Tesla Inc (TSLA) — Q1 2019 Earnings Call Transcript

Thank you, Sherry, and good afternoon everyone. Welcome to Tesla’s first quarter 2019 Q&A webcast. I am joined today by Elon Musk, J.B. Straubel, Zachary Kirkhorn, and a number of other executives. Our Q1 results were announced at about 2 p.m. Pacific Time in the updated letter we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments 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 filings with the SEC. During the question-and-answer portion of today’s call, please limit yourself to one question and one follow-up. But before we jump into Q&A, Elon has some opening remarks. Elon?

Thanks, Martin. On Monday, we hosted our first-ever Autonomy Investor Day showcasing our new in-house design full self-driving computer and our AI-based software trained by more than 400,000 Tesla vehicles. All Tesla class vehicles today have all the hardware necessary for full self-driving, and over the year updates will enable our customers to use the Tesla ride-hailing network fleet and generate income, which as we said on Autonomy Day a few days ago, we think is somewhere between $10,000 and $30,000 a year, in some cases, perhaps more. We are the only company in the world producing our own vehicles and batteries, as well as our own in-house chip for full self-driving. We are in a position unlike anyone else in the industry. And in 2020, we expect to have 1 million robo-taxis on the road with the hardware necessary for full self-driving. We believe we will have the most profitable autonomous taxi on the market and perhaps – yes. Last quarter, we experienced a massive increase in delivery volume in Europe, similar to what North America experienced last year, as well as the massive increase in delivery volume to China. As far as challenges go, this was a good one to have because we booked vehicles and consumers supported them. This rapid increase in overseas volume strained our logistics operation and resulted in over half of our global deliveries occurring in the final 10 days of Q1. This was the most difficult logistics problem I have ever seen, and I have seen some tough ones. So, I will say it again: half of all vehicles produced or half of all deliveries occurred in literally the final 10 days of Q1. As a result, a large number of vehicle deliveries shifted into Q2, which, of course, negatively impacted Q1 net income. As we said, we could not get the vehicles to customers specifically in time. In response to this, we are in the process of regionally balancing our vehicle builds throughout the quarter. This will lessen the strain on Tesla, result in a much better delivery experience for customers, and have a very positive effect on our working capital in the middle of the quarter. In Q1, Model 3 was yet again the best-selling premium car in the U.S., outselling the runner-up by almost 60%. It’s worth just dwelling on that for a moment, just how absurd this is compared to predictions that were made several years ago. There are literally – best knowledge zero predictions that this would happen if you go back just even 5 or 6 years ago: an electric car would be the best-selling premium car in the U.S. And we believe over time we will be the best-selling premium car throughout the world. And in fact, in Norway in March, we set a record for the highest sales of any car period ever. And that would be something similar in Switzerland as well. So, this is really an incredible achievement by the Tesla team. Since the introduction of the standard range, standard range class, only 70% of previous Model 3 vehicles have actually been non-premium vehicles, where people actually pay more for a car than they have ever paid for a car. They never anticipated paying this much for a car, but because they want the Model 3 more than they ever wanted a vehicle, they are willing to pay more to get a Model 3. Keep in mind, global expansion for the Model 3 has just begun, and this segment is vastly larger internationally than it is in the U.S. We are continuing to make significant improvements to our vehicle lineup, including updating the Model S and X production line to culminate in the next generation of powertrains. We announced this yesterday and we are now in production with the significantly more balanced powertrains for the Model S and X, as well as an upgrade to the suspension system to have active adaptive damping in the suspension system and to enable charging at 200 kilowatts, among other small changes. If anyone is thinking about upgrading their Model S or X, this is a great time to do it. We also introduced a loyalty program where if someone is an existing Tesla owner and they buy a performance Model S or X, they get their first upgrade for free; this is as a thank you and an appreciation to existing Tesla customers. The Model S now has a range of 370 miles. Motor Trend test drove the car a few days ago and drove nonstop all the way from San Francisco to Los Angeles at normal highway speeds and they said they could have gone faster even though there was headwind as well. So, this is pretty remarkable that an electric car could go nonstop between the two biggest cities in California. I mean, I have never – back when I was driving gasoline cars, I always had to stop at the gas station. This is literally better than a gasoline car with the rare exception. Additionally, there is an increase in power; it accelerates faster; it’s just better in every way. We are also increasing the size of the battery pack, which is a testament to the powertrain team and how we have improved the efficiency of the powertrain by such a significant margin. With the recently announced product improvements on Model S and X, along with the continued expansion of Model 3 globally, we expect the order rate to increase significantly throughout the year in commensurate with our production levels. I am very excited about the future for other products, especially full self-driving, which will fundamentally transform transport as we know it: the Tesla Semi truck, Model Y, improvements to Powerwall, Powerpack, and the Solar Roof Version 3 on the energy side. There is no question in my mind that Tesla has the most exciting product roadmap of any consumer product company in the world. Finally, I want to thank our employees for their incredible work and our customers for their continued support.

