Tesla Inc (TSLA) — Q3 2019 Earnings Call Transcript

Thank you, Sherry, and good afternoon, everyone, and welcome to Tesla's third quarter 2019 Q&A webcast. I'm joined today by Elon Musk, Zachary Kirkhorn, and a number of other executives. Our Q3 results were announced at about 2:00 PM Pacific Time in the update deck 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. Please press star one now if you would like to join the question queue. But before we jump into Q&A, Elon has some opening remarks. Elon?

Thank you. First of all, I'd like to just thank the Tesla team for an incredible job this quarter. The execution was outstanding on just about every front. So it's just an honor to work with such a great team. Q3 was obviously a very strong quarter and we had record deliveries. We're able to make great strides in controlling our costs. We shifted back to GAAP profitability while also generating strong free cash flow. And again, this would not be possible without each employee doing their part to reduce cost. Our operating cost is now at the lowest level since Model 3 production started. Regarding Gigafactory Shanghai, this month we started trial production at Giga Shanghai and built four vehicles from body to paint to general assembly. This is a real factory with a tremendous amount of equipment in it. While a lot of people see the outside show of the factory, which is enormous, and it was essentially underwater in January. It was below the water table literally. What is, I think, much more significant, is that we're able to install massive stamping machines, a fully operational paint shop, and a sophisticated general assembly line in the same period of time, in parallel with building. I'd like to thank our team for this extraordinary achievement. I'm not aware of any factory of this magnitude in history being constructed in such a short period of time, approximately 10 months. As far as I know, this is unprecedented. And Gigafactory Shanghai will become a template for future growth. We're planning to build Model Y in Shanghai as well, of course, and build a Gigafactory in Europe and we hope to announce the location of that Gigafactory before the end of this year. Regarding Model Y, we're also ahead of schedule on Model Y preparations in Fremont, and we've moved the launch timeline from full 2020 to summer 2020. There may be some room for improvement there, but we're confident about summer 2020. I've actually recently driven the Model Y release candidate and think it's going to be an amazing product and be very well received. I think it's quite likely to, just my opinion, but I think it will outsell Model S, Model X, and Model 3 combined. Regarding Version 10 and Smart Summon, last month we released our latest Software Version 10, which includes video streaming, games, karaoke, Spotify, and a host of other new features and improvements. Most importantly, it includes the first version of Smart Summon, which has now been used 1 million times. So, it's now over 1 million uses of Smart Summon, and in the next week or so, we will be releasing an improved version of Smart Summon taking into account all the data from those 1 million Smart Summon attempts. This really illustrates the value of having a massive fleet because it allows us to collect these corner cases and learn from them, and use street learning to become rapidly better just as Navigator and Autopilot did on the freeway. Expect a number of improvements in Smart Summon in the weeks to come. This is really just the beginning as we collect more data and Autopilot and Full Self-Driving functionality get better. While it's going to be tight, it still does appear that we will be at least in limited early-access release of a feature-complete Full Self-Driving feature this year. So, it's not for sure, but it appears to be on track for at least an early access release of a fully functional Full Self-Driving by the end of this year. Lastly, we're highly focused on decisions that really make a material difference to the company, such as opening Gigafactories in other continents. It's worth noting that these Gigafactories effectively will triple our output. When you consider increased output per Gigafactory, it's going to actually more than triple our output over time. There are a lot of interesting things happening with respect to advanced batteries, more efficient powertrains, and full self-driving, but that will be something for a future time. One last item is that tomorrow afternoon, we will be releasing Version 3 of the Tesla Solar Roof. That's the integrated solar panels integrated with the roof. Version 1 and 2 were still sort of figuring things out. I think Version 3 is finally ready for the big time. We're scaling up production of the Version 3 solar roof at our Buffalo Gigafactory. I think this product is going to be incredible, but we'll talk more about that on the official product launch tomorrow afternoon.

Thank you very much. I think Zachary has some remarks as well.

