M&A Announcement

Aug 1, 2016

Good day, ladies and gentlemen, and welcome to the Tesla and SolarCity combination 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 operator assistance during the conference, please press the Star then the zero on your touchtone telephone. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Jeff Evanson. Sir, you may begin. Thank you, Chanel, and good morning, everyone. Welcome to our call to discuss the combination of Tesla and SolarCity. From Tesla, I'm joined today by Elon Musk, J.B. Straubel, Jason Wheeler, and Tesla General Counsel, Todd Maron. From SolarCity, we have Lyndon Rive, CEO, Peter Rive, CTO, and Tanguy Serra, CFO. Earlier this morning, we issued a press release and short investor presentation at the same web address as this webcast. During our call, we will discuss our business outlook and make 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 SEC filings. We're going to start today's call with some comments by Todd, our General Counsel, followed by comments from Elon, Lyndon, and then Jason. Q&A. During the Q&A time, please try to limit yourselves to 1 question and 1 follow-up, so everyone gets fair time. Also, let's please stick to the discussion of the combination this morning. We certainly can discuss other matters about Tesla Wednesday evening this week, when we report our financial results for Tesla's 2nd quarter. If you'd like to ask a question, go ahead and press star 1 now to enter the queue. With that, I'll turn it over to you, Todd. Please begin. Thanks, Jeff. Good morning, everyone. Just real briefly before passing it off to Elon, wanted to go over the quick overview of the transaction, which, if you have the investor presentation, is on slide 3. Under the deal, Tesla will acquire SolarCity in an all-stock transaction. SolarCity shareholders will receive 0.110 shares of Tesla stock for each share of SolarCity stock, and this corresponds to a per-share value of $25.37. The pro forma ownership of the combined company would be approximately 93.5% Tesla and 6.5% SolarCity. The expected close is in Q4 of 2016, after we go through the standard SEC review and regulatory process. There will be a special approval process for this deal where the transaction will be subject to the approval of a majority of the disinterested shareholders of both companies voting at each shareholder meeting. With that, I'm gonna pass it over to Elon, who can speak more about the objectives of the deal. Hi. Actually, I think I've spoken quite a bit at length publicly about the objectives, so I don't think there's anything new I have to add, as described, when we announced it and then again in my Master Plan update. The entire deal is essentially driven by a need to bring together the products on the battery and the solar side to create an integrated product for the end user, the end user being all the way from the individual to the utility. The idea is that there's one sales process, one installation process, one service contact, one phone app to monitor things. On the hardware side that we can integrate the power electronics and the energy management going from DC from the solar panels, DC from the battery pack, and mixing and matching that to provide AC to homes and businesses, or in the case of utilities, in some cases, very high voltage DC. This is really all part of solving the sustainable energy problem. Something that has been a goal from the beginning. In fact, from my sort of first, tongue in cheek, actually, I should say, master plan 10 years ago. That's, you know, that's why we're all doing this, is to try to accelerate the advent of a sustainable energy world, and I think this is an important step in that direction. Thank you. Hey, Elon, I'll add to that. This is Lyndon speaking. You know, many of the material we're discussing right now are very familiar with Tesla, but may not be that familiar with SolarCity. You know, just to elaborate more on the importance of vertical integration. When SolarCity started, we at first didn't do our own installation, and we quickly realized that in order to provide the best services and the best products, you need to do your own installation and can control that customer experience. We vertically integrated our installation services and our financing services and was able to provide a better experience for our customers and separated from the competition. We became the biggest in the country. Now, 1 out of every 3 systems installed in the country is installed by SolarCity. You know, we're larger than the next 50 solar companies combined. In order to continue to maintain this differentiation, you've got to do more than just vertically integrating the services. You've got to vertically integrate the products as well. That's the next phase of the company. Tesla creates some of the best products in the world. When you add their manufacturing expertise, the investment they're making into storage. As Elon mentioned it's gonna be very clear that this combination of solar combined with storage will be able to provide energy at a lower cost than traditional forms of energy. That energy won't just be energy as we know today, it'll be energy plus grid-related services, where you can address all the grid needs when you add storage to the equation. I'm very excited about this next phase and I think together we can really accelerate the adoption of clean energy. Cool. Thanks, Lyndon. This is Jason. I'm speaking to page 12 of the presentation we sent out first. First and foremost, the headline here is, we believe we can generate substantial cost efficiencies with the combination of the 2 companies. Right now, we're targeting $150 million within the first full year after closing. If I drill down on that, some of the details, clearly there's gonna be sales and marketing efficiencies. There are opportunities to rationalize our sales channels. We're talking about 1 brand and a complete solution for the customer. There's also opportunity to leverage our combined digital and retail capabilities. We also think there's real opportunity just to improve the overall value proposition when combining the 2 companies. On hardware costs, there'll certainly be supply chain efficiencies. There are common components between the two companies. Inverters is a great example. Rationalizing the software as well. We believe there's substantial opportunity to reduce installation and service costs. Elon has talked about this already, but we're talking about 1 trip, or 1 trip by 1 truck to