Thank you very much, Elon. I think Zachary would like to have some remarks as well.

Yes, thank you, Martin, and thanks Elon as well. Overall, as we reflect on the progress of Q1, this was one of the most complicated quarters that I can think of in the history of the company, and it was ambitious even by Tesla’s standards. The global expansion of Model 3 was a huge theme within the quarter. We launched the standard range lineup for Model 3, product retooling from Model S and Model X, which Elon just talked about, and we implemented various pricing adjustments while monitoring the corresponding impact that had on our order mix and deliverable cars. There are two key themes that I would like to discuss briefly, and then we will open it up to Q&A around cash and profitability for the quarter. First, on the cash front, we exited Q1 with $2.2 billion in cash and cash equivalents on hand. This was a $1.5 billion reduction from our 2018 ending cash balance, but this reduction is attributed to two factors. The first is that we paid off a $920 million convertible note on March 1. Note for those of you looking at the cash flow statement: $188 million of this is flowing through our operating cash flows. The balance of the $1.5 billion reduction is more than explained by the working capital impact of expanding Model 3 operations overseas. The two components to this, as we have discussed, is that international operations naturally command additional working capital because of transit times, but also the stress on our delivery operations meant that not all of our cars were delivered; both of these factors occurred in Q1. We do not expect to repeat this in Q2 and we expect our quarter-ending cash balance to continue to increase going forward. I will also note that we are tracking in April to the largest amount of deliveries from Month 1 in the history of the company. On the working capital point, as Elon noted, 50% of our deliveries in Q1 occurred in the final 10 days of the quarter. This is because we prioritized international builds for the first half of the quarter and then U.S. local builds in the second half. This led to a binary inflow of Model 3 cars to EMEA and China, significantly stressing the delivery operations. We also faced important issues in Shanghai and Beijing which we worked through, but that also skewed deliveries towards the final couple of days and weeks in the quarter. We are addressing this by regionally balancing our builds and we have already executed this for Model 3. The S and X will be implemented in the next week or two. The secondary benefit of this is that it enables us to run stable operations throughout the quarter, so we don’t have to staff many of our delivery areas and logistic operations to the fleet. We expect significant cost savings to come from this. On the P&L side, we incurred $188 million of one-time adjustments that led through to net income. $120 million of this was related to S and X pricing adjustments that we announced on February 28. This included a reserve for a potential increase to return it for a residual value guarantee and buyback guarantee of vehicles, as well as an adjustment for the inventory value of our used Tesla inventory and service volumes. There is an additional $67 million related to Q1 restructuring and other charges that flowed through. Within the automotive business, one thing that I want to note here is that automotive revenue was negatively impacted by $501 million attributed to the reserve increase for S and X that I just noted. If you adjust for this, the decline from Q4 to Q1 in revenue is roughly in line with the decline in deliveries. Within automotive gross margin, Model 3 gross margin declined slightly to approximately 20%. This is due to two factors: one is the pricing adjustments that we made on February 28 and the shift towards the standard range lineup which we launched. We also successfully executed on a number of cost reductions which offset this impact; labor content, warehousing, and scrap are examples of double-digit improvements from Q4 to Q1. In spite of launching the standard range variants, North American ASPs are close to $50,000, with the majority of our orders being from long-range variants of Model 3. In S and X, the impact on margin was more significant. Two major pieces here: the volume reduction led to a reduction in fixed cost absorption which impacted our margin, as well as the pricing actions that we took on February 28. Even though S and X have been in production for a while, we still continue to make operational improvements there; labor content is an example which improved quarter-over-quarter. As we look to the future here, I agree with Elon’s sentiments about the excitement of our product lineup. From a financial standpoint, what we have effectively done here is build an incredible base of knowledge and assets that we can quickly scale and replicate into different products around the world. So, Gigafactory Shanghai is a terrific example of this. As we noted in the letter, CapEx can bring up capacity 50% for Giga Shanghai as compared to Model 3 in the U.S. Our internal forecast that we are executing against is actually better than that. Model Y, as we have noted, is built on the Model 3 platform, allowing us to leverage the knowledge there for capital-efficient expansion. In energy as well, as we have noted previously, 2019 is a big year for storage, so a lot of exciting improvements are coming there, and the expansion will help improve margins as we can better utilize some of the assets we planned investments in. Just to conclude the opening remarks here, I personally have never felt more excited about the future of the company, and I am looking forward to the discussion.