Yeah, thank you, Elon. Thank you, Martin. Q3 was a great quarter for Tesla. I know many employees are listening right now, and I want to thank you for your passion and your hard work. We've made terrific progress, and yet again, we realized margin improvements in nearly every aspect of the business. There are three key points I would like to highlight. First, we returned to profitability in Q3, aided by improved gross profit, reduced operating expenses, and the absence of negative one-time items that weighed on our financials in the first half of the year. GAAP automotive gross margin improved sequentially to 22.8% and over 20% excluding regulatory credits. We achieved these improvements through higher production volumes on Model S, Model X, and Model 3, enabling better fixed cost absorption. We realized improvements in labor hours per vehicle as well as other costs such as warehousing, logistics, delivery, and import-related items. We're also making continued progress reducing material costs, including commercial negotiations with suppliers. Model S and X ASPs increased even accounting for revenue deferrals related to free unlimited supercharging. Model 3 ASPs declined slightly, driven by mix in Asia and pricing action in EMEA. North American ASPs held flat as mix improved, offsetting pricing action we took at the start of the quarter, which is great to see. Note that with the release of Smart Summon in the US, we were able to recognize $30 million of deferred revenue. As we expand Smart Summon to additional markets and release new features, we will continue to recognize additional deferred revenue. Our services and other loss reduced yet again, reflecting our focus to improve efficiency in this area of the business, and we further reduced operating expenses despite increased orders, deliveries, and new programs in development. Lastly, on net income and other income, we saw benefits from foreign exchange, which as I mentioned last quarter, we don't hedge. The second key point I want to highlight is that we demonstrated another quarter of strong free cash flows despite a significant increase in our captive leasing mix and a sequential increase in CapEx spend. This has enabled year-to-date positive free cash flows for the company. Our cash balance increased by approximately the same amount as our free cash flows, and we exited the quarter with our highest quarter-ending cash balance ever of just over $5.3 billion. Specifically, on captive leases, we've received a number of questions on how these are funded. We use our leasing warehouse and ABS sales to allow for captive leases without material use of cash. It's important to note here that our warehouse and ABS flow through financing cash flow, and as a result, leases negatively impact free cash flow. This impact was material in Q3 as the lease rate increased substantially by 50%. In addition, CapEx spend increased, driven primarily by Gigafactory Shanghai and Model Y spending. We've received a number of questions on why our capital spending appears low compared to prior levels, even though there are multiple new projects launching and in development. As we noted in the shareholder letter this quarter and last quarter, this is because we've made great progress on improving our capital efficiency. My third and final point is around demand and growth. Our global order rate remains strong and continues to increase. Despite increases in production levels, our order backlog has been growing, and quarter-to-date orders are significantly higher than at this point last quarter. In the immediate term, we're focused on increasing production of Model 3, Model S, and Model X as quickly as we can. The bulk of this work involves continued optimization of existing equipment. We've also made targeted adjustments to pricing to better balance supply and demand. Our pace of execution on these factories and capacity expansion has increased significantly. As Elon mentioned, the first phase of Gigafactory Shanghai is already production-ready, and we've been able to pull in the timeline for other major projects. Overall, we are quickly turning the corner for our next phase of growth and our financial health continues to strengthen. We remain focused on reducing costs which enables rapid investments in future programs and growth.

Thank you very much. I think also our Director of Energy Operations Kunal Girotra wanted to have some remarks.

Hi, everyone. My name is Kunal Girotra, and I've been with Tesla for about four years, working on different aspects of deploying our energy products. I now run Tesla Energy's deployment and fulfillment teams. Over the last three months, the energy teams have made great progress in both our Solar and Energy Storage businesses. As you can see in our quarterly deck, our solar deployments rose by almost 50% over last quarter, and our energy storage deployments, which include Powerwalls and Powerpacks, grew by 15% to an all-time high of 477 megawatt hours. In the last three months, we relaunched Tesla Solar in North America by simplifying our solar offering into three sizes of small, medium, and large with transfer and pricing on the website.

Actually, if I may interject. What a lot of people don't realize is, in California and in a number of other states, if you buy our solar subscription or solar rental, there's no money down, and you instantly save on your utility bill, and there's no long-term contract.

Right.

It's kind of a no-brainer. It's really, do you want something that prints money? And if it doesn't print money, we'll fix it or take it back. It's kind of a no-brainer. It sort of plays into Tesla's overarching strategy here, which is effectively to become a giant distributor and global utility.

Yeah, absolutely. The subscription solar offering that you mentioned has launched in six states, and like you said, it's six monthly payments and no long-term contracts, and the response from customers has been pretty awesome so far.