install 3 products, solar, storage, and home charging for our vehicles. Improving manufacturing efficiency. We've talked a lot about the machine that makes the machine. To make this a little bit more real, I'll give an example. When Elon and I sat down and started reviewing our Model 3 CapEx plans, there were new buildings everywhere. I think Elon's been very clear about talking about volumetric efficiency. As we rationalize these plans, we've talked a lot about there's no need for new buildings. We can do this in the space that we have for the most part. That's an example of where we think manufacturing efficiency will come into play, and we believe that this is going to be applicable to SolarCity as well as they continue their journey down manufacturing. There's obviously opportunities to reduce customer acquisition costs as well. There's a slide in the deck on page 11, which just talks about North America, and I think there's a couple of key things that jump out there. One, in the markets that SolarCity is currently operating in, Tesla has a footprint there as well. We've got nice concentration within those shared markets. Obviously, Tesla's got a global footprint as well, which in the future we could certainly leverage. We also believe there's opportunity to cut capital costs as well. Moving on to the next page, I'm on page 13 now. I think the headline here is the Tesla-SolarCity financing strategy is really underpinned by 2 key factors. One of those factors is the continued maturation of Tesla's production capabilities. We already announced this at the beginning of, or at the end of Q2. Our production capacity for vehicles grew 20% quarter-over-quarter, and over 40% year-over-year, in spite of some of the challenges that we talked about with ramping up Model X. Number 2, SolarCity has a formidable project financing acumen. I believe that this is a real asset, and as I've gotten to learn a lot more about it, I think we're really gonna be able to take advantage of this great capability that the company has built across the enterprise. If you look at the combination of these two factors, it gives us great confidence in our ability to continue to access capital markets when necessary. That's the headline story around that, but let me drill into it a little bit. There's five points on the page. One, greater visibility into cash flow dynamics of the combined company. As stated, we're very encouraged by the observed improvements in S and X production, which is naturally going to lead to positive delivery momentum. In addition, we're quite impressed by the cash flow generation of SolarCity's large market-leading install base. Number two, Tesla's discipline to capital expenditures, applying that across the enterprise. We've demonstrated capital preservation capability at Tesla. In our Q1 earnings, we talked about $217 million in CapEx, which is significantly down from the run rate in 2015. The physics-based first principles approach we're taking to Model 3. I've already mentioned volumetric efficiency, we're also displaying a healthy disregard for conventional wisdom. It's always been thought that increases in capacity require step change increases in capital. We're looking for different ways to optimize assets that are already in place and breaking through that. We believe that'll be certainly applicable to SolarCity in the future as well. Number three, we've got great confidence in our initial capitalization, we've got a goal to delever the enterprise in the future. Number one, drilling down on this, we'll govern the near term debt growth at SolarCity concurrent with the development of a rationalized capital plan across the enterprise. Second point here, we'll continue to build our credit profile to open up new sources of capital over time. Next point, we've got revenue growth that is driven by new products that are already under development. Model 3 is the key example here. We'll generate gross profits from that vehicle, and that will enhance our overall leverage profile as an enterprise. Also the combined solar and storage offering is expected to fuel revenue growth and should help us self-fund future investments. Last point on the page, realize synergies and cash flow. I covered a lot of that on the last page. Overall, just to circle back, we think each company has things that they can provide, which as a combined entity, really increases the financial profile, and gives us great confidence in the future. All right, Janelle, I think we're ready for questions now. Our first question comes from the line of Ben Kallo of Robert W. Baird. Your line is now open. Hi. Thanks for taking my question. Could you talk a little bit about the 45-day go-shop provision? Is it just a formality? If someone else were to come in and give a higher offer, how would that impact, Elon, your next step in your master plan? If someone were to come in and make a higher offer, you know, which certainly more than like a $0.01 higher offer, then I guess the independent board members would be compelled to accept that, and we'd have to find another path. I've committed to vote my shares in favor of whatever alternate offer comes through. If an alternate offer comes through that is materially better for SolarCity shareholders, then I, I assume the independent shareholders would accept that. I should point out I had no role in establishing this valuation, the offer that was made. Nor do I understand any of the mechanics that went into it. This was, I was fully recused from the matter, so I know about as much as you do about, how this price was obtained. Great. Thank you. All right. Yeah. Thank you. Our next question comes from the line of Julien Dumoulin-Smith of UBS. Your line is now open. Hi, good morning. Good morning, Julien. Elon, Julien is one of the SolarCity analysts. Good morning, Elon. Sorry. I wanted a follow-up here just quickly on the 150. Can you break down a little bit more specifics numerically, where that is exactly coming from? Also, again, given a few months now, what are the specific targets you're thinking about in terms of storage, and where geographically are you thinking that to take place? The specific target in what? Julien, you broke up a bit there towards the end of your question. Could you repeat it, please? Yeah, I apologize. The 150, can you break that down a little bit more quantitatively? With regards to the storage element, can you quantify what kind of projected deployment on the SolarCity side you would expect and perhaps a little