pending acquisition disrupted some access to the capital markets in the interim. I'm just trying to understand SolarCity's near term path and what you'd be willing to do from a Tesla standpoint. Thank you. Yes. I mean, since Sol City is constrained in the short term from just going out and raising equity itself. Tesla would provide bridge loan if needed. I actually don't think it's going to be needed to be clear. Because I mean that's something that's something that's very appropriate to do. So we will be there if needed, but I don't think we'll be needed. Okay. Thank you. We have 3 other callers with questions. So let's try to wrap them up quick. So if everybody can be brief, that would be great. We're coming up on 90 minutes here. Thank you. Our next question comes from Dana Hall of Bloomberg News. Your line is now open. Yes, good morning. Could you talk a little bit about how you envision this impacting Tesla's retail footprint going forward? And if the Tesla stores are now selling solar panels and Powerwalls, is this sort of an effective end run around your dealership metals? That's an interesting question. Yes, we're not limited in stores. In terms of selling solar and station storage. We could do that and then potentially offer just have the car there in a gallery format, something like that. So it did open up additional options on the retail front, especially, that you mentioned. I'm just wondering whether a car dealer association say that it's a dealership if it's not if it's selling more than cars, if it's also selling solar panels and power walls and if it's going to change the look of the stores significantly enough that helps you guys out with that? Yes. I think we'll still be prevented from actually including a car transaction even if it's part of a border store. But usually there's not a limit on having galleries where you simply display the car and have information about it. And then we could look to complete transactions for solar and batteries. Yes, so I mean something like that it does open up additional possibilities, I think, mentioned. Thanks. Thank you. Our next question comes from Stetan Shah of Albert Fried. Your line is now open. Hi. I just had a follow-up. So you mentioned the positives of rolling up SolarCity. And I think somebody earlier mentioned in so many words that the analysts have been saying that this is a bailout of SolarCity. So can you just mention if shareholders don't vote for this, what happens? You mentioned that SolarCity in the next 3 to 6 months should be net cash generator. So it's not as bleak as some of these analysts have been saying. So you would be in a position if they don't vote for the potential transaction with Tesla? And then secondly, what does this deal mean for your Gigafactory? Does it have any change? Timeline has changed, because you're going to have more of a capacity or not? Thank you. Sure. I don't know where this bailout stuff comes from because I mean Tesla is not the one deciding what the market value of Solar City is. It's the stock market is. So Solar City could certainly raise capital equity on its current valuation and I think without any problem. So and SolarCity is headed to, I think, a very healthy place from a cash flow standpoint in short order. So next sort of 3 to 5 months, getting to cash flow positive. So if the company is around the corner from being cash flow positive and has the ability to raise equity capital on its own, I don't see how an acquisition is in any way a bailout. That's obviously a false description. And then the Gigafactory kind of proceeds in a penalty of SolarCity except that obviously we will gear the product of the storage product will be geared towards a solace type system. And we wouldn't be this wouldn't be something that would be explicitly exclusionary to other solar companies, by the way. It would just be that other solar companies would have to match the SolarCity product and in order to use our battery product most effectively. So it's not about sort of trying to shut up other solar companies. It's just about being able to guide the product to where it needs to go. And then we'll do the right thing with other solar companies if they're also guiding their products to match. So we're not going to basically be a jerk to other solar companies. This is really about being laser focused on having the most compelling consumer solution, that's I think the right thing to do. Okay. Thank you very much. Congratulations again. All right. Thanks. Thank you. And our next question comes from Hank Elder of Goldman Sachs. Your line is now open. Hey, guys. This is actually Brian Lee on for Hank. I have just 3 housekeeping questions more along the deal itself. And in the interest of time, I'll just run through these quickly. First is given SolarCity's relationships with various lenders and tax equity fund structures, I was hoping you could talk to any visibility into potential change in control provisions and or exposure to clawback provisions on solar tax credits that might exist. Second question would be as part of the due diligence, will the Board consider other alternatives to SolarCity? And then a third one, and I'll pass it on is, are there any colors or caps on the stock exchange ratio being proposed? And if not, what's the rationale for that? Thanks. Yes. As we begin, like really, this is kind of the beginning of the analysis, not the end. And normally it would be a lot closer to the end, because the large shareholder in both companies, it's something we have to talk about at the beginning where we don't have all the answers. But then we will compile those and present those to shareholders for their decision in the months to come. So obviously part of that diligence process would be talking to the lenders, making sure they're comfortable and think it's a good idea. Pretty sure they will, but we're going to talk to them. And yes, and then in terms of other companies, we did consider that and that's part of the initial diligence process, but we think SolarCity is the best company out there. And it's good, but it's sort of a leader in the field. It has the Slava Technology. The product direction, we believe, is correct in terms of making rapid progress towards a highly differentiated product. And there's no other company out there that's like that at all. Thank you. And our next question comes from Trip Chaudhary of Global Equities Research. Your line is now open. Thank you. I have a quick question for Ilan. I was just wondering like how does this acquisition plays out with the opportunities that Tesla may find in microgrids and grid space? Yes. I mean, we want to have I think it's always good to like productize things. So it's like kind of like you can click here and buy your microgrid versus like having a tailored situation for all over the place. Like if you can productize it, it can just happen real fast. And so I think like productizing microgrid, just click here and you get a microgrid, it just works. That's I think that's a good way to go. I think consumers obviously appreciate things that are easy, simple, fast. But actually corporate customers, utilities, they appreciate that too. Because they don't have to go through big laborious processes and paying the buck for them, blows their mind when they can just sort of click a button and then we install their thing and it works. Just because the product is big doesn't need mean that the whole process needs to be complex. Bigness and complexity are not the same thing. So I think because our utility customers have been quite positively surprised by just how easy it is to implement and it's going to get a lot easier in the future. All right. I think that's the end of the questions. Thank you, Todd, Elon and the rest of the team. Thank you, Torea. And thank you investors for all the interest. If you have any closing remarks, Elon, otherwise we can end it there. No, I think those are a lot of great questions. And then obviously, we'll have a lot more information as diligence process concludes, hopefully, reasonably near future. But I think it's easy to get sort of mired in the details. But if I think the right thing is to sort of kind of look up into the future and say where is this headed? What are the macro trends? Does this action match what the where the tides of history are going? And that's really what's going to make the difference in the long term. So I just encourage you all to think in that way. All right. Thank you, everybody. Have a great day. All right. Bye. Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program. You may now disconnect. Everyone have a great day.