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. If anyone should require assistance during the call, please press star then zero on your touchtone telephone. 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, Turiya. 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 Maron, Tesla General Counsel, J.B. 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 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 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&A.
Go ahead and press star one now to get into the queue to ask a question. With that, I'll pass it over to you, Todd.
Good morning, everyone. Thanks, Jeff. 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 a easy explanation, but it is somewhat of a unique situation. 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. Obviously, in our situation, we were only announcing an offer. 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 Elon 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. 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. 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.
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. 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 two companies makes sense here.
I did touch on most of this yesterday, I think what this call is mostly gonna be about is getting into maybe some of the detailed questions that people have. You know, as I said yesterday, there's kind of three parts to. As I said at the, at the actually Powerwall presentation last year, just part of why I think this is really quite an obviously correct move, is that in order to solve the sustainable energy question, we need sustainable energy production, which is gonna come primarily in the form of solar, overwhelmingly in the form of solar, in my view. Combine that with stationary storage and electric vehicle, you have a complete solution to a sustainable energy future.
Those are the three parts that are needed. Those are the three things that I think Tesla should be providing. It just became increasingly obvious that as we're developing the Powerwall and new versions of the Powerwall, particularly as we integrate more of the inverter electronics and the intelligence in the Powerwall, you really need to take the solar panels and the 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've got an electric car, you've got to install the wall connector and a home charging system.
Those are potentially three visits. There's at least two visits. In terms of the sales process itself, when we're selling somebody the Powerwall, very often, if not almost always, they're curious about solar and want to do the same thing. Not being able to sell them solar directly at SolarCity, or sorry, at Tesla through our stores is pretty inefficient. You know, as you look ahead to, say, Model 3 at a $35,000 car, that same person, in let's say at the same moment, we could sell them roughly an equivalent amount value of solar panels and a Powerwall, effectively doubling or almost doubling the sale at that time. Then putting it all in at the same time.
I mean, I think the, you know, the word synergy is like almost like sort of a dirty word, but 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. Yeah. I think that makes it kind of a pretty obvious thing to do. It's quite difficult to create an integrated product if you're forced to be at an arm's length and be two different companies.
You know, if we give a special deal to SolarCity and SolarCity is not part of Tesla, then why are we doing that? We can do that if SolarCity is part of Tesla. We can't do it if SolarCity is a separate company. It just makes things, the execution, I think, a lot easier and cleaner and more effective. You know, 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. You know, I think the tide of history very strongly supports it will be a sustainable energy future, primarily solar, and, you know, virtually entirely electric vehicles.
There may be things that temporarily interrupt that tide of history, but in the long term, it will overwhelm everything. Our goal is to accelerate the advent of that future as fast as possible, and this helps us accelerate it. That's the reason. Yeah, and I think there have been some questions about, like, does this sort of really increase our debt position or like lever up the bank balance sheet? It really doesn't. I think grilling country will take a closer look at SolarCity. You know, what really matters is the recourse debt. Obviously, the non-recourse debt is not what matters.
The cash flows generated at SolarCity will generate, you know, it covers all the, you know, what's required with the recourse debt. They, you know, are headed to cash flow positive situation for the next, you know, three to six months at the outside. That's where the company's been steering itself, reducing their growth rate to some degree to achieve that cash flow positive position. They're very clearly on their way to getting there in short order. It actually, we expect it to be a net cash generator, not a user of cash. Particularly when taking into account the dramatic reduction in the cost of sales of solar systems sold through our store or through our stores.
Like the biggest factor in SolarCity's increasing cost per watt in Q1 was their sales cost. As soon as they've had a quite a big increase in sales cost. That'll go radically in the other direction with sales through Tesla. I'd love to talk more about what's gonna 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, you know, really is a no-brainer. I can't talk about, you know, material non-public plans, you know, except to say that I'm very optimistic about those plans.
While to date, SolarCity has not been significantly differentiated on the product side, you know, to the solar panels themselves, they certainly will be in the fairly near future. I, actually if you just look, listen carefully to what SolarCity has been saying in its earnings calls and its announcements, that I think should be also pretty clear like that, you know, that SolarCity's saying that there's gonna be significant product differentiation. There's the Silevo acquisition, which we think is the best technology out there for high efficiency, low cost 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 it's gonna be a night and day difference. The Silevo development allows for that. Anyway, we can't go into the details of those because making kind of future product announcements that are really exciting obviously affect future product sales. Yeah, it's, you know, the full extent of that is not yet public information. I do believe it fits together very well with Tesla's plans on the Powerwall and Powerpack side. Yeah. We can turn it over to questions at this point.
All right. Thanks, Elon. Taria, 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 three questions, for one for Elon, one for why don't we start with the General Counsel and Jason. For Todd, you know, you talked in the letter about two of the directors not voting. Can you give us a sense, because this will come out in the proxy eventually, of the discussions between the 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? The other things that are likely to relate to the board issues?