bit more comment by region? All right. Actually, before Jay starts talking, I just mention, you know, again, I want to remind everyone on the call that the deal is not done. This is simply a recommendation from the independent board committees. It must go through SEC review, and it must then receive a vote of a majority of the independent shareholders of Tesla and a majority of independent shareholders of SolarCity. Only at that point is this actually a deal. This is a prospective deal, but it would be probably at least a few months, I'm guessing, we do not control the SEC timeline, before it actually becomes a deal. It is likely to close sometime in the fourth quarter. Just to preface all the questions, because I think some of the articles I'm seeing seem to assume that the deal's been done, but it's only done with the SEC review and 2 sets of independent shareholders voting, and that is at least a few months away. Sorry, go ahead. All right. Jason, you wanna take the financial question, and we'll go back to Elon for the storage penetration? Sure. Yeah, no problem. Julien, great question. Thank you. Thank you for asking it. Right now we're not assigning the $150 million at any lower level of detail than that, but let me talk you through some of the things to think about. One of the things is obviously Tesla's retail footprint is a real example to drive down customer acquisition costs. We have more than 3 million people that come through Tesla retail locations every year, and there is a broad overlap in the types of products that these customers are looking for, which we think plays right into SolarCity. One, you know, it's a great opportunity for sales channel rationalization. You know, another one we've talked about as well, we install home charging, and usually we do this through third-party providers for our Tesla vehicle sales. Also, it would be a separate person coming out to your house to install a battery storage solution, and a separate person coming out to your house to install a solar solution. In the combined entity, we can do all of this with 1 truck and 1 trip. There's real opportunities for synergy on the installation and servicing side. The other key 1 that we're looking at across the company is manufacturing as well. You know, we've been in the manufacturing business for many years now. We've developed a lot of experience in this area. SolarCity is still in the beginning of that journey, there, I think, are a lot of key learnings that can be applied to SolarCity. If I was gonna kinda wrap that all up, I think really looking at customer acquisition cost is a key source of synergy. Looking at reducing installation and service costs is another key source. Also looking at, the manufacturing capabilities of the combined entity is a third key source. Of course, we are going to look for more beyond that, and we believe there are potential revenue synergies, large potential revenue synergies in the future as well. Just on the cost side, there is a lot of meat on the bone. In terms of the storage adoption, you know, the way I see it, the first product available for residential customers is primarily gonna be focused on backup. You'll see that there's policy changes that are occurring where the grid is looking for grid services. When you combine solar with storage, you can provide essentially most of the grid services that the grid needs. You know, New York came out with a joint agreement with the solar industry and the main utilities there describing a 3-5 year glide path of how solar and storage would work together. You know, SolarCity just announced a pilot with PG&E in Northern California of how solar and storage are gonna provide grid services. As that policy becomes more common across the different utilities, I see that almost all systems will be deployed with solar and storage combined call it over the next 3-5 years. No specific quantitative targets on storage deployment yet? Not something that we will set. Okay. Fair enough. Thank you. I mean, as the companies actually get integrated, remember, this is not the companies aren't integrating, deals not yet approved, then of course, there'll be considerably high fidelity on that. I would take that sort of $150 million-$200 million estimate, I think that's conservative. Like that's what my gut feel here is. I think we will significantly exceed that even in the first year. Got it. Thank you. Our next question comes from the line of Patrick Jobin of Goldman Sachs. Your line is now open. Yeah, thanks. Good morning. I guess my first question is, you know, the 3 to 5-year timeframe for when, you know, solar plus storage makes sense, is that in all jurisdictions of the U.S., or is that some? You know, obviously, there's different, you know, rate levels and regulations as well, and, you know, there are places like Hawaii that makes sense now, but other states where it's gonna make sense, you know, in a longer time horizon. That was my first clarification. Secondly, just related to that, I mean, the question got brought up last call, you know, it, you know, it does beg the question of why now, right? If you've got, you know, sort of half a decade until this sort of makes economic sense and the degree of difficulty of what you've got going on over the next 18 months is so high, you know, why was the decision made to take this on right away? Why not wait until some of these, you know, more difficult operating hurdles were, you know, gone over, I guess? I just want to add one clarity to my comment of three to five years. That is with full mass deployment applying to essentially almost all systems we're deploying. Naturally, the adoption will occur a lot earlier with many of our customers. If you combine solar and storage and can provide a backup offering at essentially roughly the same rate as what they're paying for energy today in many of the states that we operate, we see high adoption will occur. My comment on the three to five years is essentially getting to a point where almost every single system that we deploy will have solar and storage. I just wanted to clarify that. There will be a growth period in from now until then as we integrate. Yeah. I mean, this is really long-term thinking here. In order for the right scenario to transpire in 3 years, we need to take the action now. You can't take the action in 3 years and then have it instantly be the right move. It takes time to get there. This is an action now which is anticipating several moves ahead. Oh, okay. If I can just