Thank you very much, Zachary. Let’s take some first questions from retail shareholders who have been submitting their questions on say.com. So, the first question is: will Tesla be able to complete their purchase of Maxwell Technologies? What is holding that back?

Jonathan, do you want to?

Yes, hi, it’s Jonathan Chang as our Counsel here. Right now, we are just going through approvals with the SEC. There is not a whole lot of things holding it back. We are on schedule; we are on track. Right now, we are looking to close in mid-May.

Great. Thanks.

Thank you. The second question is: is Tesla considering creating an insurance program in order to further simplify the ownership experience and to more accurately take into account the safety of driving in Autopilot? The insurance market is very unreliable for Tesla ownership right now.

The answer is yes, we are creating a Tesla insurance product and we hope to launch that in about a month. It will be much more compelling than anything else out there.

Great. Thank you very much. The next question is: Elon, most people when they think of Tesla only see it as an automotive company. Can you speak to the energy side of the company specifically, the roadmap for when you see the energy side of things really taking off and generating major revenue for the company?

Sure. The challenge really is battery cell scarcity. As far as the additional storage is concerned, we basically need an up-sell to support vehicle production as well as to fulfill power on Powerpack. Last year, in order to have enough cells for Model 3, we actually had to convert all of the lines of the Gigafactory to produce cells just for Model 3 as opposed to Powerpack. So, we are essentially scrounging cells from all around the world to continue some level of production on the Powerpack. This year, we think that we will be able to allocate at least maybe 5% to 10% of cell outputs, like current, J.B., like what do you guys think?

Yes, between 5% and 10%, something like that.

Yes. So, there are some components in a Powerwall in the car, so that translates to quite a decent number of Powerwalls. We will continue to use cells from a variety of suppliers around the world. The Powerwall and Powerpack, because I don’t have to go through vehicle production, are much more adaptable to using a variety of cells from other cell providers. So, we expect that Powerwall and Powerpack to see a very significant percentage growth this year, maybe on the order of 300% or some quite high number. Sorry, sorry. Yes, 300, confirming it, 300%. This is a very big percentage growth rate. It’s much faster than automotive. Over time, we expect that sort of growth rate to hopefully continue, and then battery storage will become a bigger and bigger percentage of Tesla’s business. We also have seen a significant increase in retrofit solar this year because we have finally refined the product offering to be something that’s extremely compelling and much more cost-efficient to deliver and install. We have radically streamlined the process from what has been done before, and we will have more to say on that possibly next week. The Solar Roof tile, we are on Version 3 of the design. That necessarily takes a while to scale up because we have to be confident that the Solar Roof is going to last on the order of 30 years and because the warranty is sort of 20 to 25 years. The rate at which you can iterate on Solar Roof is necessarily slowed down by testing which you can do on accelerated aging on the roof. We want the installation process to be simple and easy. I was actually at the Tesla Buffalo factory a few weeks ago, and I was pretty impressed with the team. We are looking forward to scaling that up significantly through the balance of this year and next.

Thank you very much. The next question comes from Jeffrey: when and where will the Tesla Semi production begin?

This is Jerome. Next year we will start production. We are very happy with driving the trucks extensively with I think so far quite amazing success.

The prototypes are working amazingly well.

Yes, very well. We just used them all the time. We load them to maximum weight and continue to make improvements.