This is Todd. You know, this is a little bit tracks back to what I was saying earlier about the stage of the process that we're in. 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 process of voting on the transaction. 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. Beyond that, it's really too early in the process to get into all the different details.
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.
Then 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, no, it was recused from voting.
Okay. For Jason, you know, given your talk earlier in the year about kind of focusing on cash and even, you know, stipulating perhaps that SolarCity could reach some sort of cash breakeven by fourth quarter, you know, how does this change your view of the pro forma companies in terms of their cash usage and their need to potentially go back to the capital market, either debt or equity, to finance the ongoing business?
Yeah, sure. On the Tesla side, I stick with the statements that we made on previous earnings calls. On the SolarCity side, you know, as Todd has laid out, we're just at the beginning of the process now. The only information, you know, I've had access to is what's publicly available. I don't have anything to say about the pro forma combined entity at this point. You know, we'll start to look at that as we get into the full due diligence now.
I guess a due diligence question, it was probably scoped out before you did the deal. You know, when you survey Tesla owners, you know, what percent have solar already? What precent are in states where solar would make sense? You know, 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 have looked 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. You know, like only about 1% of U.S. homes have solar. You have a massive addressable market that's unserved. There's, I don't know, at least 40 million-60 million households that where solar, where they could do solar if they wanted to. If the economics were right, and they liked the aesthetics and it was easy to do, they would do it. The future market there is really gigantic. Yeah, I mean, on the cash front, like we don't expect SolarCity to have a material impact on future cash needs.
Yeah, I mean, I don't think it's gonna make much of a difference really.
And J-
Yeah, positive cash flow really by the end of the year.
Just final, you know, you talked a little bit yesterday, but how does this affect how do you make sure that your personal time between this and of course the SpaceX business, given the M&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, you know, tech kind of grunt work on the ground from launching a new Model 3 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, you know, by your own admission, aggressive launch schedule for the Model 3?
I mean, my intuition about this could be wrong, from my standpoint, this makes Tesla's future execution easier, not harder. You know, 'cause it's just getting increasingly unwieldy to work with SolarCity on an arm's length basis. We really need to have an integrated product. The Powerwall and the Powerpack need to be designed together with the solar system. It's a one piece thing. We like really can't do that if we're two separate companies. We've gotta, you know, we're gonna treat SolarCity like they're any other company, which is extremely unwieldy. From my standpoint, this makes the execution easier and not harder.
I mean, I think SolarCity's got a, got a great future independent of Tesla, but, and obviously Tesla does. Being able to integrate things at the product level, at the, you know, at the consumer experience level, at the utility level, the commercial level, it actually makes it easier, not harder. You know, that's why we're doing this. I mean, like, it's like, why should companies exist at all? Like, what's the point of having companies? The point is to that, a given company is gonna create a more compelling good or service, for the end customer. Then so should the companies be two separate containers or one container?
If they're one container, we can make a more compelling product, and work together easier. That's the reason for it. I think, I think that speaks to the sort of fundamental economic goodness of the transaction. It, it will be harder if we remain two different companies.
Okay. Thank you.
Thank you. Our next question comes from Charlie Anderson of Dougherty & Company. Your line is now open. Our next question comes from the line of Brian Johnson of Barclays. Your line is now open.
Well, I already asked a question.
Turiya, why don't we go to the next caller, please? Let's try Charlie again.
Okay. Our next question.
Yeah.
-comes from the line of Charlie Anderson of Dougherty & Company. Your line is now open.
Yeah, good morning. Thanks for taking my questions. 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, you know, are you expecting much in the way of cost and, you know, just thinking about the incremental cost of combining the products, you know, 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. I mean there are estimates based on kind of what stands to reason. You know, in looking ahead particularly to next year selling Model 3, I think 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 SolarCity's correspondingly. Maybe it's not entirely in half.
Maybe it's, you know, 30%-40%, but it's a pretty, I think a very substantial drop on SolarCity's side and also a drop of a material drop on Tesla's side because you're basically selling, let's say, almost twice as much in a single transaction as you otherwise would. On the installation setup side, it's one crew instead of one visit instead of 2-3 visits. The ongoing maintenance is kind of one point of contact and not sort of two or three points of contact. The cost of the system itself is lower 'cause we're not duplicating hardware, the hardware level. I think that all makes a lot of sense. Yeah.
The fundamental cost for both companies would go down materially. I think it's when we talk about like, you know, is it sort of 20% reduction, 30% reduction, 40% reduction? It's pretty significant. For sure better than if the companies were to separate.
Great. Just another quick one from me. I wondered why now versus two years ago, versus two years from now?
Yeah. The reason now is because we're really ramping up Powerwall and Powerpack. You know, we're developing version 2, then we have kind of our plans for version 3, version 4, and so forth. SolarCity also is preparing, you know, to come out with the solar panels that as a consequence of the SolarCity transaction a couple years ago, that significantly improve the efficiency and the aesthetics of the roof. Yeah, I think the aesthetics matter a lot. As you know, Tesla, we're super sensitive to aesthetics. I think SolarCity's, you know, I think they're going to get there on their own, but I think that that journey will be accelerated as part of Tesla as well.