ask a clarification. I mean, there's just that, you know, there are a number of studies from credible sources. Studies say. lower cost of energy. Well, you know, I mean, just people like the RMI that have done a lot of work on this. You know, I'm not saying it's 100% right. I mean, there's assumptions into every piece of research, right? You know, I was just wondering, their view is that, you know, kind of the levelized cost of energy is sort of equaling the grid cost is further out than what you guys would suggest. I was just curious, maybe you haven't read their work, I don't know, but what, where do you see yourselves being different is really? Is it just the manufacturing cost that you feel you can get it, you know, better than what some of those assumptions are? I'm just kind of curious on that point. Well, it's important to bear in mind that the cost of energy varies quite dramatically around the United States and throughout the world. The pricing mechanism for that energy also varies considerably. Indeed, in some countries, there's quite a huge premium, depending upon the time of day that you use energy. In United States, for example, Hawaii has very expensive electricity. We expect to see a lot of activity in Hawaii, certainly well before, say, Texas, which has a very low cost of energy. One shouldn't look at this monolithically, but rather, as the competitiveness of solar paired with battery improves, it starts to address more and more of the total market for electricity. Initially addressing only where electricity is very expensive, then where electricity is moderately expensive, then slightly expensive, and eventually, reaching the point where it's competitive on relative to the average price of fossil fuel energy. That's a sort of steady march in that direction. It requires a lot of technology development, operational improvements and economies of scale, all of which this merger is intended to achieve. Okay. Thanks for taking my questions. If I could just chime in on that too. This is JB. I think most of our projections on cost, especially for a well-integrated product, are more aggressive than what most of these different industry studies have been assuming. You know, and also, you know, it's not just about levelized energy, as Lyndon was saying. You know, there's a lot of other, you know, benefits that have specific value when you can have a very well-integrated product with storage. I think it's really key to take those benefits into account, whether it's just backup power or whether it's, you know, aggregated grid services that these distributed resources can be providing. Got it. Okay. Thanks, guys. Thank you. Our next question comes from the line of Rod Lache of Deutsche Bank. Your line is now open. Good morning, everybody. Was wondering if you can share, maybe it's just a stab at what the revenue synergy opportunity might be or the extent to which the customer acquisition costs for solar can decline. Also, just from a high level, from a Tesla shareholder perspective, can you just talk a little bit about the financial impact of the combination? What is the impact, just roughly on the earnings and cash flow as you look out at the combination in 2017, 2018, and 2019 versus Tesla alone? Sure. This is Jason, Rod. There's a lot of questions built into that. That was like a paragraph there. First of all, on, you know, the digital capabilities from a marketing perspective that SolarCity has, the physical retail capabilities that Tesla has, I think there's real opportunity there. I also think the story of the value proposition of combined solar and storage is not well understood. I think putting the two companies together makes that message quite clear, and we're going to really be able to help educate consumers on the value there. I think that's also a huge source of potential synergy. Now, in terms of modeling out into the future, 2017, 2018, 2019, we're certainly taking a look at that. This is the early days of integration and digging through that, so we're not going to provide a lot of detail on that at this time. But more to come. Okay, thanks. Just housekeeping. Do you have a approximate record date for the for the vote? This is Todd. We don't have a record date right now. We need to go through the SEC review process, but we'll give everyone plenty of notice before the record date is set. Okay. Thank you. Thank you. Our next question comes from the line of Vishal Shah of Deutsche Bank. Your line is now open. Yeah. Hi. Thanks for taking my question. Lyndon, I just had a question on your cash flow breakeven targets. I think you had said previously that you'll be breakeven, achieving breakeven by the end of this year. Do you still expect that to be the case given the new installation run rate? As you think about the combined company and what you think about the split between leasing and direct sale, you know, I think majority of your business today is leasing. Is that gonna be the case going forward or you expect more of direct sale approach? Yeah. In terms of our forecast for cash flow positive for Q4, yeah, we still feel good about that. We'll be updating our investors and providing a more detailed cash flow forecast at our earnings call on August 9th. We still well on track to achieve that goal. Your second question on leases versus loans or cash sales, we've actually seen an increase in loan and cash sales. Over time, I actually think loan and cash sales will become a larger portion of our business, specifically as we start differentiating more with products. I think customers would wanna own the equipment too. Thank you. Thank you. Our next question comes from the line of Jamie Albertine of Consumer Edge. Your line is now open. Great. Good morning, and thank you for taking my question. I wanted to ask, if possible, and apologies, as we're again, much more focused on Tesla and have never covered SolarCity in the past. But wanted to understand a little bit about where SolarCity is in its product, sort of cycle from an investment standpoint. We know where Tesla Motors is with the Model 3 coming up and the cash needs there. Wanted to understand what the key cash components or needs were in the short term for SolarCity. Then as you think about that answer, you know, are we going to be expecting an infusion, as it relates to the combination? It sounds like, I think I heard you say a minute ago, the combined solar and storage proposition is not well known. You know, what does entail with that? Higher advertising