So, we have even used them to deliver some Model 3s.

Yes, that was fun. So yes, we will start production next year. The location was not yet set, but it’s pretty clear that we will make all the batteries and drive it in Reno.

Great. Thank you very much.

Sparks technically.

Sparks, yes. Northern Nevada.

And perhaps the last question from retail: how soon should current owners that purchased FSD get the new FSD computer?

I think from a features and functionality standpoint, I think there is no point in getting the FSD upgrade if you don’t really have it in the car for probably about 2 or 3 months. That’s when we will start releasing features that are materially different from the feature set available on the Version 2 hardware. So, no need to rush to get your computer replaced. It’s like 2 to 3 months before it becomes relevant, and then it will obviously increase rapidly from then. One other comment I will make, in case nobody asked this explicitly: for Model Y production, we are right now trying to decide whether Model Y vehicle production should be in California or Nevada, and we expect to make a final decision on that very soon. In the meantime, we have ordered all of the tooling and equipment required for Model Y, so we don’t expect this in any way to delay production of Model Y. However, it’s a very close call between Nevada and California as to whether we do the Model Y at Giga or at Fremont, but those are the two options and we will hopefully be able to make the decision in the next few weeks.

Thank you very much. Sherry, we can go to analyst questions in the question queue.

Hi, thanks for taking my questions. Your guidance for 90,000 to 100,000 Q2 deliveries, when combined with the full-year outlook, suggests somewhere between 35% and 45% sequential growth from the first half to the second. Can you talk about what is giving you the confidence to project that growth, and in particular what the order book or reservation list may be telling you?

Yes. We do see strong demand for vehicles, both S, X, and 3. The standard range plus Model 3 with Autopilot included at $39,500 is just an incredibly compelling vehicle and affordable to probably something on the order of the top 40% of income earners in the U.S. and Europe. So, I think we will see a lot of interest and demand in that. We are. And then with the upgraded S and X, I think a lot of people were kind of anticipating that there would be an S and X upgrade, and this really is kind of a game-changer of an upgrade. I think we are seeing an uptick in demand, and we expect to see that to be quite significant. We are also out of the seasonality of Q1 when few people generally don’t like buying cars in winter, and we are getting past the overhang of that tax credit cliff, which for us ended in the U.S. on December 31. These were all very positive factors. We also have just a lot of markets where there is untapped demand, especially for Model 3. We will really be seeing the right-hand drive Model 3 and expect to see significant demand in right-hand drive countries. Overall, I feel really good about the way things are headed.

Okay, thanks. And then my follow-up, sorry. As you said on a previous call, you indicated that the Y would not be built in Fremont because it was, I think you said, packed to the gills. I heard today that it is now a close call between California and Nevada. Is anticipated demand for Fremont-built vehicles less than was previously thought, or have you managed to find more capacity in Fremont, for example, with the tent or some other production method?

Well, first of all, obviously on account of tents – I mean, we like hardcore tents. I’m not talking about Cub Scout tents, which are fine, but this is actually credit going to the Tesla team, because they actually looked at how could we do this in Fremont if we had to, and we feel like we can actually append building space to the west side of the building and use a lot of internal space that’s currently used for warehousing in the Fremont factory. We believe it can actually be done with minimal disruption to add Model Y to Fremont.

Thank you.

Hey, thanks for the call. My first question is really on the Model S and Model X, and Elon, you said you are comfortable with the one you see – based on what you saw in April. Do you think that the 25,000 units per quarter is the level of demand that is where you see the market coming back already or are we not there yet? More specifically, in the U.S., the pull-forward in Q4 probably hurt a lot of demand for S and X? Is that something that we still see in the numbers today in recent weeks, or is that behind us? And I have a follow-up on Q2.

Yes. I mean, I think something like – returning to the 100,000 a year annualized demand for S and X is what we anticipate. That’s to the best of my knowledge. We don’t have a crystal ball, but that’s probably our best guess. Sorry, what was the other point?

Yes. My question was about the run-rate of demand you see at the moment. Do you still feel like weak demand in the U.S. because of the pull-forward in Q4, or do you think demand returned to normal already?

I think we expect demand to – we are seeing demand return to normal in Q2. It might be a little better than normal. I don’t have a crystal ball, it’s hard for me to say, but my impression right now is that demand is quite solid, quite strong.