Most people do actually buy it, as opposed to rent it, which actually is technically better — while you make money immediately if you rent it, it's actually a better investment if you buy it, because the cost of capital of the consumer is better than our cost of capital. There's an interesting study by Zillow and a number of other organizations that show that adding solar to your home increases the price of your home. Zillow's study showed a 4% increase in the value of the home with solar. If you add the Powerwall, which gives you blackout protection, you'll have energy security in the event of rolling blackouts or if the power goes out for any reason, which appears to be a long-term systemic issue in California particularly. That is definitely going to be viewed as a significant asset for any home.

Totally, yeah. I think to your point of buying Tesla Solar is easy because we have one of the lowest prices in the nation now, in the country, and just a little story there. We were able to lower our prices because our cost of acquisition is now less than a quarter of any typical solar company.

We don't do sales.

Yeah, we do online sales, online orders...

There's no advertising, no marketing, and no sales force. Would you rather pay for power or for marketing? I'd say, you would rather pay for the product.

Totally, yeah. That's great. On solar, we've also simplified the fulfillment process with a goal of really fast order-to-install timelines. We've done many residential installs with a single related visit to a customer's home because of the reduced complexity. We've also been working with cities and counties to submit generic permits that follow a template rather than customizing for every situation, because...

Actually, this is a really big deal. I want people to appreciate the great work by you and the energy team to get this done, because one of the inhibitors, both from a cost and timing standpoint, is getting permit approval from these various regional authorities. We've pioneered a novel approach which is sort of an innovation applied to bureaucracy. We've gotten a massive number of housing approval authorities to take a generic template, as opposed to a custom template, which makes it simple and low cost and fast to get approval for solar, which is how it should be.

Totally. Yeah, around 350 cities and counties have accepted it.

And more coming.

Many more coming.

I think ultimately it will be almost everyone.

Yeah, yeah, we have a lot more small cities and counties that have to come online, but that will be our focus in the coming days. It's more important as we scale Solar Roof too. For all our deploying energy products, we need the innovation in the bureaucracy space that you said as well.

I mean, yeah.

Yeah, so all these improvements have led us to speed up our customer order-to-installation timelines from months to, in many cases, days. As Elon, you already said, we've added the option to add Powerwalls to secure people from future power outages, and home-installed Powerwall – as shown in the recent California outages, many homes ran successfully.

Yeah, you can tell which homes have a Powerwall because that's where the lights are on. Look at the neighborhood; all but a few lights are out, and there's usually the ones with the Tesla Powerwall.

Yeah.

I think also like the single truck roll – yeah, single visit install is a big deal. We're taking it from where the solar industry would often be three visits before the solar was installed and would often take a lot of time to do the installation. We've streamlined all of that to the point where in many cases it's a single visit to do everything, and it's fast, minimizing disruption to the homeowner. Ordering solar is literally one click. You can order solar for your house in less than one minute.

Yeah, and then we have done the same thing in the commercial solar space. Nobody thought of putting a simple left side with prices for commercial solar. We do that now, and we've seen a good response from small businesses wanting to go solar. Removing the complexity of long-term contracts and simplifying the terms and conditions, a commercial solar sales process which would typically take six months is now taking a couple of weeks. So the same thing that we have done in residential, we want to expand more and more in commercial as well. Overall, the roadmap for energy products from solar, Solar Roof, Powerwall to Megapack is super exciting, and I expect Tesla Energy to become a larger part of our overall ecosystem as we leverage and integrate the same competencies from our Vehicle business. The future is pretty exciting for Tesla Energy.

Great, thanks.

Thank you very much. So first we're going to take some questions from say.com. We will then take questions from both institutional investors as well as retail investors.

Yeah, what we're seeing is that word of mouth is more than enough to drive our demand in excess of production. We have no plans to advertise at this time. At some point in the future, we may do advertising not in the traditional sense, but more to just inform people and make sure they are aware of the product, but not engage in the typical trickery that is commonplace in advertising.

Okay. The next question from institutional investors is, Elon, other than robo-taxis and autonomous vehicle capabilities, when you look over the next three years, what are you most excited about at Tesla that you believe investors don't understand or have missed?

I think there is generally a lack of understanding or appreciation for the growth of Tesla Energy, as Kunal was talking about. In the long term, I expect Tesla Energy to be of the same or roughly the same size as Tesla's automotive sector or business. This is the most underappreciated group. I think it could be bigger, but it's certainly of a similar magnitude to Tesla Solar. Meaning, if you take Tesla Solar plus battery stuff, Tesla Energy is, I think, the least appreciated element. Part of it is like, for about 18 months, almost two years, we had to divert a tremendous amount of resources. We had to basically take resources from everywhere else in the company and apply them to the Model 3 production — fixing the Model 3 production ramp and simplifying the design of the Model 3. For about a year-and-a-half, we unfortunately stripped Tesla Energy of engineering and other resources and even took the cell production lines that were meant for Powerwall and Powerpack and redirected them to the car because we didn't have enough cells. Now that we feel that Model 3 production is in a good place and headed to a great place, we've restored resources to Tesla Solar and storage. That's going to be, I think, the really crazy growth for as far into the future as I can imagine. But we had to do it because if we didn't solve Model 3, Tesla wouldn't survive. So unfortunately, that shorted pretty much the other parts of the company. It would be difficult for me to overstate the degree to which, I think, Tesla Energy is going to be a major part of Tesla's activity in the future. Tesla's mission from the beginning has been to accelerate the advent of sustainable energy; that means sustainable energy generation and sustainable energy consumption in the form of vehicles, electric vehicles. One of the stats we will publish in the future along with our vehicle production is how much sustainable energy Tesla produced or Tesla customers produced with our products. You'll see that we're producing about the same or comparable amounts of sustainable energy as are consumed in our cars. For the longest time, the rebuttal against electric cars has been that they use dirty power from coal. Well, no, we're solar power. It came from companies not just Tesla. Yeah, sustainable generation and sustainable consumption, and that's what we're doing. And we'll do more of it.

Okay. Thank you. The next question from investors is related to full self-driving attach rates. Given that self-driving regulations will evolve unevenly in different markets, would you consider selling modules individually? For example, navigation Autopilot or Summon versus the current strategy of selling the package as a whole in order to encourage adoption and getting more data?

I think we'll continue to sell it in a bundled fashion. I mean, any Tesla that you buy already has basic Autopilot included. That really is a pretty major advantage relative to other cars. The next step will be full self-driving with Smart Summon being kind of the beginning of that. Obviously, we have the two sides of it: highway Autopilot and Summon which is low speed in parking lots and that kind of thing. Now we need to work on solving the intermediate portion which is traffic lights and stop signs, and navigating through windy roads in suburban neighborhoods. That's the focus right now. You're going to want it all. That's the answer. Something everyone is going to want for sure.

Okay.

At the point which we're able to upload the software enabling a Tesla to become a robo-taxi, expect to have that from a functionality standpoint by the end of next year. The functionality — basic functionality aspirationally by the end of this year but reliable enough that you do not need to pay attention in our opinion by the end of next year. The acceptance by regulatory authorities will vary by jurisdiction. But that transition, that sort of flipping the switch from a car that is not a robo-taxi to a robo-taxi, I think will probably be the biggest step-change increase in asset value in history by far.

Okay. Thank you. The next question is, with respect to Model Y, what are your latest expectations for launch timing? Do you anticipate any Model 3 production downtime at Fremont during the launch? How should Model Y gross margin percent look compared to Model 3 gross margin?

We've talked about the launch time. What really matters is the timing to volume production where volume production is some number in excess of 1,000 units per week. We're confident of reaching that point no later than the middle of 2020. From an interest standpoint, we do not expect it to interfere. The body line is separate, the paint line is — we do not expect it to interfere with Model 3. No, we do not expect any downtime. Zachary, do you want to add anything from a margin standpoint?

Yeah, from a margin perspective, we're expecting ASPs for Model Y to be slightly higher than they are for Model 3, and this is common in the industry between sedans and CUVs. The part that we've worked very hard on is controlling the cost of Model Y, and our steady-state forecast for that program puts the cost at roughly equivalent to Model 3. There will be a ramp in efficiencies at first, of course, as we launch the program, but as it stabilizes with steady-state production, we do expect that it will be a higher margin product. It's something that we're very excited about within the company.

Okay. Thank you. And the last question from institutional investors is, can you provide an update on FSD package attach rates? As FSD attach rates improve, will you let the financial benefits manifest in higher gross margins for the company and shareholders or will you lower the price to drive delivery volume?

I don't think we're going to need to lower the price of FSD. I expect the price of FSD to increase slowly as the functionality and capability improve. That's unchanged. Our cash gross margin obviously is higher than our GAAP gross margin because of unrecognized revenue associated with FSD attach rates. That's why I think it's in the order of $600 million or in the order of $0.5 billion of unrecognized revenue. If you were to include that, which is obviously recognized as we release the full self-driving functionalities, the actual gross margin we're operating on a cash basis today is higher than the GAAP gross margin.

Okay. Let's now go to questions from retail investors. The first question from Craig is, can you provide more detail on the DeepScale acquisition, its importance, and whether Tesla is still on track to recognize and respond to traffic lights and stop signs with automatic driving on city streets by the end of 2019?

Sure. DeepScale is a very tiny company. It's basically about 12 people, and they have some expertise in increasing the efficiency of neural nets for a given amount of compute, which I think is helpful. It remains to be seen, but the intent behind what was a very tiny acquisition was to slightly accelerate FSD. That is the intent, and hopefully, that will turn out to be true.

Okay. The second question we've already answered regarding Model Y delivery. So we'll jump to the third question from Craig. News reports suggest that Gigafactory may already be producing Model 3s for the Chinese market. Could you please update us on the production expectations for Giga 3? And confirm the purpose of the second building now being built. Is that for battery production as suggested by some press outlets?

Yeah, we're in trial production of Model 3, basically sending cars through the system, and we're ramping rapidly. We're expecting to hit volume production in a few months. The second building is indeed for battery and module production. There's obviously a bunch more construction beyond what is already there because we need to build out more facilities for Model Y production at Shanghai as well.

Okay. The next question from retail investors is, can you update us on the initial results of Tesla car insurance? Is there a timeline to expand it nationally and internationally?

Yeah, I can take that. So far, we've launched Tesla Insurance in California. I have to say that I'm quite pleased by the results so far. The take rates, as measured by quote-to-purchase conversion, are quite high by industry standards, and we expect that this will only increase as folks understand the products better and receive some of the known price increases coming from some of the standard carriers that they'll come to us and look for an alternative. There's a bunch of work happening behind the scenes on improving the product, particularly the purchase flow, to make sure it's the best product experience for our customers. We're also working very hard to get other states lined up in the States, and then also to launch in some countries internationally. We're not able to provide specific timelines on those changes, but we're definitely working as quickly as we can, given how well received Tesla Insurance has been in California.

Yeah, I think it also has a secondary effect of ensuring that the third-party providers of insurance provide reasonable rates to our customers.

Completely agree. The goal here is not to have an outsized market share of insurance; it's just to make sure our customers have an alternative to other companies, as well, if those rates are high. Ultimately, what makes the most sense for a total cost of ownership perspective is for folks to have good pricing on their insurance.

Yes, exactly.

Okay. And the last question from retail investors. There is skepticism regarding your comment that the full self-driving will be feature-complete by year-end, resulting from confusion about feature-complete. Could you please talk to this and perhaps give us a list of features that establish the FSD baseline?

Yeah, feature-complete, I mean, the car is able to drive from one's house to work, most likely without interventions. It will still be supervised, but it will be able to drive. It will fill in the gap from low-speed autonomy with Summon. You've got high-speed autonomy on the highway, and intermediate speed autonomy, which really just means traffic lights and stop signs. Feature-complete means it's most likely able to do that without human intervention, but it would still be supervised. I've gone through this timeline before several times, but it is often misconstrued that there are three major levels to autonomy. There's the car being able to be autonomous but requiring supervision and intervention at times. That's feature complete. It doesn't mean every scenario everywhere on earth, including every corner case; it just means most of the time. And then there's another level, which is that we think the car is safe enough to be driven without supervision. The third level would be that regulators are also convinced the car can be driven autonomously without supervision. Those are three different levels.

Okay. Thank you very much. Sherry, we can now go to the questions from analysts.

Hey, guys. Thanks for taking my question. I was hoping that you could give us a little bit more color on sizing up the key factors in the auto gross margin improvement from Q3 to Q2, particularly you mentioned some nonrecurring items in the letter. Should investors be prepared for any meaningful headwinds as the China plant comes up, but isn't at full production yet?

Yeah, I can provide a couple of comments on that. On your last question about China headwinds, there are always ramp inefficiencies when we launch a new factory. We don't expect China to be any different than that, so there will be some that we experience in Q4. The amount of that is hard to forecast, given that it's a different type of factory design than we did here in Fremont. We're working very hard to limit the ramp inefficiencies, but certainly fixed cost absorption and having all of the labor ready as we ramp will have an impact on Q4. On the margin improvement, a couple of things there for auto gross margin. As I mentioned in my opening remarks, S and X average selling prices increased from Q2 to Q3. That's important, as I mentioned in the last earnings call. The prior powertrain versions of S and X provided significant headwinds on average selling price for that product in the quarter. We've also done a bunch of work as a company to become more targeted in how we adjust prices on our products and how we optimize that based on local supply and demand. I think there is a bunch of good work from the team on that in Q3, which we allude to in our financials. Cost reduction has just remained a huge focus for us, it's hard to underestimate how much of that has been engrained in the culture of the company. Jerome and his team have done absolutely tremendous work there. On every line item of our cost: manufacturing, labor, warehousing, logistics, there's just a tremendous amount of good work that happened there. Specifically, on nonrecurring items, two that I'll note: one being the Smart Summon revenue recognition, debatable whether that's considered recurring or not given that we continue to expect to release more features and release revenue associated with that in the future, but we did want to call that out specifically and the dollar value around that because we know there's been speculation around the impact for the quarter. Foreign exchange is just something that since we don't hedge, it has an impact, and it comes and goes every quarter. We'll have to see as the quarter plays out the effect that that has.

Hi, everyone. This is George Dailey on for Adam. So, first question, is it a fair assumption to say that once the Shanghai Gigafactory is ramped, the Model 3 sold in China for China could be the most profitable car you sell, even more profitable than the average car made at Fremont right now?

That one is also difficult to forecast; it's a good question. At least based on the plans that we have now, we're expecting it to be roughly in line with where Model 3 is coming out of our Fremont factory. There's still a bunch of work around cost optimization in the factory after we launch with ramp inefficiencies, and we need to work those costs down. And then there will be work to land on what the right mix is within the country and where we ultimately land on the product offering. So I think for now, it's safe to assume that it's roughly in line with the margins that you see coming out of the Fremont facility.

Great. If I could just sneak in one more, it's been over seven years since you launched the Model S. Many OEMs seem that they don't have the same commitment to battery electric vehicles that you do, and many don't even offer one right now. As your business model proves to be more sustainable, could we potentially see Tesla maybe supplying other OEMs with batteries or software or complete electric vehicle architectures in an effort to accelerate mass adoption of sustainable transport?

Yeah, I think there's — it would be consistent with the mission of Tesla to help other car companies with electric vehicles on the battery and powertrain front, possibly on other fronts. It's something we're open to. As a lot of people know, we opened our patents so that those would not serve as an obstacle to the adoption of electric vehicles or solar power or stationary storage. We're definitely open to supplying batteries and powertrains and perhaps other things to other car companies.

Okay. Thank you. Let's go to the next question, please.

Hi. Thank you. I have two questions. The first is, Software Version 10.0 added a lot of functionality that's never really been available in a car before through an over-the-air update. In your shareholder letter, you say that this lays an important foundation for things to come. Can you just talk about the longer-term plan or your vision for the direction of the software platform, and if you have plans to monetize that opportunity?

Well, the goal for the infotainment system is to say what's the most amount of fun you can have in a car, which I think — I don't think other car companies really think about it that way. Certainly, what is the most fun — how can we maximize the enjoyment of a car such that it's not just some transport utility device with no soul and no character. We want it to be fun and entertaining, something that you love. There's a lot one can do because people are generally spending a couple of hours a day on average in their car. That's a pretty high percentage of their waking time outside of like showering and going to the bathroom. It's a lot of time. I guess, maybe there's some way to monetize it, but we haven't really thought about it that way. Our goal is to just make — say what is the most fun you can possibly have while you're in your car. As autonomy gets better and better, that's going to become much more of an entertainment opportunity. We'll see where that leads; that's our goal.

Great. Can you help us to frame the opportunity for emission credits? As the standards in the EU start to tighten next year, I'm not looking for an exact number; but maybe more to understand whether this is an opportunity in the tens of millions, hundreds of millions, billions, anything to help us frame the opportunity, and also whether you have any ongoing dialogues with OEM?

We certainly have ongoing dialogues with OEMs, but as you see from our financials, the tax credits or emissions credits are not forming a very big percentage of our revenue. They're — I mean, Zack, what was the last quarter? It was really quite...

It was over $100 million.

But out of like several billion. So it's like 1.5%. It's not — it's not exactly a giant percentage. Obviously, the credit situation in the US is not particularly strong for obvious reasons, which we think is not great for the future, but anyway that's the way it is. In Europe, there's much more of a sensitivity to the environment, but we're not counting on some big windfall; maybe it will be good, maybe not, we don't know. But we're not counting on it.

Yeah, I think that's a fair way to characterize it. Our expectations are that credit revenues will generally increase with time, not necessarily increasing every quarter. We did increase from Q2 to Q3, but there's a certain amount of them that are baseline based on the number of cars that we build and deliver, and there's others that are deal specific, and those deals can happen at any point. We're constantly in conversations with automakers about this, but within the company, we manage the business without counting on any profit or cash flows from regulatory credits, and we view it as purely incremental. My recommendation is that everyone should feel it that way. It's just an extra that comes through.

It's obviously a good thing to help accelerate the advent of sustainable energy for sure. There seems to be a strong push in that direction in Europe, which is great. Probably within the US, that over time will also become a strong push.

Thank you. Let's go to the next question, please.

Hi, it's Edison [ph] on for Emmanuel. Thanks for taking our questions. First, there's been a lot of activity in the industry about electric pickups lately. Just curious if you have any updates, more insights you can share on the one that you're about to put out later? Secondly, there was a comment I think earlier about the order book quarter-to-date. Can you just clarify what was the baseline? Any insights about the geographic mix of that?

Yeah, we're not — I think we've said enough about the Tesla Cybertruck. This is not the right forum for us to do product launches. I think, in my opinion, and I could be totally out to lunch here, but I think the Tesla Cybertruck is our best product ever. That's my opinion. Demand does not seem to be weak; we should be production constrained this quarter.

Yeah, that's right. The baseline from the comment earlier that I made was looking at this point in the quarter in Q2, and order rates are strong in all markets. I think we're very encouraged as a team at the reception of our products as more people become aware of electric vehicles. Competitive products help raise that awareness, and overall interest is just increasing. Our focus internally is to increase production as fast as we can both with the existing equipment and accelerating our timelines on new capacity. We believe that everybody should be driving an electric car, so we need to move as quickly as we can.

Absolutely. We want to get the Tesla volume to where it is perhaps somewhere on the order of 1%, replacing 1% of the global fleet over time. That's about 20 million vehicles a year, just by the way. I do think that the demand for new cars will rise as the world transitions away from combustion engine vehicles, just as when people had CRT TVs; sales were just basically the replacement rate. When flat screens came out, there was a big step change in demand because now getting a big flat screen TV was much better than having a small CRT TV. I think we'll see the same thing with electric vehicles: instead of people just buying a car because their last car wore out, they'll buy an electric car because they're fundamentally a better car, especially if it's got self-driving.

Thank you. Let's go to the next question, please.

Hi. Thank you for taking my question. I just feel how you...

Hi, Pierre. We cannot hear you.

It's very quiet, so we can't hear you.

Can you hear me now?

It's muffled, but we'll try.

Okay. Sorry for that. I was wondering how your thinking has evolved on Model S and Model X. It looks like the deliveries have stayed to the deliveries of the previous quarter and that Model 3 has indeed cannibalized the demand for these cars, quite a big deal. How are you thinking about these two models going forward? What's the strategy you have in mind? I have a quick follow-up on the Model Y.

The Model S and X are really niche products. I mean, they're very expensive, made in low volume. To be totally frank, we're continuing to make them more for sentimental reasons than anything else. They're really of minor importance to the future. They are great cars. The Model S I think if you're out there and you're going to buy a Model S, I think you just made a mistake, to be totally frank. It's incredible, especially the new one with variable damping suspension, hospital operating room, HEPA filter for air purification, the raven powertrain. It's the fastest car in the world; it's just so easy to drive. It makes you feel like Superman driving that car. It's incredibly safe. It's just an amazing vehicle. The Model X is like the Fabergé egg of cars. That's why so many artists and musicians buy the car; it's an art piece basically.

Yeah, just to add — I agree. They're absolutely phenomenal cars. We are increasing production on our S and X lines for this quarter in response to increasing demand. Part of the story here is, as we have launched, ramped, and stabilized the Model 3, that has consumed a lot of attention around the company. Now as that has stabilized, we're able to focus our attention and balance that between S and X and Model 3. The delivery numbers in Q3 understated the interest in the product for that quarter. We continue to see strength in the order rate, which we anticipate will be reflected in S and X deliveries in Q4.

I mean, the basic Model S at this point has a range of 370 miles. Technically it’s 373, but we certified it incorrectly as 370, but it’s 373. There are some software improvements that we think will make that even better. We're also expecting there's going to be an over-the-air improvement that will improve the power of the Model S, X, and 3. This, by the way, is coming in a few weeks. It should be in the order of a 5% power improvement due to improved firmware. Drew, do you want to say anything on that?

Yeah, we just continue to learn how to optimize the motor control in our products. So, a 5% improvement for all Model 3 customers and 3% for S and X.

Yeah, and there's also the single pedal driving that will improve the range as well.

Very excited about that. It's an improvement in comfort and feel.

Yes. And faster supercharging for Standard Range and Standard Range Plus customers, which is a big deal.

I don't think there's ever been a situation in history where you buy a car and it gets way better over time just through the software. Not a little bit better, but a lot.

It's very exciting, I think. As a customer myself, I enjoy these updates. I always look forward to them.

Yeah, might move the Model S range to almost 380 or high 370s with the update.

And we're not stopping to work there. We'll continue working on these developments.

Absolutely.

Pierre, did you have a follow-up question?

Yeah, just a quick one on the Model Y. I was wondering what you have learned with S and X that make you think maybe when you launch Model Y you have some cannibalization of demand on the Model 3? Have you started to think about that and how to approach it?

No, I don't think. We're not expecting to see cannibalization of Model 3; one is a sedan and one is an SUV.

Yeah, the best comparison we have for that is when we launched Model X and we had Model S at the time.

Model S sales increased.

Yeah, and we didn't see any cannibalization there.

The opposite. When we launched Model X, Model S sales increased.

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

Hi. Good evening. Thank you for taking the questions. First, just wanted to ask a question on Giga III. You're targeting 3,000 units a week. But we saw with Fremont that the ramp on Model 3 was lumpy. You sort of ramp and then sort of cut production to fix the bottlenecks. Given this is a brand-new capacity, how smooth should we expect production to be on a week-to-week basis? Meaning, once you hit the 3,000, is that 3,000 you could go every single week in a quarter or is it still going to be lumpy within a quarter?

If you've got a crystal ball, we'd love to use it.

I'm looking for it.

It should be smoother than Model 3 because there's a lot of commonality of parts. If you look over a reasonable enough time frame, the production will actually be fairly smooth. But from a week-to-week standpoint, it will not be. It will be about as smooth as, say, the stock market. How smooth is the stock market from one week to the next? If you extend the time period to, say, two or three quarters, it will be very rapid steady growth. Obviously, it will go way past 3,000 a week.

Okay, great. Thank you. Just a follow-up. You mentioned, Elon, you mentioned earlier in your comments that one of the things you're optimistic on in the future is Tesla Energy, and I think we understand that part of the challenge in the past was kind of a reallocation of resources away from Energy to the Auto side. Could you just talk to where you see the greatest pockets of growth in Energy? Is it solar or storage? Now that you can reallocate resources, what would that entail in terms of capacity? What does reallocation of resources look like?

I think, on a percentage basis, Solar will grow the fastest, but Storage will also grow higher on a percentage basis. I think both over time will grow faster than Automotive. They're starting from a smaller base. If you look at year-over-year growth, it will be absolutely incredible, I think. From one quarter to the next, there might be some fluctuations due to seasonality or some short-term parts shortages, but over the course of a year, there will be gigantic increases. With Solar, it's hard to install a lot of solar in the winter, especially on the East Coast. The roofs are full of snow and ice. You will expect to see some seasonality there, but then it ramps up quite a bit as the weather improves.

Okay. Thank you very much. I think that's unfortunately all the time we have today. Appreciate all your questions, and we're looking forward to talking to you next quarter. Thank you very much, and goodbye.

All right, thanks.