costs, consumer education. Really trying to get a sense and triangulate here where capital is needed and where capital is coming from in the short term. Thanks. Let me answer just the combined solar and storage. We actually think it's gonna appeal to a different emotion to customers today. Today, the primary emotion for going solar is it's environmentally a better source of energy and you can save money. Once you add storage to the equation, you have backup. You go from saving money, environmental and then reliability or safety. You know, with many of the large climate events that are occurring, blackouts are quite common. You know, in the East Coast and West Coast, you have earthquakes. This type of insurance or this type of product will appeal to a large base of customers. We actually think that'll actually help with acquisition cost and bring it down. In terms of capital for SolarCity, you know, as I said, our goal is to be cash flow positive in Q4. You know, as we look at ramping up the manufacturing facility in next year, that will assume additional capital. I think with Tesla's help, we'll be able to make it more efficient. I think that answers your questions. That's very helpful. Just as a follow-up, if I may. Actually, if I can just add. If I can just. Sorry, it's Elon here. If I can just add one thing, which is, I do think we're again, the deal needs to conclude. You know, we're still probably, at least a few months from that being done. I think we would expect a decrease in the marketing expenses and the sales expenses for SolarCity that's quite substantial. And the folks would be much like with Tesla through a network of stores, where we have tremendous amount of foot traffic that I think is underutilized because we have just 2 cars right now to sell them and 1 prospective car. And selling them storage plus solar, I think will also educating them about that, I think could quite dramatically leverage the value of the stores, and would allow us to reduce the advertising spend of ideally we're really not into advertising. We will be at some point in the future, but not now. And reduce the selling expenses substantially as well. Thank you so much. I appreciate that additional color, Elon. All right. Thank you. Our next question comes from the line of Philip Shen of Roth Capital Partners. Your line is now open. Good morning, everyone. Thank you for the questions. You know, just to drill in a little bit deeper, I know this might be tough, but to what degree can you talk about or quantify the customer acquisition costs, integration costs, reduction? I think I just heard Lyndon mention that Tesla might support the manufacturing launch of Silevo. Can you discuss that in any degree as well? Thank you. Yeah, I think on the manufacturing side, as Jason was articulating, I think Tesla at this point is starting to become quite good at manufacturing. In fact, I think with the battery Gigafactory and with Model 3, I think we will start I mean, obviously this is, we need to show that we can do this. I'm starting to feel confident that it's possible to dramatically improve the state-of-the-art of manufacturing by applying a physics first principles approach to manufacturing process, and to be sort of quite specific, really applying a couple of the key concepts behind the rocket equation to factories. One being the usefulness density of a factory which defines the capital expenditures associated with a factory, and then the exit velocity of product from that factory. Those are actually analogous to two elements of the rocket equation. We found that, by applying those principles to automotive manufacturing and to battery manufacturing, we've been able to come up with dramatic improvements, that we ultimately think will lead to at least a half order of magnitude improvement over the next best auto factory in the world. Of course, talk is cheap, and we need to show that that's true, but the math suggests it is. We'll then be applying those same principles to the production of solar cells, panels, and modules, as well as making those systems, really custom designed to a house or location, business, whatever the case may be, and making them beautiful. I think this is very important. There needs to be an asset to your house. Like, it needs to be so good that when it's done, you call your neighbors over to show them how proud you are. Great. One more, if I may. In terms of the solar storage business, as you guys ramp, you know, the focus of SolarCity historically has been residential, but 10%-20% of the business in a quarter could be commercial. Is there a focus at all for that business to pursue the commercial opportunities that might be more economic near term? Or is the focus solely on the residential side? Yeah. You know, most people actually don't know this, but we're actually the largest in the country as well when it comes to the commercial industry, you know, behind the meter commercial. We've actually been selling a fair amount of storage already for behind the meter commercial. With commercial, the utilities separate demand cost from energy cost. When you provide solar combined with storage, you can offer customers a higher level of savings, plus they have backup. That division is growing really nicely with inside the company. There's also the utility scale business that we've done a fair amount of work there. We've announced the large project in Hawaii, where we can firm up energy when you combine solar and storage and can provide a large part of the island's energy needs at night. With the benefit of storage, the ramp up and ramp down period is almost instant. We definitely see that market growing, and it has been growing. Elon, Lyndon, thank you. Yeah. If I can add a little bit there, because I think Just to touch on what Lyndon was saying at the end there. It's common for, you know, for SolarCity or actually the hopefully combined company, you know, to be cast as sort of competitive with utilities or belligerents in a, you know, belligerent situation. But actually I think I really see it as quite different from that. I see us as really working hand in hand with utilities to transition the power generation to a sustainable scenario long term. And I think it's very important to bear in mind that as transport becomes electric, and as a lot of heating, which is currently using fossil fuels, becomes electric, the demand for electricity is going to increase dramatically, probably by a factor of something on the order of at least 2, maybe 3. That's