You know, 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 a power outage with the Powerpack, and allowed you to go potentially completely off grid, it's kind of a no-brainer. Like, why wouldn't you do that?
Thanks so much.
Thank you. Our next question comes from Sachin Shah of Albert Fried & Company. Your line is now open.
Hi. Good morning. Congratulations on the offer. Couple questions I think that people are kind of trying to digest. I think strategically, Elon, that you've made your points clear. I think the valuation is what the market is having issues with. You know, there are some questions about SolarCity's balance sheet, and you mentioned about the debt. How do you put that into context, with the, you know, exchange ratio that you've offered, you know, kind of not jeopardizing kind of the future of, you know, Tesla, while you make this offer?
Well, I think Tesla's getting a pretty good, you know, at current share price. I mean, so Tesla doesn't decide what their company's share price of public market should be, the public market does. We're just obviously keying off of what the, you know, public market price is, which is decided by people, yeah, like other than ourselves. Then there's, you know, I think a quite, you know, a reasonable, neither high nor low acquisition premium that is, you know, being put forward subject to further diligence. You know, I think it's, I mean, I think, you know, every element of it is very reasonable.
Like something that's out of whack about the proposal, it's sort of, you know, extremely normal to have a acquisition premium of that size. It's certainly, you know, quite a bit lower than, for example, say LinkedIn's. LinkedIn I think had a 50% premium. You know, here we're talking about a sort of, you know, low 20%s to maybe 30% premium. It's, you know, it's more or less in line with the average acquisition premium for any given public market company. It's, like I said, extremely normal.
Just overall these, you know, I think when we're down the road, not even far down the road, like, you know, next year, particularly as you go further into the future, these numbers are going to seem like very smaller, very small numbers, you know. I think as a combined automotive and Power storage and power generation company. I mean, the potential is there for Tesla to be a trillion-dollar company, like market cap company. Which is, you know, if we play a major role in transitioning the world to a new form of energy generation and storage and transport, you know, that's what kind of, that's what happens.
That's Yeah, I think, one isn't gonna be worried about, whether it's, you know, a few hundred million dollars one way or the other here down the road. It's not, you know, really gonna make a difference.
Okay. I appreciate your candor about the trillion-dollar market cap. I think that leads to, you know, the future value of SolarCity. I guess the near term, because you're not voting your shares, both on Tesla and SolarCity from my understanding.
That's right.
How do you expect the near term, kind of shareholders or near term focused shareholders to kind of vote this in vote in favor of this? I'm assuming it's a simple majority. It's kind of a chicken and an egg thing where your future, your expectation of the future is probably correct, strategically. 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 getting to the finish line.
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, you know, Tesla shareholders being receptive to, you know, voting in favor of this? Because ultimately it's these two or three ducks, you know, 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.
Yeah. I mean, the exchange ratio, obviously, I mean, there's some bounds on the exchange ratio that, you know, if we exceed the bounds of reasonableness for any party, obviously it wouldn't happen. You know, except the obviously the market cap of SolarCity is decided by the market. That's what it is what investors think it is. The premium, you know, you don't get to acquire companies for zero premium. That's just not how it works. Some reasonable premium obviously is appropriate in a situation like this, as it always is.
You know, we're kind of, we're right where premiums normally are, and actually lower than some recent prominent premiums paid, like the LinkedIn one, which I said I believe was on the order of 50%. I think that, you know, it's a reasonable market cap with a reasonable premium. One can maybe quibble around the edges a little bit, but I don't think there's anything's, like, out of whack there. You know, at the end of the day, this will definitely be up to the, you know, you guys who own shares, 'cause like I said, I'll recuse myself from the shareholder vote. It has to be a, you know, majority of non-me shareholders.
Like I said, I'm doing this because I think it makes things better and in the future, not worse, for everyone. I'd really recommend voting in favor of this because I think anyone who doesn't vote in favor of this is gonna be voting against their best interests. you know, we will certainly abide by the shareholder vote. If there's a great deal of unhappiness, we won't move forward. I just really want to emphasize that I have zero doubt about this. Zero. you know, arguably, we should have done it sooner. 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.
gives us time to create a very compelling integrated product and bring that to significant scale next year.
Okay. You when you say, you have no doubt, you believe the special committee, independent board, when they do their due diligence, you know, and reverse due diligence on both companies, that you'll be able to reach an agreement. That seems very likely.
At the board level, yeah. I mean, like the board opinion is unanimous in both companies. I mean, unless there's something discovered that, like, that I have no idea about or, you know, well, that nobody on the board has any idea about, which is extremely unlikely, you know, Well, the independent board members would recommend in favor of completing a transaction, somewhere in the price range that was mentioned, most likely. It would be up to shareholder vote to say, excluding me, to say yes or no. Yeah. I think that's about as fair as one can make it.
Great. Thank you very much. Congratulations again.