And then my second question was briefly on...

Sorry, Zach would like to...

Yes. Well, just one thing I wanted to add to that. Just on the production side of S and X, we did reduce production in Q1 as was noted. That was part of the retooling that we put in place to get the longer range vehicle out with the improved suspension, and we are in the process of increasing production backup over the course of Q2. Just for the pervasive expectations, we will exit Q2 at a higher production rate than we did in Q1 on S and X and then return back to a more normal volume in Q3. It’s already increasing.

And my follow-up was really on Q2. With 90,000 to 100,000 units you are getting back to fairly nice volumes, and I’m surprised you still expect a loss. So maybe if you could take us through where we will see in Q2 pain points compared to Q4 and Q3 where you had a profit for similar volumes. How much of the loss in Q2 will be one-off costs, how much is the price points coming down in the mix, and how much is pricing and other things?

Sure. So quite a bit. We think if we didn’t unwind or pulled the wave where we made cars in the first half of the quarter almost exclusively for Asia and Europe, and in the second half almost exclusively for North America, then we could deliver more cars. We think it is important to unwind this wave because it ends up being sort of optimizing for one quarter, but really adding a lot of costs and difficulty, and not just – not being a good expense for customers and pretty aggressive efforts from the Tesla team. If we had to fully optimize for profitability in Q2, I think we can do it, but then we would be unable to unwind this crazy wave of deliveries, and it also helps our working capital within the quarter to not have the wave. Zach, do you want to talk about some of the other items?

Yes. No, I think you summarized it well, Elon. Two other things that I would add: one is we did make pricing adjustments to our products in Q1, which puts pressure on margin, and so that’s part of what we will see in Q2. The teams are working extremely hard and making terrific progress on improving the cost efficiency of the business without sacrificing growth, and that in combination with the efficiencies from unwinding the wave is where we feel we will be comfortable returning to a place of profitability in Q3 once all of those pieces are in place.

Thank you.

Thank you very much. Let’s go to the next question.

Thanks. First question, Elon, a couple of days ago, I asked you how safe is the Autopilot technology and you said something like twice as safe as normal driving, but you seem to be in a really unique position to collect exabytes of data. You could potentially be externally validated much more rigorously, provided the regulatory body or insurance institute. When could we expect to see Tesla do that type of validation so that investors could also get a sense of its significance? It seems really important for adoption. Thanks. And I have a follow-up.

I think we are just going to continue to report the absolute numbers. I think a point of detail: just give those of you our bytes of Tesla that maybe sort of data mine the situation and then try to turn it positive into negative. So we are just going to keep reporting. We do give some more detailed information to insurance companies to help with rates. Obviously, as we launch our own insurance product next month, we will certainly incorporate that information into the insurance rates. So, we essentially have a substantial price and sort of arbitrage or information arbitrage opportunity where we have direct knowledge of the risk profile of customers based on the car, and if they want to buy Tesla insurance, they would have to agree to not drive the car in a crazy way. Or they can, but then their insurance rates are higher. So we are just going to keep reporting the numbers at a broad stroke level, which I think is really what matters.

Okay, I understand it.

That’s the safety.

Okay. And just as a follow-up, Elon, and you kind of alluded a little bit, there is just so much drama around Tesla’s share price and quarterly results. From the outside, at least, it looks like a huge distraction. At the same time, there is so much alternative capital and large amounts of strategic capital that is incrementally deployed in domains where Tesla has real leadership. So how important is it for Tesla to be a publicly traded company, Elon?

Well, mate, I don’t want to surprise you, but I would prefer we were private, but unfortunately, I think that ship has sailed, so...

But is it important? I mean, do you think the company’s value is maximized being public? Is there just only so much you can do, and you just have to play the hand you’re dealt?

Well, I think this feels like the sort of price of the stock is being set in kind of a manic-depressive way. And I think Warren Buffett’s analogy is just like perhaps being a publicly traded company is like having someone stand at the edge of your home and then just randomly yell different prices for your house every day. It’s still the same house.

Yes.

So, it’s a bit of a distraction at times, but I’m not sure what to do about it.