actually going to present a huge challenge for utilities, where they're really going to have to build a huge number of new electricity plants and lots of new transmission wires all over people's neighborhoods, and new substations all over people's neighborhoods, which people don't want, and it's a big headache for the utilities to do. Or you can combine centralized renewable energy generation with localized renewable energy generation on the rooftops. I think there's a prosperous future here for both utilities and rooftop energy providers. Everyone wins because this is a growing pie, a rapidly growing pie. You know, when a pie is constant or it's shrinking, that's obviously where you get, you know, you can get kind of negative competition. This is really a case where the pie is growing rapidly, I think there's plenty of room for utilities and for rooftop providers like SolarCity. I think that's what people want. Like I think people want that. If you ask the average person, "Do you want a ton of new power lines going through your neighborhood? Do you want a ton of new substations being built?" Nobody wants that. It would take ages to do that, and I think we'd probably get stuck in permitting, and it's just not a good way to go. On the other hand, if you say, "Do you want beautiful localized rooftop generation paired with, transition to sustainable central generation?" I think it's the obvious thing that we all want for the world, and that's the solution we should all fight for. Thank you. Our next question comes from a line of Joseph Spak of RBC Capital Markets. Your line is now open. Good morning, everyone. Elon and Jason, I mean, you both mentioned, you know, in terms of synergies, you know, one visit, one installation, one. Synergies. You mentioned I guess I wanted to get your thoughts on 1 bill, which presumably, you know, simplifies it as well, and whether you think you need to. Yeah you know, build something bigger internally from a financing perspective or potentially form a JV with someone to facilitate that. I don't know about a JV. I mean, I'm not the biggest fan. I just have a hard time, you know, with JVs, just trying to think of any good examples that work. I'm in all for writing, you know, having simple deals where parties understand each other and whatnot, like what we have with Panasonic. A lot of people think we actually have a JV with Panasonic, but we don't. We have a simple, I don't know, real short couple pages contract or something. Just everyone understands the basic principles of what it means to work together. You don't have all the governance issues of a JV, which usually leads to problems down the road. We will have, I think, as a combined company, actually a stronger balance sheet. It sort of stands to reason if you're gonna maintain, say, cash reserves in one company and then cash reserves in another company, you can't take the probabilistic combination of what both companies need. It's actually less efficient to have cash reserves in one company or another. I think a stronger balance sheet means you can also raise lease financing a lot easier. Not sure if anyone else would like to comment on that. I think we're good. Chanel, Actually, let me mention real quickly, we are at the 45-minute mark, so we do want to try to wrap up within one hour here and get you all to your trading desks. Chanel, let's go to the next caller, please. Okay. Our next question comes from a line of Edwin Mok of Needham & Company. Your line is now open. Hi, thanks for taking my question. Elon, I have a question about your master plan. You mentioned that on the plan you actually said empowering individual to be the only utility. Kinda conceptually, do you see that the solar business should have more of your customer owning the solar system versus, you know, right now, SolarCity mostly are leasing, which has been SolarCity's owning the system. That's my first question. Yeah. I think obviously it's up to the customer, I think we want to, you know, and SolarCity, by the way, is already starting to do this. Really offer customers, as we do with cars, 3 options: outright ownership, a loan which you can get an extension of your house mortgage, which is actually a very low cost to capital way to do it. Actually, it's cheaper than what SolarCity can do. I think it sort of actually involves a bit more paperwork with the bank usually, but it's actually the most economically efficient way to do it, is an extension of the loan on your house. or have SolarCity do a lease. SolarCity's cost, like I said, look, SolarCity's cost capital is higher than that of the individual in most cases. The logical move is actually to either own it outright for the cash purchase or to add it to your home mortgage. I think we're gonna push a lot more in that direction. Also of course it decreases the dependency of our solar business on the capital markets. Great. That's very helpful. Just a question on technology development. I think on your prepared remarks you mentioned that some of the components, such as inverters, you can potentially develop your own or have some technologies synergy there. Maybe can you give us some more color in terms of which areas and that you guys are working, have already started working on together or which area that you guys plan to start work together on these kind of technology, joint technology development? Well, as separate companies, it's actually quite difficult for us to work together, because, you know, there has to be a justification for why, say, Tesla is favoring SolarCity or SolarCity is favoring Tesla. For independent companies, it has to be an arm's length transaction, where the same thing is offered to other companies. Everything's gotta be run through the independent board committees. It's very unwieldy. And in fact, one of the things that sort of really prompted the timing of the merger was, you know, just the difficulty of, for example, this big utility deal that we're doing in Hawaii, which my understanding is, will be the largest combined solar battery deal in the United States, perhaps the world. How we had to spend months running it through independent board committee of Tesla and SolarCity and, you know, conflict waivers and we're like, "Man, we're gonna do dozens and then hundreds and maybe thousands of these deals. There's no way we can keep running, you know, we can have such an unwieldy process." It's just crazy. We gotta combine the companies. Obviously until we combine the companies, we, you know, there's, we