Yeah. Thanks. Yeah, I mean, if anybody here thinks like, hey, if there's some, you know, better way to do this, you know, like morally better way to do this or, better way to do this from an execution standpoint, like, let me know. I mean, we've tried to do this in a way that's as fair as possible and really going beyond what's legally required, and, to make it as, you know, not just legally correct, but morally correct.
Thank you. Our next question comes from the line of Colin Rusch of Oppenheimer & Co.. Your line is now open.
Thanks so much. You know, at what point are we gonna 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. JB is on the board of SolarCity. There's been a lot of sharing. You know, to have a price here without some sort of scope of return on capital, you know, I think would be incredibly important for us. When are we gonna get that information? You know, you know, without you're begging off the detailing on synergies, but I think, you know, getting specific about return on capital for Tesla shareholders will be essential to getting this done. You know, when are we gonna get that information?
Yeah, I agree. I agree. I mean, as Todd was saying, like we're gonna 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, you know, 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, you know. Since I'm like a large shareholder of both companies, we have to tell you at the beginning of the process, not the end. We will certainly have all that done for you.
The reason it's not just all, you know, in a neat package is because this is a 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. Definitely get all that information, and I'm confident it will be extremely compelling.
Okay. The second question is around Silevo. There's actually a lot going on in terms of manufacturing for solar at this point with Asian manufacturers reducing cost well in excess of what expectations have been. Certainly there's folks that are getting around the import duties. You know, even with the potential savings on installation costs with the extra efficiency at Silevo, you know, it looks like, you know, 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.
You know, can you talk a little bit about, you know, you're begging off some of the product details here, but, you know, what you're expecting.
Sure.
Tesla to be able to bring to that engineering process to improve that cost trajectory. By the time you get that Silevo factory up and running, you know, there's going to be, you know, I think at least a $0.15 cost disadvantage for their target cost at this point. I think there's something that needs to get done there to make that a compelling offering.
Sure. 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, you know, said we would build the world's best car, we did that. You know, at SpaceX we said we'd 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. You know, 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 Silevo technology is that it has significantly higher efficiency than the very low cost Chinese panels. On the same surface area of roof, you can get, you know, as much as a third more power. Aesthetically speaking, the Silevo panels look better. They look a lot better. If it's done right, we can make your roof look better with solar panels than without. This is a night and day difference. If you've got let's say somebody's got a, you know, a $400,000 house. If you make the roof look ugly, arguably you've made that house worth 5% less or some non-zero percent less valuable.
If you make the roof look beautiful, you've made it the house more valuable. Maybe that's +5% or some non-zero plus percent in the value of the house. If it is something on the order of 5%, the value delta there is called $40,000 or maybe it's only like 2% or 3%, it's only, it's at $20,000. You know, it's like there's, it's you have quite a big value delta.
Being able to have higher power that looks great and I think it costs better, 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'll pursue and I think we'll be confident we'll get there.
Okay. I'll follow up on that. I think my question was more around the process technology at Silevo than the ultimate.
You mean in terms of the fundamentals of the?
Yeah, the fundamentals of the process technology, you know, and where you're gonna get the cost at. I think there are a variety of detailed questions I can come back to you with. My follow-up question on that is just, you know, fundamentally, SolarCity is a specialty construction and specialty finance entity at its heart. As you look at Tesla being, you know, a evaluated manufacturer of a variety of products and a technology company moving into what we see as a fundamentally different business, you know, 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?
You know, the actual boots on the ground, you know, 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?
Yeah. I mean, I think the biggest asset that we'd be acquiring are the installers, the installation team of SolarCity. You know, and all the people trained in doing the permitting and the paperwork and all the complexities that exist in municipalities throughout the country, and understanding how to deal with, you know, 37 different roof types, and having efficient logistics infrastructure for doing the installations. I mean, I think there's some strengths in the SolarCity sales side that we can take advantage of. Yeah. But I really don't. I do wanna emphasize like I think the Silevo technology is gonna make quite a big difference.
I don't see any fundamental cost issues that prevent it from being at or lower cost per watt than any other panel in the world.
Okay. Thanks a lot.
I mean, I've spent time in the, you know, in the SolarCity Silevo pilot plant in the Bay Area. You know, so I'm not unfamiliar with this. You know, my observation is there are dramatic improvements where like there's not some physical thing that's preventing it from being super competitive, right? It's, yeah, actually a relatively straightforward manufacturing process, you know.
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 wanna 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. 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, recused 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 morally correctly, I'm sure. We'll move into a diligence phase very quickly. Hopefully diligence can take place, you know, promptly, so in the next two, three weeks, and we can get to a place where everything makes sense, that there's a signed merger agreement.
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'd move to a shareholder vote.
We're now getting a little bit further out, so it's harder to predict with certainty. The hope would be that there would be a shareholder vote on each side in the next few months.
Thank you. Our next question comes from the line of Joseph Spak of RBC Capital Markets. Your line is now open.