Hi thanks. In the update letter, you talked about supplier limitations impacting production. Can you just talk about what that was and how long you think that might continue to impact you? And then I have a follow-up.

In Q2, we don’t think we have two supplier interruptions; at least the significant ones that we’re aware of.

Okay. And I guess there was some concern out there that Model 3 was cannibalizing S and X, despite them being all different vehicle classes. It doesn’t sound like you’re saying that at all, but I was just wondering if you had any evidence that proves or disproves this? Any thoughts there would be helpful.

No, they’re reducing through different market segments.

Also, not only 3.5% of our trade-ins for Model 3 are coming from Model S. So, for all the Model 3 trade-ins, Model S accounts for a super, super tiny portion.

Yes, for sure. People Model S just want to trade it in for another Model S or maybe an X.

Okay, let’s go to the next question, please.

Hi thanks everybody. A couple of questions. One, you mentioned a $50,000 ASP for North America Model 3s; can you give us a little bit more detail on kind of is that a number like since the February 28 price adjustments? Is that what you’re kind of seeing as order flow? I’m sorry, ASP is kind of the current order flow since those price adjustments?

Yes, this is Zach. I mean, what we saw on February 28 when we launched the standard-range, the standard-range class variants, is that there’s pent-up demand for those products that released very quickly after it was announced. As more time has passed and order rates have stabilized, the average ASP has actually been increasing each week since then; just under $50,000 ASP represents the most recent one, and we think it’s starting to stabilize there. We’ll see where things trend in EMEA and China as well, but what we’re seeing in North America is that over 50% of our orders are long-range variants in ASPs.

That’s really helpful. And the follow-up is, I know order questions have been asked before, but let me put it this way: I imagine that S and X orders need to have a couple of days to pick up after the upgrades. But on Model 3, whatever your assumption is within the 90,000 to 100,000 Q2 deliveries, whatever that assumption is for Model 3, does your current order flow support that? Or do you need something kind of positive to happen over the course of the quarter to get there?

I think we’ll be fine. Yes, I don’t think there are any major things required.

Okay, thanks a lot, guys.

Yes, thank you. Elon, I was wondering if you could talk about this whole notion of raising capital. For about the last year, you sort of shooed it as almost an evil thing, and I think a lot of investors believe that the company might be better served and its growth aspirations if it did raise capital or had a stronger cash base. Given that you used up about $2 billion worth of cash in the quarter, aren't you potentially trying to go through a very thin space while trying to grow quickly and be self-funding, which, quite frankly, may be unrealistic. So why not raise capital? And why do you view that as something that Tesla shouldn’t do or wouldn’t do? And I have a follow-up, please.

Yes. I don’t think raising capital should be a substitute for making the company operate more effectively. In that sense, I think it’s just important to have strong financial discipline within the company and to make sure we don’t have extraneous expenses and we’re just being frugal with capital. If we keep raising capital every time, then we simply lack the forcing function to improve the operational efficiency of the business. I think it is healthy to be on a Spartan diet for a while. At this point, I do think there are it is similar to raising capital; that’s about the right timing, but yes.

So, does that mean that investors should expect a capital raise in the near to medium term? I hear you on the force and constraint, but I mean growth does eat cash, especially in a capital-intensive business. If you really do believe you have a first-mover advantage, why wouldn’t you want to push it as quickly as possible even if it meant raising capital in the short term?

Yes. First of all, I’ll just say that I don’t think capital has been constrained for our growth thus far, and if there was a final constraint on growth, we would have faced capital before now. It is very important as the company scales to make sure we are on a solid foundation and that we reinforce financial discipline throughout the company and are spending money very efficiently. At this point, I think we are doing that; there’s more work to do, and Tesla today is far more efficient as an operating organization than it was a year ago. We’ve made dramatic improvements across the board. I think there’s merit to the idea of raising capital at this point.

Just to add to that, the journey we’ve been on for the last 12 to 18 months on being more efficient in how we spend money has really changed the full trends of the company. It has enabled us to accelerate a number of cost reductions on the COGS side of our products, and then make improvements in operating expenses as well. As we look forward to capital investments for Giga Shanghai and Model Y, and ultimately our European facility, our CapEx capacity has come down significantly through the work of the team here. It has been a very productive journey for us.

And technically, we did raise some significant capital in China for the Shanghai Giga on the order of $500 million. We want to ensure that we don’t have to grow under the level of capital stuff under the Shanghai factory.

Thank you. Now let’s go to the next question, please.

Hi guys, I was wondering when you say obviously the logistical challenges were a headwind in the quarter. You talked about trying to regionally balance your deliveries going forward. Is that basically saying that people in Europe and China are just going to need to wait longer to take their deliveries, and you’re going to try to emphasize more in North America?

No, they would actually receive their cars sooner. It just means that instead of building cars in batches, say the first half of the quarter is just dedicated to China and Europe cars and the second half dedicated to North American cars, we blend vehicle production for customers throughout the world throughout the quarter. We don’t want a situation again like we had in Q1 where essentially all the cars were arriving at customers worldwide at the same time. We literally delivered half of the entire quarter’s deliveries in the final 10 days of Q1. That’s insane. We need to unwind that; it’s not a great customer experience because we are shorthanded, and we have to redeploy like fuel from those working in sales, HR, legal, engineering – everyone just to deliver cars. Then they can do their regular jobs. So, it just makes sense to plan production according to demand throughout the quarter.

Okay, that makes sense. Then the second question, I guess on go to market, there were some periods of time there where the company was focused on closing storefronts. A fair amount of noise was made around that. It looked like some of the commentary was hedging that strategy. I was just wondering if there’s any update there. If you have that, that would be helpful. Thanks.

Sure. I think Tesla just sort of didn’t handle messaging that well. That’s amplified by statements taken to an extreme where there was a misunderstanding. We will continue to have stores, and we will continue to add stores provided they are in locations where there’s high foot traffic and that are in our target market. We will continue to add stores in locations that are no-brainers. We will close stores in locations where they are incredibly hard to find, and the foot traffic of potential buyers is very low such that it does not support the costs of the store and the people in it. It’s just common sense. All sales online just means that even if you go into a store, we would guide you to order the car on your phone. Essentially, there are information centers, places you can get a test drive and buy some Tesla merchandise, that kind of thing. But all sales online doesn’t mean all stores are closed; it just means when you buy a car, you always do it on your phone, in the store, at home, or anywhere.

Okay, very good. Thanks.

Hi yes, thank you for taking the questions. I’m just wondering if you could comment on the agreement you seem to have reached with FCA on the possibility of selling your CO2 credits to them in Europe and what that means for your potential cash inflow. When that might start occurring, and if there is any chance any of those things are in your Q1 cash position?

I think it’s a confidential deal with FCA, so we agreed with FCA not to comment on it publicly, so we must abide by that.

And can I ask you a question coming back to what Adam was saying about the drama that surrounds your situation? Why don’t you reduce some of it by disclosing on a monthly basis your deliveries and also maybe disclosing early your greenhouse revenue instead of just reserves? So we get right away a better view on some of these details that kind of move the stock.

I think that would actually be counterproductive because people read too much into what occurred in a month. Even at a quarterly basis, things can be lumpy. The more granularity provided on a monthly level, the more people would reach all sorts of conclusions that don’t make sense. Sales to a particular country, say overseas, are affected by when the ship arrives. If the ship arrives on the 31st of the month or the first of the next month, this will make it look like something dramatic has happened. But actually, the ship was just a day late. So, people reading that would actually increase the drama, not decrease it.

Filling the ship 100%, so it just ends up being lumpy. If you’ve calculated like GDP of a country to offset the U.S., GDP on Sunday is extremely low, but GDP on a Monday is extremely high. It does not mean nothing has really changed.

Great. Thanks for taking our questions. First one, on customer deposits, it looks like it’s essentially flat to maybe slightly down. I understand it’s probably some timing with deliveries that could have helped it towards the end of the quarter. But we would have thought it would have increased given the Model Y rollout. So, our question is what was the initial order intake for the Model Y? And just coming through your earlier comments, what daily order rate are you seeing right now for the rest of your products?

I think we don’t want to comment on the granularity of deposits. Again, people read too much into this. We’re not commenting on the Model Y because we’re just not in production, so you can’t really read anything into Model Y orders at this point.

Okay. Well, then my second question would just be if you anticipate a further price adjustment the next level with the credit phasing out July 1?

We don’t comment on future price changes unless you see it publicly.

Okay. Let’s go to the next question, please.

Yes, could you comment on whether you’ll be better constrained at 100,000 vehicles a quarter in Q2?

Self-constrained, you mean? We don’t feel constrained at 400,000.

And then as you look at the Maxwell Technology integration, post close, how quickly do you think you’ll be able to integrate that technology into the battery production? Could you comment on potential for chemistry and form factor changes as you get it integrated?

You’re really asking some pretty super secret sauce questions here. I think we’ll probably have an Investor Day, like an Autonomy Day, maybe later this year or early next, just to go over the cell and battery technology and future strategy. I think that will be very informative, but we do recognize the criticality of this.

Okay, thank you so much, guys.

First question is really just a clarification on the outlook of 25% non-GAAP gross margin that you’re targeting. Is that over the mid-term or is that something you expect to hit by the end of this year? If so, what gets S and X back higher given the price cuts?

Yes, this is Zach here. We’re targeting for the end of the year, although internally, we are working towards S and X non-GAAP gross margin achieving that sooner. The biggest lever there is actually two components. One is, as we increase volume back on our S and X production line, there’s just a natural benefit there from fixed cost absorption which will help us. We also have a number of cost reduction projects in place that we’re executing on over the course of the year. The third piece, which applies to S and X but also Model 3, is that we’re seeing an increased take rate on our full Self-Driving offering. The revenue associated with that, given that the full suite of functionality is not there, and as that option becomes more available, we will be able to apply more revenue on that. So all of these things together within our internal projections gives us confidence.

I should mention that the upgraded powertrain for S and X was actually launched with a significant cost down because we basically took the high volume, driving units from the Model 3 which is an extremely efficient magnet motor and product electronics, and we made a version for the contract units of S and X. We’re actually able to get cost reductions while improving range and performance of the car; that’s just one example.

Okay. The second question is just looking at the 10-K. You’ve noticed a $4.9 billion purchase obligation, which I think is primarily related to Panasonic Giga 1. In some of your communication, you indicated production constraints. I guess the question is, does that $4.9 billion correlate to reaching that 35 gigawatt hour rate? If you can’t hit that because of production constraints, does that adjust?

This is just for your information; the purchase obligation in the 10-K is basically for the entire contract we have with Panasonic. It’s not something that we need to hit immediately. It’s going to take a couple of years to fulfill.

Okay.

Great, thanks for taking my question. It sounds like from the tone of the call that you don’t see that there’s a demand issue for some of the product. But margins seem to be under pressure, and typically automakers stop pricing when there is a demand issue. So, what is the logic behind the price cuts during the quarter?

I mean, our goal, as we've been very clear about from the beginning of the company, is to make our cars as affordable as possible. We thought it was important to offer the $35,000 Model 3 and create a sort of bundled package for the Model 3 with the increased range because we think that the difference between 220 and 240 is quite important. We’ve realized that it’s the sweet spot, and I think the $39,500 Model 3 really nails that. We see a lot of consumer response accordingly. You can tell by the $35,000 version of the Model 3, of course, that didn’t have Autopilot and has a software introspection, that kind of thing; it’s slightly more inconvenient to buy. We see very few people actually take us up on that $35,000 offer, but it’s there and will remain there.

As a follow-up, you’re still targeting the China facility ramp by the end of the year. Are you still confident in the 3,000 per week? Do you have a battery supplier yet that’s getting pretty close to the point?

Yes, the Shanghai Gigafactory progress is going incredibly well. The execution of our team underground there is, I get daily emails with Tesla pictures from one day to next from Tom who leads the Gigafactory program. I’m in that Gigafactory email loop. In terms of execution, of course, the production grows as fast as the bottleneck item. That’s very important to bear in mind; we have 99% of things in good shape to make the car. Regarding that said, it looks like we’ll reach volume production at the end of this year at over 1,000 cars per week, maybe 2,000 from Shanghai Giga at the end of this year. That’s what it looks like to be the case right now. If it’s not at the end, it will be shortly thereafter. We expect to have multiple battery suppliers for Shanghai Giga.

Great. Thank you very much everyone. Unfortunately, this is all the time we have for our Q&A today. Appreciate all of your questions, and we look forward to talking to you in the next quarter.