just, we're constrained by conflicts of interest. I mean, the irony of this, you know, a lot of the reporting around this merger is that, you know, there were reporting like, "Oh, there's all sorts of conflicts of interest in the merger." I'm like, "No, the conflicts of interest are if we don't merge." The whole point, the point of the merger is to get rid of the conflicts of interest. Silly buggers, honestly. We can't really we can only talk prospectively what we might do, but we can't actually do anything. It's very limited what we can do until we are actually one company. Yeah. Maybe just quickly on the inverter point. You know, power electronics is something that is really quite core to Tesla, and I think that it's something we see as this, a really strong competency of ours. You know, most people don't realize it, but Tesla is one of the biggest manufacturers of power electronics in the world if you look at all the charging equipment in the cars, the inverter that runs the motors in the cars. You know, looking forward, it's something that we see a lot of potential on, and we see this, you know, an interesting and, you know, lucrative opportunity if we can, you know, more aggressively innovate and integrate that with storage. Great. Thank you. Thank you. Our next question comes from the line of Colin Rusch of Oppenheimer. Your line is now open. Thanks so much. You know, in the last call, you talked about the potential for loaning SolarCity some money because of the length of the acquisition process. Can you give us an update on your expectations now that you've done a deeper dive, SolarCity's updated its guidance, and you're a little bit more familiar with their need to refinance assets on what your expectation is for providing a loan from Tesla to SolarCity during this process? Sure. This is Jason. Sure. I'd say, like, it turned out that Tesla would not need to provide a loan to SolarCity. Yeah, what he said. Okay. Then, you know, you just talked about your power electronics capabilities, and certainly that's an area for innovation in terms of the integration of these assets. You know, we would expect that you'd probably apply some of Tesla's engineering expertise on that. How quickly do you think you could have a product that fully integrates the two without using an outside inverter to assist the integration? I think we don't wanna jump the gun on future announcements. We are internally betting on the come here. If this doesn't go through, it will be a bit awkward. We are betting on the come on integrated system of power electronics, which actually does get quite complex actually. It's not an easy technical problem to solve and solve well in terms of mass, like volume, cost, aesthetics, longevity of the electronics. I, you know, as JB saying, like I think we're probably the best in the world on advanced inverter technologies. We're kind of working that direction kind of, you know, hoping that this all goes through. Again, with SolarCity, I'm working at arm's length, so less than ideal. We want to reserve the product announcements for the right timing as opposed to this is sort of more of a financial call. Okay. All right. Thanks so much. Thank you. Our next question comes from the line of John Murphy of Bank of America. Your line is now open. Good morning. Just a question on funding and maybe sort of a non-traditional angle to it or maybe not so non-traditional. I mean, you guys have highlighted, you know, the potential to raise money in different forums. Would you ever consider bringing in a well-capitalized third party into the equation, if this deal goes through and you think you need more capital to really help with that? I'm not sure what that means, but I think we are gonna do okay on the capital front. I did mention at 1 point that there may be some merit in doing, you know, small equity capital raises combined company just to delever and de-risk the balance sheet. You know, small meaning kinda low to mid-single-digit %. I don't think we need more than that. Tesla's core business of Model S and X sales and Powerwall and Powerpack sales will, you know, will be generating quite significant positive cash flow. SolarCity's business will also be generating a lot of cool positive cash flow. It's really mostly about scaling up the Model 3 and then scaling up the advanced solar cell and module manufacturing. If we weren't in such kind of a crazy rapid growth mode, we would be producing significant positive free cash flow. Yeah. I'm sorry. I was really kind of coming from this sort of the idea that there might be a third party that you'd be talking to in some other way, it sounds like nothing like that is going on. No. I mean, I'm sure there's third parties we could talk to, but there just doesn't seem to be a need right now. Okay. Just a second question, a follow-up to sort of the efficiencies you may gain in manufacturing, I certainly applaud you for trying to be more efficient on manufacturing over time. It sounds like you're trying to really advance the ball more than other folks have. Just curious what that means for employment in your plants. I mean, sort of, you know, the dumb guys, you know, view of the auto world, which is where I come from, is usually a 250,000 unit plant, has about 3,000 workers in it. It sounds like you're gonna have a much greater, you know, capacity with maybe a lot fewer workers. I mean, it does get into sort of this existential question of. You know, as there's less manufacturing and less employment, you know, where does the demand ultimately come from? Once again, I applaud you for trying to get more efficient, so I'm not, you know, making any judgment on that. I think that's actually the exact right thing to do. Just, you know, as you think about employment in general, it just seems like it, you know, could start hollowing out the demand side. This is for a broader question, not just so specifically for you, but it seems like you're gonna make a lot of progress. How do you guys think about that? Yeah. Well, I mean, there's broad societal implications long-term for automation of everything. If you have self-driving vehicles, then obviously what do the people do who currently drive vehicles? This can apply to many professions. It's not unique to automotive. I think we're going to have to rethink the whole social contract. I mean, we could spend a long time dealing with philosophical and existential questions. But on, in the specific case of Tesla's factories, I actually think we're gonna