Thanks. I guess I just wanted to get your sense on how much of a play you think the SolarCity bet is on lower storage costs. Meaning, you know, we've seen some proposed changes to net metering laws and if that sort of continues or there's more of that, you know, how long does the business model work? Like, do you need to see the falling storage costs for it to work? And is your confidence in that the reason to go forward with the deal?
The storage costs are gonna drop really dramatically with each passing year. I think the, you know, I mean, depending, you know, with exclusion of certain situations like Nevada, maybe Arizona, which, you know, we're working to mitigate, it'll be ahead of the net metering situation. Like in New York, a reasonable deal has been arranged and, you know, basically this gets ahead of the net metering situation in call it roughly the two to three- year timeframe. It's definitely important for long term. Although, you know, some 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.
They have a value argument, it's just exaggerated. It's obviously very important for the long term. It's, it's gonna work together well. I mean, this is what the world needs, you know. This is the ultimate solution for, is what we're talking about here. Solar power, stationary storage, electric cars. This is Earth's solution. We're gonna try to make that happen as fast as possible. The fundamental good of SolarCity and Tesla will be measured by the degree to which we accelerate that transition. We're gonna try to make it happen as fast as possible. You know, I think we'll have a meaningful impact on that timeframe.
Maybe just two real quick ones. If the deal's consummated, 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? On a technical point.
Yeah.
It So you will do that?
Yeah. I mean, I do think it's valuable to have transparency. We will wanna show that transparency as much as we can. You know, for some cases, it can be like, where exactly should the cost be allocated? I just think 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 are what. We're, you know, we don't wanna have an information discount to the stock because people are uncertain. I think that having clearer information gives people a better understanding of the value of the company, the various pieces.
It will inevitably, you know, lead some people to reach conclusions they maybe shouldn't reach or they're premature, but I do believe in transparency.
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, you know, 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. You do get a lot of complications with that if you backflow power from the car into the wall. You know, like when is the car allowed to do that? When is it not? I mean, how much do you allow the car battery to be drawn down? You know, people I think were pretty upset if the lights are on in the house, but they can't drive their car, because of like all the power in the house shuts down.
I think the right solution is to decouple it into, you know, vehicle, stationary battery and solar. Obviously folks will still need to supplement that power at the grid level by having, you know, 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 gotta kind of ground mount the utility scale solar battery system and feed that to the grid. But if anyone that's, you know, 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.
Like there's like one pixel inside that box that I showed, which was the box of how much land area you need to power the United States. That was like a little box. Like I said, fits into like the little Texas Panhandle or corner of Utah. Inside that box is one pixel. That's the surface area of the battery packs needed to support the entire United States, one pixel. Anyway, we're gonna try to build that as fast as we can. You know, not just the U.S., but throughout the world.
Thanks.
That video, by the way, is available on our website of Elon's presentation on the Tesla Energy products. Elon, we are at the half-hour mark here. We have nine more questioners in queue. I'll defer to you.
Yeah, yeah. Definitely
how far long you wanna go. let's Turiya, let's go to the next.
Let's definitely try to answer everyone's questions. You know, like I said, I really would encourage folks to like think about the long term, you know, where is this all headed. 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. You know, it's basically SolarCity's product roadmap and Tesla's product roadmap, which obviously, you know, very significant, still non-public information, which I wish I could tell you about, can't. The timing is, if anything, you know, maybe we should have done this sooner. I certainly don't think we're doing it too early.
What, you know, 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. Tesla's gonna be the leader in all three. If you, if you believe that that's the future we're headed towards, which, you know, everything points to that being true, and really like gasoline cars, we're gonna have to look back on gasoline cars like we look back on steam engines. It was like a phase. It was a bit weird. Like, yeah. We're gonna look at back on fossil fuel power generation in the same way. It was a weird phase. Now we wanna get out of that weird phase as soon as we can.
This is all about accelerating us getting out of this idiosyncratic, you know, moment in history when we were digging up sort of Cambrian-level fossils and burning them. I think you'll be telling your grandchildren like, "Yeah, you won't believe what we used to do. It's like we used to dig up, you know, the liquidized remains of dinosaurs and old plants and put them in cars and burn them to move. Did the same thing with the power plants." Be like, "That sounds crazy." That's what it's gonna be in the future, obviously. Yeah, we're trying to have the non-weird future get here as fast as possible.
All right, Turiya, 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 Kallo from Baird. Elon, I was just wondering, you know, I understand, you know, working together and being cumbersome by separate entities, but you know, could you just talk us through what the difference is of actually owning SolarCity versus maybe doing some kind of, you know, JV or some other kind of entity like that, to help you guys, you know, work through some of the issues?
Yeah, I mean, the problem is that I think we just, we hit the You know, it's like why We don't have a good basis for doing some special deal with SolarCity, because that's effectively a conflict of interest. I Like, ironically, a conflict of interest goes away for one company, but it doesn't go away for two separate companies. Like there's not really a good rationale for just offering a special deal and only working with one company that I also happen to own. You know, just it's I don't think we have, you know, a good moral or legal basis for behaving in a special way to SolarCity unless we're it's actually one company.
Got it. Then one more, if I can. Could you just, you know, could you just rank some of the things that you talked about in kind of the order you look at, you know, as far as, you know, revenue synergies from, you know, cross-selling, the technical synergies of, you know, being able to work with on both the manufacturing, both the panel side as well as the battery side. Then maybe the third one bucket being cost synergies. If I forgot any out there, maybe list those as well in kind of the order that you're thinking of them. Thanks.
Yeah. I mean, I think we'll have a more definitive answer for you once this process wraps up. I mean, I've forgot what I'm saying here is anecdotal. It is kind of the way I think about it from a gut standpoint, is like first and foremost, what allows us to offer the most compelling product to consumers and businesses? That and a seamlessly integrated product that all just works together, that's better. Like, you don't wanna have to have a heterogeneous, you know, systems integration problem. Like that's, you know, that's just basically where the interfaces break down, people are sort of pointing fingers like, "This didn't work."
No, your thing didn't work." It's like if it's just one integrated system, there's no finger-pointing. There's, you know, you can iron out all the bugs, and it just works. You're not wondering whether should I blame the solar company or the battery company or the who knows? You know, 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. You know, I think we can guide the integrated product to be just right, to be better. That's kind of from that standpoint more than anything else. Then in addition, you know, there's just obvious cost savings to be had if in the same store we can sell twice as much dollar volume.
Like, well, it's the same store, now it's selling twice as much stuff. If with the installation crew, if they're now able to knock out three things in a single visit, rather than schedule two or three separate visits, that's also way better. You know, one could argue like this sort of like how much better is it? It's definitely some percentage better that's material. You know, which is kind of I mean, that's kind of like the threshold for making a decision. It's obviously gonna be a lot better. Like if you just cut the visits down to, you know, from two or 3: 1, okay, you've probably cut your transport, labor, and logistics costs maybe in half, something like that.
If you have a seamlessly integrated product, you can have less servicing costs, and things are gonna break down less. It's just the thing you'd wanna buy if you're the end customer. Why would you wanna buy anything else?
Thank you. Our next question comes from-
Go ahead, Turiya.
Ryan Brinkman of J.P. Morgan. 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 disinterested shareholders of Tesla? What's your sense in terms of, do they see the same value in combining the two businesses as you do? What's your sense about how they'll vote on this?
Well, we wanted to make sure everyone heard about it at the same time, so we've not discussed it with anyone because we wanted, you know, investors far and large to hear about it at the same time. Now, separate apart from that, over the years, has this idea been bandied about with some of our largest shareholders, institutional shareholders? Yeah, I mean, there have been discussions, and I think, 'cause, you know, some of them see it as like a natural thing to do. It's, I mean, it's interesting to sort of, you know, look at the feedback that I've received since we made the announcement yesterday.
Anyone who's product-focused sent me sort of a congratulatory note, and like, "Why didn't you do it sooner?" sort of message. Then people that are sort of more finance focused, they were like a lot more worried about it. You know, in the long run, the value of the company is defined by the value of its products and services. That's, I think, real important to bear in mind. Like, it's why companies exist. They shouldn't exist otherwise. You know, the value of the company will follow the value of the product. You know, a company that starts making lousy products is pretty soon gonna have a lousy valuation.
A product, a company that makes great products is pretty soon gonna have a great valuation because that's how this is gonna be set up, and it's how it should be set up.
Oh, great. Thank you. Thanks.
Thanks.
Thank you. Our next question comes from Patrick Archambault of Goldman Sachs. Your line is now open.
Great. Yeah. Thanks a lot for taking my question. Look, I think a lot has been laid out about the strategic vision for this, you know, longer term. I wanted to piggyback on one of the earlier questions and just get a sense of, you know, the possible financial sense it makes kind of in the shorter term. You know, and correct me if I'm wrong, I don't cover SolarCity, but my understanding is the storage plus, you know, solar piece of that business is actually quite small. You know, you've had places like the, you know, Rocky Mountain Institute put out, you know, fairly detailed studies on, you know, combining solar plus storage.
You know, that suggests the levelized cost of energy won't be lower than the current available, you know, price for, you know, maybe call it 5- 10 years. You guys sound very confident that this makes sense sooner. I just wanted to get.
Yeah, definitely.
-your view on that.
Yeah, I think the important thing is to bear in mind, like, it's a big world out there. There are places where the cost of energy is much higher than other places. Like for example, in Hawaii, energy costs are very high 'cause they have to ship in all of the fuel for their power plants. So it's very expensive and 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. It's gonna make sense for many parts of Europe and many parts of the United States. Yeah, then over time it's gonna make sense for everywhere.
Like everywhere is gonna be solar battery. Well, I mean, there'll be some wind of course, some geothermal, hydro. And there'll be some long tail of, you know, before the final coal plant finally stops operating and the final natural gas plant stops out of operating. I mean, those might last. You know, there'll be some long tail 'cause it's gonna look like an S-curve as is typical for new technology adoption. You know, it's like in the beginning of the S-curve, people tend to under predict what's gonna happen. Then it goes through an exponential growth phase then approximately linear growth phase. Usually people over predict what's gonna happen in the steep linear portion of the growth phase, then it goes back into a logarithmic to complete the S- shape.
You know, that's what happened with the internet, for example, cell phones. Same thing will happen here. Yeah.
I guess like within the U.S., do you think like five years is a reasonable timeframe for the economics to start to work?
Oh, yeah. Absolutely.
On a mass scale.
If not less than that.
Okay.
I mean, it just needs to be on a scale that it's like, that as our factory operates at maximum capacity. We think the factory is gonna be operating at maximum capacity as far into the future as we can see. Like, this is all about production. You know, 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 can. You know, and I mentioned like this whole thing about like manufacturing the machine that builds the machine. It's like, let me tell you, like, order of magnitude improvements are what I think can be achieved.
Won't get there right away, but by version three of the machine that builds the machine, order of magnitude. That, that's the sort of, you know, compared to car manufacturing, you look at that and you're like, it'll seem like an Alien Dreadnought. Like, what the fuck? You're gonna be like, "What the hell is that?" And, it's just like, it blows my mind that people don't realize just how much improvement potential is possible. And I mean, this is like we're doing high school level physics necessary to figure this out. It's like not mega complicated. Just go to the factory and say, do a volumetric density calculation on say, what percentage of the 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. What is the velocity? What is the exit velocity of the product? How fast are things moving out the exit? You know, what's the sort of mass flow or the MDOT of the factory? It's really low. The fastest car plants in the world, the car exit velocity is basically grandma with a walker. It's real slow. You know, 0.2 meters per second. That's, you know, really, really slow. It could do way better than that. The fastest person can run 10 meters per second, faster than 10 meters per second. Why is car exit velocity only 0.2 meters per second? That's ridiculous.
you know, why is the volumetric efficiency of a car factory 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. 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. With Model 3, I think we're, you know, we're aspiring to get to version 0.5 of Alien Dreadnought level of where Alien Dreadnought level is like version 3. You'll certainly see that directionally. Where it's most obvious is in the cell production. 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. That's pretty good. There's a lot of room for improvement. Cells are going through that thing like bullets from a machine gun. In fact, the exit rate of cells will be faster than bullets from a machine gun.
Well, we look forward to the next time you take us around.
Yeah. Come, come to the Gigafactory party. It'll be an eye-opener.
Thank you. Our next question comes from Colin Langan of UBS. Your line is now open.
Oh, great. Thanks for taking my question. A lot of analysts that cover SolarCity are highlighting, you know, major liquidity concerns with the company. You sounded pretty confident that that was gonna 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 just general operational efficiencies. Like there's a lot of things that are duplicated. We expect costs to decrease and to increase the positive cash flow, you know, from the SolarCity acquisition. Yeah, I mean, might take like a few months for those to come into effect, but, you know, pretty short order. Let's say six months after the acquisition is complete, I would expect those efficiencies to be there and be significant.
That's my second question. In terms of the time horizon, in terms of delivering on, you know, goals and promises, you know, particularly around this acquisition, you actually think the synergies would be achieved within six months of post-closing? It'd be that quick?
Yeah. I think from the point at which it is, the deal is done, yes. It should be meaningful and noticeable by the, you know, the second full quarter after the acquisition is completed. I'm highly confident that that will be the case, yeah.
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 with more of a marketing or sales relationship between the entities, you know, 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 those 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 were if we did that. I think, yeah, I mean, I still 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, obviously that's fine. Separate companies, we can't do that. Yeah.
Okay. My second question, you know, 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? You know, obviously I'm thinking about it more from the SolarCity side.
Sure
you know, given what we saw with Vivint and SunEdison, you know, the pending acquisition disrupted some access to the capital markets, in the interim. I'm just trying to understand, you know, SolarCity's near-term path and what you'd be willing to do from a Tesla standpoint. Thank you.
Yeah, I mean, since SolarCity is constrained in the short term, from just going out and raising equity itself, Tesla would provide, you know, a bridge loan if needed. I actually don't think it's gonna be needed, to be clear, because I mean, that's something that's certainly appropriate to do. We will be there if needed, but I don't think we'll be needed.
Okay. Thank you.
We have three other callers, with questions. Let's try to wrap them up quick. If everybody could be brief, that would be great. We're coming up on 90 minutes here.
Thank you.
Go ahead.
Our next question comes from Dana Hull of Bloomberg News.
Yes, good morning. Could you talk a little bit about how you envision this impacting Tesla's retail footprint going forward? If the Tesla stores are now selling solar panels and Powerwalls, is this sort of an effective end run around your dealership models?
Well, that's an interesting question. Yeah, we're not limited in stores, you know, in terms of selling solar and station storage. Yeah, we could do that, and then, you know, potentially just have the car there in a gallery format, something like that. Yeah, it does open up additional options on the retail front, actually, now that you mention it.
I'm just wondering whether, you know, a car dealer association can say that it's a dealership if it's selling more than cars, if it's also selling solar panels and Powerwalls, and if it's gonna change the look of the stores significantly enough that that helps you guys out with that.
Yeah. I think we'll still be prevented from actually including a car transaction, even if it's part of a broader store. usually there's not a limit on having galleries where you simply display the car and have information about it. Then, you know, we could look to complete transactions for solar and batteries.
I mean, something like that, it does open up additional possibilities now that you mention it.
Thanks.
Yeah.
Thank you. Our next question comes from Sachin Shah of Albert Fried.
Hi. I just had to follow up. You mentioned the positives of rolling up SolarCity. You know, I think somebody earlier mentioned in so many words that, you know, the analysts have been saying that this is a bailout of SolarCity. You know, can you just mention if shareholders don't vote for this, what happens? You mentioned that SolarCity in the next 3- 6 months should be net cash generator. It's not as bleak as some of these analysts have been saying. SolarCity would be in a position if they don't vote for the potential transaction with Tesla. Secondly, you know, what does this deal mean for your Gigafactory?
Does it have any change, timeline has changed, because you're gonna have more of a capacity or not? Thank you.
Sure. I don't know where this bailout stuff comes from because, I mean, Tesla's not the one deciding what the market value of SolarCity is. It's, you know, the stock market is. SolarCity could certainly raise capital, you know, equity on its current valuation, and, like, without any problem. SolarCity's headed to, like a very, very healthy place from a cash flow standpoint, in short order. You know, like next sort of 3-5 months, getting to cash flow positive. You know, if a company's, you know, 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.
The Gigafactory kind of proceeds independently of SolarCity, except that obviously we gear the product, the storage product will be geared towards a SolarCity type system. 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 in order to use our battery product most effectively. It's not about sort of trying to shut out other solar companies. It's just about being able to guide the product to where it needs to go. We'll do the right thing with other solar companies if they're also guiding their products to match.
We're not gonna basically be a jerk to other solar companies. This is really, you know, about being laser-focused on having the most compelling consumer solution. Yeah, that's, you know, I think the right thing to do.
Okay. Thank you very much. Congratulations again.
All right. Thanks.
Thank you. 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 three housekeeping questions, more along the deal itself. 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? Third one, and I'll pass it on, is, are there any collars or caps on the stock exchange ratio being proposed? If not, what's the rationale for that? Thanks.
Yeah, as to the beginning, really this is kind of the beginning of the analysis, not the end. Normally it would be a lot closer to the end, because a lot of shareholders in both companies, it's, you know, it's something we have to talk about at the beginning where we don't have all the answers. We will compile those and present those to shareholders for their decision in the months to come. Obviously, part of that due diligence process would be talking to the lenders, making sure they're comfortable and think it's a good idea. I'm pretty sure they will, but we're gonna talk to them.
Yeah, in terms of other companies, we, you know, we did consider that, and it's part of the initial due diligence process. You know, we think SolarCity is the best company out there. It's sort of a leader in the field. It has the Silevo technology. The product direction, we believe is correct, you know, in terms of making rapid progress towards a highly differentiated product. There's no, there's just no other company out there that's like that at all.
Thank you. Our next question comes from Trip Chowdhry of Global Equities Research. Your line is now open.
Thank you. I have a quick question for Elon. I was just wondering, how does this acquisition plays out with the opportunities that Tesla may find in microgrids and grid space?
Yeah, I mean, I think there's We wanna have, I think it's always good to, like, productize things. You know, so it's, like, kinda like you can click here and buy your microgrid, very like, you know, versus like having a tailored situation for, all over the place. Like, if you can productize it can just happen real fast. I think, like, productizing a microgrid, just click here, and you get a microgrid can just work. That's, I think that's a good way to go. You know, I think consumers obviously appreciate things that are easy, simple, and fast. Actually corporate customers, utilities, they appreciate that too.
Because they don't have to go through this big laborious process, and it's a pain in the butt for them. It blows their mind when they can just sort of click a button, we install their thing and it works. You know, just 'cause the product's big doesn't mean that the whole process needs to be complex. Bigness and complexity are not the same thing. I think some of our utility customers have been quite pleasantly surprised by just how easy it is to implement. It's gonna 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, Turiya. Thank you, investors, for all the interest. If you have any closing remarks, Elon, otherwise we can end it there.
I think those are a lot of great questions. Obviously we'll have a lot more information as the diligence process concludes, hopefully, you know, in the reasonably near future. I think it's easy, you know, it's easy to get sort of mired in the details. I think the right thing is to sort of look up into the future and say: Where is this headed? What are the macro trends? Does this action match where the tides of history are going? That's really what's gonna make the difference in the long term. I just encourage you all to think in that way.
All right. Thank you, everybody.
So that was-
Have a great day.
All right. Bye.
Gentlemen, thank you for your participation on today's conference. This concludes your program. You may now disconnect. Everyone, have a great day.