have more people, not fewer people. The volume and vertical integration will be a lot higher. the ratio of Um, so- The ratio of worker to output. Yeah, the- Just curious where you think you could get that to? Yeah. It's going to be substantially better than anything else out there. We will have a lot of work. I mean, I estimated, for example, that the Gigafactory will probably end up at triple its original expected output of, you know, from 50 gigawatt hours to probably 150 gigawatt hours. The headcount we had estimated about 5 or 6,000, I think it probably ends up more like 10,000. That's a tripling of output for a doubling of workforce. That's, you know, it will actually be with a higher training level. I think we're gonna have to establish schools and training and everything because a lot of the work is gonna be more sophisticated and involve maintenance and upgrading of machines and dealing with anomalies in the production process. It's gonna require a lot more training as opposed to sort of basic repetitive actions, which really are better done by a machine. And I think the quality of work will be more interesting, and it's gonna require us to engage in training, and I think establish internal training, high levels of internal training, as well as work with educational institutions to make sure that the students are graduating with the level of training that's needed to deal with a very sophisticated machine that makes the machine. You know, I think it's more rewarding and interesting work, but yeah, one that requires more training. Great. Thank you. In Nevada, we're actually already partnered with several of the local colleges and universities and technical schools, you know, setting up curriculum that really focuses on just those things. You know, basically, you know, working with automation, figuring out how to maintain it. It's been really interesting. There's huge interest from students and also, you know, the workforce in general. That's very good to hear. Thank you. Thank you. Our next question comes from the line of Michael Morrissey of Avondale Partners. Your line is now open. Hi. Thanks for taking the question. two questions here, actually. first off, how can the combination of SolarCity and Tesla help de-risk the Gigafactory as Model 3 production ramps, you know, specifically kind of ensuring that there's an outlet for, you know, the additional battery output into grid storage application? I can maybe take a shot at that one. You know, a lot of the initial growth and scale-up of the Gigafactory is focused very much on Model 3. You know, we don't, you know, really absolutely need, you know, some large storage market to justify or sort of fill up the Gigafactory. It's actually ramping up as fast as we can possibly, you know, grow it. You know, that said, though, we do see, I think as we've said a few times, you know, incredibly, you know, strong growth in the storage products coming out of the Gigafactory. You know, eventually those could make up a very large % of the output. I think if we are able to do a very well-integrated product and we can, you know, see the demand that Lyndon was talking about earlier, you know, ramping up to essentially all the solar installations, you know, that could really help, you know, fill up that portion of the storage demand in the intermediate term. All right. Thanks for that. I guess, you know, maybe this one's for Elon, but, you know, a lot of people have made the comparison in saying that, you know, General Motors or Ford never made sense for them to acquire ExxonMobil. Why should Tesla and SolarCity combine? You know, I think that it's a bit of a false analogy and ignores, you know, the key difference between, you know, distributed, renewable energy infrastructure and, you know, potential, autonomous vehicle fleet, owner long term. You know, Elon, I'd like to, you know, get your thoughts and a little bit more of the, you know, the longer term leverage between, you know, a fleet of autonomous vehicles and, you know, a distributed network of, you know, renewable energy infrastructure. Sure. It's always dangerous to apply kind of past historical analogies to a future that's very different, conceptually different. I think it takes time for people to kind of adjust their templates, and sort of reappreciate the dimensions by which something should be viewed. I mean, 'cause one could also have said, for example, with the advent of when there were just horses and carriages, that and going towards, automotive companies, that's like, well, clearly the horses, the horse companies and the carriage companies weren't combined. Why should car companies, produce motors and vehicles? You know, when you have an integrated thing with a car, it makes sense to have the motor and the car designed by the same company so you can have a good integrated system that works together well. That same paradigm didn't exist in horses and carriages. There wasn't a good rationale for the carriage company to also own all the horses. Now with solar, you really need to combine storage because obviously the sun doesn't shine at night, and sometimes it gets cloudy, and there's variance during the day for how much energy is produced. It's obviously lower in the morning, it peaks in the middle of the day and then is lower at dusk, and then off at night. Naturally, you need to buffer that power, because people want electricity 24 hours a day. You know, it naturally lends itself to being an integrated product. You also wanna factor in the, you know, when does it make sense to charge the electric car? You wanna charge the electric car at the right time of day. You don't want to charge it and kind of deplete your home storage units, if you know that dawn's about to break and you're gonna be generating electricity. It's, you know, you sort of You want the the station storage, the battery in your car and the solar power to all work together, and provide you with, a great solution for your home. I think that there is natural product integration here where there isn't for gasoline in cars. You know, you don't want a gas station at your house, you know? It just doesn't make any sense. I'm showing no further questions at this time. I would now like to turn the call over to management for closing remarks. All right. Thank you, Chanel. Thank you everyone for joining us today. Look forward to talking to you Wednesday after market close. Have a great day. All right. Thanks, Aaron. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect.