Tesla Motors (TSLA) Earnings Report: Q1 2015 Conference ...s.t.st › media › xtranscript › 2015...

CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive

EventDescription:Q12015EarningsCallMarketCapasofEventDate:29.44BPriceasofEventDate:230.43

©2014TheStreet,Inc.Al l R ightsReserved Page1of25

TeslaMotors(TSLA)EarningsReport:Q12015ConferenceCallTranscriptThefollowingTeslaMotorsconferencecalltookplaceonMay6,2015,05:30PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

JeffEvanson;TeslaMotors;VPofGlobalIRElonMusk;TeslaMotors;Chairman&CEODeepakAhuja;TeslaMotors;CFOJeffreyBrianStraubel;TeslaMotors;CTO

OtherPart icipants

DanGalves;CreditSuisse;AnalystJohnLovallo;BofAMerrillLynch;AnalystAndreaJames;Dougherty&Company;AnalystColinLang;UBS;AnalystRodLache;DeutscheBank;AnalystColinRusch;NorthlandCapitalMarkets;AnalystAdamJonas;MorganStanley;AnalystBrianJohnson;BarclaysCapital;AnalystRyanBrinkman;JPMorgan;AnalystTripChowdhry;GlobalEquityResearch;AnalystPatrickArchambault;GoldmanSachs;AnalystBradErickson;PacificCrestSecurities;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Gooddayladiesandgentlemen,andthankyouforstandingby.WelcometotheTeslaMotorsFirstQuarter2015FinancialResultsQ&Aconferencecall.

(OperatorInstructions)

Asareminder,today'sconferencemayberecorded.Now,mypleasuretoturnthefloorovertoJeffEvanson.Sir,floorisyours.

Jef f Evanson (VPofGlobalIR):

Thankyou,[Hughie],andgoodafternooneveryone.WelcometoTesla'sfirstquarterQ&Awebcast.I'mjoinedtodaybyElonMusk,TeslaChairmanandCEO;JBStraubel,ourCTO;andDeepakAhuja,Tesla'sCFO.Weannouncedourfinancialandoperationalresultstodayinashareholderletterthatisavailableatthesamelinkasthiswebcast,Andareplayofthewebcastwillbeavailablelatertodayatthesamelink.

TheshareholderletterincludesGAAPandnon-GAAPfinancialresults,aswellasreconciliationsbetweenthetwo.Ournon-GAAPmeasuresaddbackdeferredrevenueandrelatedexpensesforcarsdelivered




wherecashhasbeenorwillverysoonbecollected.Thesenon-GAAPresultsalsoexcludestock-basedcompandnon-cashinterestexpense.RevenuesandcostsassociatedwithcarsleaseddirectlythroughTeslaaretreatedthesameinourGAAPandnon-GAAPfinancialinformation.

Duringourcallwe'llbediscussingourbusinessoutlookandmakingotherforward-lookingstatementswhicharebasedonourpredictionsandexpectationsasoftoday.Actualeventsorresultscoulddiffermateriallyduetoanumberofrisksanduncertainties,includingthosementionedinourmostrecentform10-KfiledwiththeSEC.Now,Hughie,ifwecouldpleasehavethefirstquestion.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)DOurfirstphonequestionwillcomefromthelineofDanGalveswithCreditSuisse.

DanGalves (Analyst-CreditSuisse):

IfweassumeModelSvolumeof50,000in2015,deliveriesneedtoaverageover14,000perquarterinQ3andQ4.What'sthebiggestchallengetogetthere,anddoyouhaveorderratestodaythatsupportthatlevelofvolumeinthebackhalf?

ElonMusk(Chairman&CEO):

Yes,that'saboutright.Actually,withModelXproductionrampingupquiteheavilyinQ4,dependinguponhowthatrampgoes,andobviouslyit'sdifficulttopredictthatwithperfectclarity,butourvolumeessentiallydoublesinQ4.Dependinguponhowtherampgoes,Iwanttoemphasize,sometimespeopledon'ttotallyappreciateisthatthereareseveralthousanduniquepartsinacar.Andifevenoneofthosepartsisnotavailableforanyreason,thenyoucannotship--youcannotscaleproduction.

Essentiallytheproductionrampgoesaccordingtotheunluckiestandworst-performingsupplierorpartofTesla.Thatsaid,wedoexpecttoseeasignificantrampinQ4fortheX.Andhavesomethingthatismaybeasmuchas2timesofthequartersinQ4.

Asfarasdemandforthat,wedonotseethatbeingaproblem.TherearehugeadvanceordersfortheX,andweseeasteadyclimbindemandfortheS.


Okay.Gotit.Justafollow-up.You'veimprovedtheModelSawholelotinthelastcoupleofyears.DoesthatmakeiteasiertolaunchModelXatahighqualitylevel?DoesitallowyoutomoveengineeringanddesignresourcestowardModel3fasterthanyoumovedresourcestoModelX?


Yes.InthecaseoftheX,iftheXendedupbeingalotmoredifferentthantheSthanweoriginallyanticipated,sothatthehedevelopmenttookalotlongerandweweredistractedsolvingallsortsofissueswiththeSduringthattime,whichmadeitdifficultforustoallocateengineeringresourcestotheXwhentherewereissuestobesolvedwiththeS.Ithinkwe'lldoalotbetterwiththeX.

WearepayingcloseattentiontosomeofthethingsthataredifferentabouttheXtomakesurethattheyarenotanissue,particularlybucklingdoorandthesecondrowseats.I'mfeelingprettygoodaboutthings.

Becausethatproductionrampscalesexponentially,dependinguponwherethatexponentialcurvefalls




acrossaquarterlyboundarycanactuallymakequiteasignificanteffectontheproductionanddeliveriesinthatquarter.That'swhyit'saloteasiertopredictthecontinuousthanifit'sdiscreetwitharbitraryquarterlycutoffs.

IreallythinktheXisgoingtobe--it'sreallygoingtogoingtobeagreatcar.Ijustdrewupthelatestprototypetoday.Anditwaslike,wow,thisisbyfarthebestSUV.


Soundsgood.Thankyou.


Goahead,Hughie.Nextquestion,please.

Operator :

NextquestioncomesfromthelineofJohnLovallowithBankofAmericaMerrillLynch.

JohnLovallo (Analyst-BofAMerrillLynch):

Thefirstquestionis,doyouguysearn4or9ZEVcreditspervehicle,andhowmanyvehiclesareparticipatinginyourbatteryswapbetaprogram?

DeepakAhuja(CFO):

Theamountofcredits,ZEVcredits,weearndependsonthesizeofthepack.Differentforwhatwearedoingforthe60versus85,andnowthenewoneisat70.

Thathasbeenvaryingovertime,theamountofZEVcreditsweearn.I'llneedtoconfirmthatbeforeIgivetheofficialnumberhere.


TheZEVcreditsthing,itsortofmovesthingsbylike2%.It'snotsuper-material.I'mnotsurewhatthepointofyourquestionis.


Here'sthepointofthequestion,isthatassumingthatyouguyssell10,000vehiclesinZEVstatesthisyear,thatwouldmeanthatyouwouldneed400program--sorry,400vehiclesinvolvedinthisbatteryswapprogram,ifyouassumethateachofthemswap25timeseach.Aminimumof400vehicles.I'mjustcuriousifthereare400vehiclesinvolvedinthebatteryswapprogram.


YoudorealizethatZEVcreditsdon'tsellfor100centsforthedollar.Theysellforlike$0.50,orsometimesless.TherearenotalwayscustomersfortheZEVcredits.


I'mjustaskingaboutintermsofwhatyouguysareactuallyearningpervehicle.Okay.AndIguessthenextquestion--


How'dIdo?Yes.Andasmoreofourproductiongoesoverseas,obviouslytherearenoZEVstates




overseas.AsoursalesincreaseoutsideofCalifornia,also--orCanada,thosearenotZEVstates.Sothisislike--ZEVstuffisanincreasinglysmallpartofthepictureovertime.


Okay.That'sfair.Goahead.

Jef f reyBrianStraubel(CTO):

Wedohavehundredsofvehiclesinthebatteryswappilotprogram.It'snotlike10orsomethinglikethat.It'shundredsofvehicles.


Yes.We'resteadilyincreasedtheinvitationlist.Wefoundthatthereisnotalotofinterestinpeopledoingpackswap.Wemaketheinvitationsandwegotaverysmallpercentagethatactuallytakeusupontheinvitation.


Right.No,theonlypointisthatithasadifferenceoffiveZEVcreditspervehicle.Thatwastheonlypoint.

Secondquestionwouldbe,andfinalquestion.ThereissomenewsreportsayingthatSolarCityhassaidtheyarenotgoingtousethe7-kilowatthourbattery.Infact,Ithinktherewasaquotefromaspokesman,whetherit'strueornotwedon'tknow,sayingthatitdoesn'tmakeeconomicsense.Canyouguyscommentonthat,please?


LetmejusttalkmorebroadlyabouttheresponsetothePowerwallandPowerpackbecauseIthinkthat'sreallythequestionsyoushouldbeasking.Theresponsehasbeenoverwhelming,like,crazy.

Inthecourseoflessthanaweek,we'vehad38,000reservationsforthePowerwall,2500reservationsforthePowerpack.ThePowerpack,itshouldbenoted,typicallythisisbroughtbyutilitiesorlargeindustrialcompanies,forheavyindustrialwork.

Typically,Powerpack,it'satleast10Powerpacksperinstallation.Soifthere's2500reservations,actually25,000Powerpacks.

Powerwallalsois,wesuspect,isprobablyanaverageofthenumberofPowerpacksisprobably1.5to2perinstallation.38.000reservationismorelike50,000or60,000actualPowerwalls.

Sothereisnowaythatwecouldpossiblysatisfythisdemandthisyear.Wearebasicallysoldoutthroughthemiddleofnextyearinthefirstweek.Itwasjustcrazy.

Wehad2500requestsfromcompaniesthatwanttodistributeandinstallPowerwallandPowerpack.Wecan'tevenrespondtothem.Wehaveto,like,triageourresponsetothosewhowanttobeadistributor.

It'scrazyoffthehook.Itseemstohavegonesuper-viral.

ForthespecificcaseofSolarCity,whattheyarereferringtoisthatthereistwoversionsofthePowerwall.There'sthedailycyclingversionandthereisthepowerback-upversion.

Oneisenergyoptimizedinoneisdailycyclingoptimized.Forthedailycyclingoptimizedone,theeconomics,itistrueintheUS,withrareexceptions,aremoreexpensivethenutility.




Ifsomebodywantstodoadailycycling,basics,theygooff-grid.It'sgoingtobemoreexpensivethanbeingon-grid.

Thisdoesn'tmeanthatpeoplewon'tbuyit,becauseTherearepeoplewhowanttogooffgridonprincipleortheyjustwanttobeindependent.That'swhattheSolarCitycommentisabout.


ItmightalsobeworthnotingthatSolarCitydoesn'tyetoperateinEurope.Andthemaintargetapplicationforthedailycyclingbatterypackwasactually--wereseveralmarketsnotinthecontinentalUS,andparticularlyGermanyandAustraliaareverystrongmarketswhereitdoesmakeeconomicsensetoday,basedonthefeed-intariffandtheelectricityratestructuresinthosecountries.SolarCity'scomments,Ithink,needtobeputintheregionalcontext.


SolarCity'sonlyoperatingintheUS.ThePowerwall--itwillbeavailablefromSolarCityandfromotherinstallersinbothconfigurations.Butifsomeoneisdoingadailycyclingapplication,theyaredoingitbecausetheyspecificallywantgridindependence.There'ssomenumberofpeoplewhowillwanttodothat,andthat'sgood.

It'salsoimportanttoappreciatefor,eventosaythepowerbackupsystemssothatyoualwayshavepowerintheeventofpoweroutage.Let'ssaythatappealsto2%ofhouseholdsintheUS,or1%.Thatis1millionhouseholds.Like,isthere1personin100careabouthavingbatterybackupintheeventofutilityoutage?Probably.

Wecouldn'tevensupportasmallfractionofthatRightnow.Soitskindofamootpoint.


Okay.John,Ihopethatanswersyourquestions.Hugh,Iguesswe'rereadyforthenextquestion,then.

Operator :

OurnextquestioncomesfromAndreaJameswithDoughertyandCompany.

AndreaJames (Analyst-Dougherty&Company):

JusttobuildontheTeslaenergyconversation.Whatareyourrevenueandgrossmargintargetsonthatbusiness?Howdowelookatthe2015ramp?


Thegrossmarginrevenueobviouslyisgoingtochangewithtime.Whenit'slowvolume,madeinthreemonths,itwillberelativelylowmargin.

OncewegettoGigafactoryupandrunningandhigh-volume,gettheeconomiesofscaleworking,thisisjustaguessrightnow,butmaybeit'ssomewherearound20%.Thisisnotlike--it'slikewedon'thaveenoughinformationtosayexactlywhatthatwouldbe,butprobably20%isareasonableguess.

Intermsofvolume,wearegoingtotrytoscaleitasfastaswecan--astheslowestmanufacturingconstraint.It'seasiertosaywhat'sthelongtermwithoutsayingexactlywhichquarterisitgoingtobein?Idon'tknow.

Ithinkwe'llseedemandforstationarystorage,asmeasuredinmegawatthoursorgigawatthours,tobeapproximatelydoublethatofthecar.That'sourbestguessforlong-termdemand.Yes.





Howdowethinkaboutyourcapacity,orevenyourcostperkilowatthour,becauseit'sdifferentthanacar,right?Thedutyloadiswaydifferentforastationarystorageapplication.Couldyoujusteducateusalittlebitonhowwelookatanalyzingthatbusinessandthedifferencebetweenthatandtheenergyneedsofthecarbusinessperpack?


Thereistwoapplicationswhicharequitedifferent.Oneisbackuppower,orpeak-up--theequivalent,onautilityscaleoflikeapeakerplant,whichisahigh-energyapplication.Andthereisthedailycyclerapplication.Therearedifferentchemistries,dependinguponwhatyouhave.

Thebackuppowerchemistryisquitesimilartothecar,whichisanickelcobaltaluminumoracathode.Thedailycyclingcontrolconstituentisnickelmanganesecobalt.It'squitealotofmanganeseinthere.

Oneismeantfor,callitmaybe60or70cyclesperyear.Andtheotheroneismeantfordailycycling--dailydeepcycling,soit's365cyclesayear.

Thedailycyclerone,weexpectedtobeabletodailycycleforsomethingontheorderof15years.Obviouslywarrantyperiodwouldbealittlebitlessthanthat.Weexpectedtobesomethingthat'sinthe5000-cyclerangecapability.

Whereasthehigh-energypackismorelikearoundthemaybe,dependingonhowit'sused,anywherefrom1000to1500cycles.That's--theyhavecomparabletocalendarlives.

Nowforthehigh-energyone,it'simportanttoappreciatethatthisisactually--hasalotofinterestfromutilitiesbecauseutilitieshavetomaintainthesethingscalledpeakerplants,andwhenthereisasharpincreaseinusage.YoucanimaginethehighestenergydayinCaliforniaonahotsummerdaywherethere'saheatwave,theenergyconsumptionthereisveryhighcomparedtoapleasantspringnightwherenobody'sair-conditioningorheatingison,orforverylittleandcommerceisnothappeningandpeopleareasleepandlightsareoff.

Thatcanbeahugedelta.Dependinguponthesituation,itcanbeanywherefroma5to10timesdifference.Havingabatterypackthatcantakeoutthoseveryweirdsharppeaks,liketheheatwaveday.Youcaneitherhaveabatterypack,whichrequiresbasicallynomaintenanceanddoesn'trequirefuel,andit'sgoingtopeakshavethosetroublesomedays.Oryoucanhaveapowerplantthatrequiresfuelandmaintenanceandit'salwaysgottobemaintainedandgets--ittakestime.Youcan'tjuststartitupinthreeseconds;you'vegottoletithaveabitofnotice.

Thehigh-energypackisactuallyveryeconomicallycompetitiveinthosesortsofsituations.Thehighcyclingpackisreallygreatforifyou'vegotsomesortofwindorsolarsituation,that'swherethehighcyclingoneisreallygreatontheutilityscale.

Ishouldsayweexpectmostofourstationarystoragesalestobeattheutilityorheavyindustrialscale.It'sprobably,againjustaguessbecauseearlydays,5to10timesmoremegawatthourswillbedeployedattheutilityandheavyindustrialscalethenattheconsumerscale.

So,thePowerpackwouldbetheonethatistheheavyduty,thebigproductionsalesone,notsomuchthePowerwall.Powerwallisgreat,butit's,likeIsaid,it'sprobablyonly10%or20%thesizeofthePowerpackdemand.





Maybeonepointonthecoststructure.There'sdefinitelyalotofcommonalityinthesupplychain,andeventhemanufacturingbaseonhowwedothemodulesthemselves,fortheTeslaEnergyproductsalongwiththevehicleproducts.

AswerampupproductionontheTeslaEnergyproducts,theredefinitelyarebenefitstothevehiclecostsofenergystorage,fromscaleandfromgenerallymovingmorematerialandkilowatthoursthroughthatwholechain.Bothbusinessbenefitseachother.


ClearlygiventheveryhighdemandthatweareseeingforTeslaEnergyproducts,we'reactuallytryingtofigureoutifwecangofromourcurrentproductiontargetof35-megawatthoursatthecellleveland50atthepacklevelinourNevadaplanttomaybe50%morethanthat,orevenhigher.Becausejustthesheervolumeofdemandhereisjuststaggering.WecouldeasilyhavetheentireGigafactoryjustdostationarystorage.


Right.Soyouhavesomecapacity.Ithinkyousaidmaybe15%ofyourcapacitymightbereservedforstationarystorage.MaybeIreadthatinanarticlesomewhere,I'mnotsure.


15gigawatthours,orone-thirdofthe50gigawatthoursthattargetedatthepacklevel.15%is15gigawatthours,orroughly30%.


Okay.Youmightadd,now,you'relookingatdoinganother50%,andgrowingthecapacity50%.Youhavethespace,Iguess,thereinNevadatodothat?


Wedo.Idon'twanttomakethataprediction.Thatseemslikethethingweshoulddo,sowe'reinvestigatingthat.Itseemslikethelogicalthingtodo.Sowearegoingtotrytodothat.

We'refairlyconfidentatthispoint,likeIsaid,thattheentireGigafactoryoutputcouldjustdostationarystorage.Thenit'slike,wowokay.Butweneedtomakecars,too.Wejusttrytomakethefactorybigger.

That'sthetotallogic.It'snotmorecomplicatedthanthat.


Butgiventhechoicebetweenmaking--sorry,andthenI'llgetoff.Thankyousomuchforyourtime.Butgiventhechoicebetweenmakingapackforacarandmakingapackforastationarystorageapplication,howdoyoupickwhichonegetsthepriority?


Well,Iguesswe'dpickcars,becausewe'vegotthiswholeotherplanthereinFremontmakingcars.Carswouldgetthepriority.

Yes,thatwouldbethelogicalpriority.Itreallyfeelslike,man,thestationarystoragedemandisjustnuttyworldwide,it'sjustcrazy.





Great.Thankyou.


Hughie,weactuallyhaveaquestione-mailedinfromoneoftheanalyststhatisoutofthecountry.Iwillreadthosenext.We'llstartwiththeenergystoragequestions.

Guys,doouryearsinR&DworkinvehiclebatteriescontributebenefitsintothisTeslaEnergybusiness?Whereaswe'vedrawnsomelearningsfromthevehiclebusinessforTeslaEnergy?


Welearnedalotaboutbatterypacks,obviously,andhowtomakethemandhavethemlastforalongtimeandworkinhightemperaturerangesandthatkindofthing.IthinkthereareafewpointsofclarificationthatshouldbemaderegardingthePowerwall,Becausealotofpeopleconfusedaboutthewholeinverterissue.

ThePowerwalldoesincludeaDC-to-DCinputterthatcaninterfacedirectlywithasolarpanelinstallation.Ifsomebodyhasasolarpanelinstallation,theyalreadywillhaveaDC-to-ACconverterforthesolarpanelsystem.NoincrementalDC-to-ACinverterisneeded.

Insomeoftheanalyseswe'veseenonline,bypeoplewhothinkthey'reexperts,theydon'tseemtorealizethatthereisaDC/DCinverter.Wehaven'tbeen,Iguess,quiteclearaboutthat,whichweneedtobe.

Ifyoualreadyhaveasolarinstallationoryou'regoingtogetone,theACinverterisalreadythere.That'sanimportantpointinconsideringthecostofthesystem.

Thentheoperatingtemperature,it'sactuallycapableofoperatingatamuchwiderbandoftemperature.We'vegottofixthatspecificationthat'sstatedonthewebsite.


Ingeneral,mostofthelearningsfromthecarR&Dandengineeringcarryover.It'spartofwhywecandothissoquickly.


Weknewwherethecarworks,thepackwouldwork.Thecarworksprettymucheverywhere.

Infact,itdoesworkeverywhere.Thepackwillworkeverywhere,obviously.


Ifanything,it'squiteover-engineeredforabatterypackthatdoesn'thavetomoveandgetsmountedonyourwall.Ithinkthat'sgoingtobeagreatbenefitforreliabilityandlongevityofthepack.


ThenoneforDeepak.Wouldyoubewillingtoprovideanybreakdownofthecapital--theCapExspendinginQ1?

DeepakAhuja(CFO):

TheCapExspendingwasprimarilydrivenbythecapacityexpansionthatwe'redoingforModelX,includingthetoolingspend.Thenofcourseweareputtinginthenewpaintshop,whichisavery




significantinvestment.ThatwillbereadyinQ3.

ThenwehavealsohadinvestmentsintheGigafactoryandoursalesandservicenetwork.That'sprobablytheorderinwhichwe'vebeenspending.


Great.Thankyou.Okay,Hughie,let'sgobacktothequeue,please

Operator :

NextquestioncomesfromColinLanganwithUBS.

ColinLang (Analyst-UBS):

Myfirstquestion,stayingonthestationarystoragetopic.Howdoyouviewthe--youmentionthereistwodifferentchemistries.HowdoesthatworkwiththeGigafactory?

Doesthatrequireallseparatelines?Isthereanymorecomplexity?Isitallwithinthesamefacility?Howdoyouviewyourchemistriesversusothercompetitiveoptionsoutthere,thereareotherpeoplewhoarebullishonthingslikezinc,othermorebasicchemistry?


TheycouldstillbothbebuiltintheGigafactory.WehavemultiplelinesoperatingintheGigafactory.Ifonelineisbuildingnickelcobaltaluminumchemistryandanotherisbuildingnickelmanganesecobalt,thatstillworksjustfine.Alotofthecellassemblyandthentheprocessesthathappenafterthatarealmostidentical.


Theylookthesameatthemoduleimpactlevel.Youcan'treallytelljustbylookingatthem.It'stheinternalchemicalconstituents.

Ifyouthinkofthe--rightdownthepalm,thecellisachemicalengineeringproblem.It'slikealittlecanofchemicals.Andthenthemoduleandpackproblemismechanicalengineering,electricalengineeringandsoftwareengineeringproblem.

Ifyouhaveasmallnumberofcells,thenasanoverallengineeringproblem,it'smostlyaboutthecell.Onceyouhavealotofcells,thantheintellectualpropertychallenge--theintellectualchallengebecomesmoreatthemechanical,electricalandsoftwarelevel,whichiswhereTesladoesquitewell.

That'swaydon'treallysee--nobodyelsehasapacklikeours.Thecellsarerelativelygeneric.Themoduleandpackisnot.


We'velookedatprettymucheverychemistrycouplethatcouldpossiblyberelevantforthisandareconfidentthatwhatweareusingisgoingtobethebest.Ifthere'ssomethingbetter,wecanalsoadjustandchangeovertime.There'salotofflexibility.


I'mnotsureiftheexact,therightanalogywouldbe,ifyoulookatalaptop,andyoucansay,alaptop'sreallyjustlikeaIntelCPUandsomemicroandDRAMchips.Bigdeal.




Whatisanycomputercompanyactuallydoing?Theyaredoingalot.


Whatdoyouviewasyourcompetitiveedge?Itsoundslikeyouthinkitisthesoftwareandelectronicintegration,thecompetitiveadvantage.Inyourpresentationyouactuallymentionyouencourageothercompaniesthatbuild--tothemarket,aswell.


Ithinkintermsoftheelectricalengineering,themechanical,thesoftwareandtheoverallaesthetics,andhavingsomethingthatreallyjustworksandiseasyforconsumersandutilitiesandlargeindustrialapplicationstojustorderanditjustworks,andit'sjustisthereasafullyintegratedsystem.That'sthevaluethatTesla'sadding.


Ithinkthere'salsosubstantialbenefittothetrackrecordoftheautomotivefleet.That'ssomethingthatalotofthenewerstart-upcompaniesordifferenttechnologiesinthisspacereallystrugglewith,especiallyintheutilityapplicationwhereyouneedtobesureit'sgoingtoworkfor15-plusyears.Wehaveasenseofscaleandagreattrackrecordonthevehiclefleetthatyoucanreallypullfromdataandpulldatafrom,andunderstandhowit'sgoingtowork.


Ishouldn'tsaylikeweareweddedtoaparticularchemistryoranythinglikethat.Wejustwanttousethebestchemistry.Whateverlittlecanthatcontainsthecathodeandanodeandseparatorandelectrolyte,whateverthebestconstituentsofthatcanare,that'swhatwe'llwanttouse.

We'dloveitifsomeonecouldcomeupwithabetterinternalchemistryforthecell.It'sworthnoting,like,nobodyhassentusanything,asamplecellthat'sbetterthanthecellwe'reproducing,orsomethingthatwewillproduceintheGigafactory.

We'dloveitifsomebodywoulddothat.Theyjusthaven't.Sothere'salthesethingswhicharebigonpromiseandshortondeliverywhenitcomestobatterychemistry.

It'sjustarealhardproblem.Hardlyaweekgoesbythatthere'snotsomeallegedbreakthroughinbatteries.Whatthey'lldoisthey'llcitethepowerbutnottheenergy,orthey'llforgettomentionthatitonlylastsfor50cycles,orusesanincrediblyexoticrawmaterials.


Oronecomponentoutofthebatterypulledseparately.


Yes,exactly.It'snotlikethefullpicture.It'snotlikewedon'twantabetterchemistrytoexistthanwhatwe'reusing.Wewouldloveitiftherewassuchathing,andI'msuretherewillbeimprovementsovertime.We'llimplementthemassoonastheyareremotelyproduction-ready.


Thanksforthecolor.Justonelastfinalquestion.Anycoloron--afinancialquestion--otherexpensesisupquiteabit.Itwas$22.3million.Whatwasreallyjustdrivingthatinthequarter?

DeepakAhuja(CFO):




Thatwasessentially,revaluationofprimarilyourforeigncurrenciesthatwehadattheendofthequarter.Thedollarwasprettyclearlystrongagainstforeigncurrenciesthere.

It'salso,inmostcases,unrealizedlosses.AsthecurrencymovesinQ2indifferentdirections,thatcouldhaveanimpact,aswell.Apositiveimpact,iswhatI'm--


Okay.Soweshouldconsidermostofthoseone-timeinnature,becauseofFX,balancesheetFX?

DeepakAhuja(CFO):

Yes.Theyarenotrelateddirectlytoouroperations.It'ssimplytherevaluationofourcurrenciesintoCompanyitems.


Okay.Thankyouverymuch.

Operator :

NextquestioncomesfromthelineofRodLachewithDeutscheBank.

RodLache (Analyst-DeutscheBank):

Coupleofquestionsonstationarystoragefirst.Oneisitseemslikeutilitiesmovequiteabitslowerthanothermarkets.Iwaswonderingwhenyouarethinkingabouttheexpectationsforthetrajectoryofgrowth,ifyouhadthecapacitytoday,howlongdoyouthinkitwouldtakeforyoutogettothat15-gigawatthours?

Alsorelatedtothisbusiness,itseemslikeyou'reusingthird-partiesformostofthedistributioninstallation.Ifyouachievedmaybea20%grossmargin,canyoupassalonganythoughtsonhowweshouldbethinkingintermsofSG&Aisallocated?


Ithinkit'sprettyearlydays.Wearebeingsuperspeculativeatthispoint.


Maybeonepointonthedistributorsiswe'reonlyfocusingonthatapproachforPowerwall,inmostcases.Sowithutilities,wearebuildingthoserelationshipsdirectly.

It'snotsomethingthatisreallyeffectivetogothroughadistributionchannel,andit'ssomethingwe'vealsobeendoingforanumberofyears.Itdidn'tjuststartlastThursday.

We'vebuilttheserelationshipspartiallythroughvehicleinfrastructureandchargingquestionsandbackandforth,super-chargingaswell.There'sactuallyquitealotoftrustbuiltbetweenTeslaandmanyoftheutilitycompanies,whichisveryhelpfultogrowthatbusinessfaster.


Thanks.AclarificationonthecommentaboutthefactthataDC/ACinverterisalreadythereforsolar.Doesthefactthatitneedstobebidirectionalchangethenatureofthecost,ornotreally?





No,notinmostcases.Becauseifyoualreadyhavesolar,typicallytheenergytochargethebatterycancomefromthesolarpanel.Ithinkmaybeonewaytothinkofitisifthebatterypack,thePowerwallwithit'sinternalDC-to-DCconverter,itcanactmuchlikeasolarpanel.

Itcanmatchvoltagewiththesolarpanelarray,anditcanfeedpowerbackintothat.Theexistinginverterdoesn'tparticularlyseeabigchange.


Okay.Gotit.Ontheautobusiness,doyouhaveanypreliminaryexpectationsonthemixofthe70Dversus85?Anythoughtsonhowthataffectsmargins?

Lastly,aquestionforDeepak.Inthepastwewereabletolookatyoursupplementalinformationonleasingwhereyoudisclosethevalueoftheleasesdeliveredandthevaluethatyouarebookingthisatonthebalancesheet,whichispresumablyyourcost.Anditsortofapproximatedyourgrossmargins,butthisquarterwhenyoudothemath,theimpliedmarginsweresomethinglike44%,notlike29%,30%.Istheresomethingunusualthere?

DeepakAhuja(CFO):

Iwillanswerthesecondone.No,there'snothingunusualinthosenumbers.Astheoverall--whatyou'reseeinginthesupplementaryinformationisthenewcarswe'vedelivered.

What'scomingthroughultimatelyisthecumulativeimpactofalloftheleasingsthatwehavedone.Buttomyknowledge,there'snothingelseunusual.


Okay.Itseemslikeaprettyhighmargin,though,whenyoulookatitthatway.Anythingonthemix,70Dversus85?


It'sstillprettyearlytobepredictingmixbecauseyouhavetodistinguishbetweenwhatinitialdemandversussustaineddemand.Itlooksliketheremaybegoingtobecomparablenumberof70sversus85s.Butthisisdifficultto--thisisextrapolatingonverylittleinformation.

IthinkakeypointIshouldmakebeforethiscallendsiswereallyoptimizing--atthispoint,goingforward,wearetobeoptimizingfortheoperationalefficiencyoftheCompanyasopposedtospecificquarters.Thisis--Ifeellikewhatwe'vedoneinthepastwherewe'vereallyhadtoscrambleattheendofquarters,andsometimeshavenotagreatcustomerexperienceattheendofquarters,it'snotreallytherightthingfortheCompany.

Sowearegoingtobeoperatingmoreforsteady-stateefficiency.Andthatmeansthequarterlyfluctuationscouldbealittlehigher.Butinthelong-term,itwillbebetter.That'sanimportantconsideration.

Alsounlikeothercarcompanies,Tesla'ssalesareonlyrecognizedwhentheyarriveattheendcustomerandwe'vereceivedpaymentandalltheregulatorydocshavebeenprocessedandallthat.Oursalesarealwaystruesales.They'renotsalestothechannel.

Inotherwords,othercarcompaniesare--theirsalestothechannel.Soit'spossibleforthemtomakenumbersworkwherethey'resellingtotheirchannelasopposedtoendcustomers.Inourcase,it'salwaysendcustomers.




AsweareshippingtoAsiaandEuropeandacrosstheUS,it'sfairlyeasyfortheretobeaplus/minus5%differenceindeliveries,justduetologisticsissues.It'snotahugevariation,plus/minus5%.That'skindoflike--ifashipislateorearly,itcanaffect--itcouldbe500carsthatareaffected.That's5%,whichwe'veseeninthepast.

That'sanimportantthingtobearinmind.Thenumberthat'smuchcontrollableforusistheproductionnumber.

Ourproductionpredictionsare--forthevehiclesare,atleastfortheModelS,notsomuchforanewvehiclebutforexistingvehicle,ourproductionpredictionsarealotmorecontrollable.Andaspeopleatthispointrealize,thedemandisdifferentfromproduction.Ourcarsarealmostallorderedinadvance.

Wereallydon'tseeanydemandissue.Youcanseethatbydeliverytimesofthecarsonourwebsite.Someofthesepeoplewillinterpretaquarterlydeliverynumberassomehowbeingrelatedtodemand.Thisisnotthecase.

It'susuallyrelatedto,weproducedacertainnumberandthenwewereabletodeliveracertainnumberinthequarter,andthere'sawholebunchofcarsonshipsorontrainsorontrucks.Andthat's--butbecauseTeslaisdifferentfromothercarcompanies,applyingtheothercarcompanies'templatecanleadtoincorrectconclusionsaboutTesla.

Isthismakingsense?ShouldIelaboratefurther?


Itmakesense.

DeepakAhuja(CFO):

ToaddtowhatElonsaid,tobemoreefficientoperationally,weareshippingmorebytrainratherthantrucks.It'smorecost-efficientandcreateslessdamagetothecar,givesabettercustomerexperience.Wearetakingalltheseactions.


IguessmyquestionismoregearedtotryingtoassesstheeffectonASPsandmarginsasyouarechangingthemixalittlebit.Iappreciatethat.


Yes.Toansweryourquestiononmargins,Ithinkthere'stwothingsthatarehaving--theaveragesalespriceisgoingtodeclinealittlebit,butourcostsareimprovingaswell.Weseethatmoreorlessnettingout.Sothattheefficiencyimprovementsoffsetapproximatelyanyaveragesellingpricechange.


Gotit.

DeepakAhuja(CFO):

AndifIntheprocesswe'regrowingthemarket,whichwetrulyarebyhittingtherightsweetspot,thenwe'redoingtherightthingwiththe70D.The70Dhasahighergrossmarginthanthe60,forexample,and60wasjustnothittingthemarket,justdidn'thavetherightattributesthatourcustomerliked.

Itwasalowtakerate.Webroughtaproductwhichisfarmorecompellingandmuchmorecompetitivewithothercars.





Great.Thankyou.

Operator :

OurnextphonequestionwillcomefromthelineofColinRuschwithNorthlandCapitalMarkets.

ColinRusch (Analyst-NorthlandCapitalMarkets):

Asyoulookatthegrowthoftheorganization,theentiretyor--ofthecultureandtheworkforce,Iknowthatyouremployeesareextremelymotivated.Couldyoutalkabouthow,asyougrow,howthat'sgrownandchangingandwhatyou'redoingtomaintainthatintegrityasyougoforward?


Itistrickyascompaniesgrowtomaintainaconsistentculture.Ithinkwe'redoingokayasmeasuredrelativetomostcompanies.

Wedoneedtogetpeopletothinkdifferentlyandhaveanexpectationofinnovation.Ithinkwearedoingokayonthatfront.


IthinkhavingageneralmixofpeoplethathavebeenhereforaverylongtimeandhaveseenmultipleprogramsandseentheCompanywhenitwasevenmuchsmallerthantodayandmorescrappyandhadtogothrougheventighterfinancialdifficultlaunches,thingslikethat,reallyhelpsmaintainthatculture.Andwetryandpairdifferentmanagersupwithnewgroupssothatthatculturesortofinfusesthroughout.


Yes.Ourgrowthrate--likethisyear,personnel-wise,it's,let'ssay,leveledoff.It'sstillfairlysignificant,butit'slike--ouretpersonnelgrowththisyearwillprobablybe20%to30%,whichis,Ithink,amanageablenumberforintegratingwithpeoplethatalreadyhavetheTeslaculture.

It'salreadyaprettybigimprovementinproductivity,becausewe'relookingat,let'scallitattheupperendofthat30%personnelincrease,but100%increaseinvehiclevolume.Ithinkthat'saprettygoodindicatorofproductivityimprovement,justlikehowmanypeopledowehaveandhowmanycarsarewemaking?


Thesecondquestionisreallyaroundsomeofthechoicesthatyoumadewiththebatteryproductandwhychoosing10-KWandthesize,and220poundsisactuallyprettyheftyforagaragewall.ThenalsothebatterymanagementsystemIthinkthere'salotofconfusionaroundwhereit'slocatedandwhattherealfunctionalityis,asyoulookoutatinterfacingwithutilitiesandthesignalsthatyougetfromthemarketintermsoflookingatdemandcharge-offset,demandresponseandsomeoftheotheradvancedfunctionalitythataregoingtobeabletobemonetizedinbusinessmodelswiththeproduct.

CanyouclarifywherethatBMSsystemiswhereitresidesandwhoownsthattechnology?Andwhyyouguysmadethosechoices,alongwiththeweightandsizechoices?


SomeofthedifferentrevenuestreamsyouaretalkingaboutourmixedbetweenPowerpackand




Powerwall.TheBMSsystemlivesinsidethebatterypackinbothcases.

ButwiththePowerpackandthemoreutility-sizedinstallations,thereweoftenwillhaveasitemastercomputerormastercontrollerthatcontrolsmultiplePowerpacks.Thatsitecontrolleriswhattheninterfacestotheutility,ormaybeacommercialcustomer,toruntheschedulechargeanddischargethatwouldbeappropriateforagivenapplication.

OnthePowerwall,it'sabitofadifferentsituation.StilltheBMSlivesinsidethebatterypack,butinsomecasestheinverter,maybethesystemthat'sdecidinghowtomanageenergyandtheoverallhouse.Thatcandependonwhichtypeofinverterwe'reusingonhowthatworks.

Intermsofthesize,wereally,forPowerwallagain,weoptimizedthesizearoundwhatwasthemostcommonphotovoltaicsizeandalsowhatwefeltwaskindofthesmallestmodularincrementforbackup.It'sprettykeytonoteherethatyoucaninstallmultiplePowerwallstogether.Having10kilowatthoursdoesn'tmeanthatyoucan'tveryeasilyputin20or30or40.

Inmanycases,Ithinkpeoplewilltohavethebackupmatchingthattheywanttosee.Wefelt10kilowatthourswasthelowestcommonelements.Ifyougosmallerthanthat,youstarttorunintoworseeconomiesofscaleandmoreofthesystemthat'snotrelatedtostorage.


Great.Iwillhavesomefollow-upoffline.Thankssomuch,guys.


Hughie,beforewegotothenextquestion,Ijustwanttogiveeverybodyastatusupdatehere.Alotofimportantthingstotalkaboutonthiscall,butweare50minutesintothecallandwestillhavesevencallersinqueue.Justletyouguysthinkabouthowwemanagetimehere.Hughie,let'sgotothenextquestion,please?

Operator :

OurnextphonequestionwillcomefromAdamJonaswithMorganStanley.

AdamJonas (Analyst-MorganStanley):

Evening,everybody.FirstquestionontheModelSandthereleasecandidates.Howmanyreleasecandidateshaveyouproduced?

Whathavebeensomeoftheissueswiththerecentproduction?Andwhytheslight--amIseeingaslightfurtherdelaybyreleasinglate3QfromwhatIthoughtwasmoreofanAugusttimehorizonforinitialdeliveries?Anythingthatmightbebehindthatthatyouwouldhighlight?


Ithinkwe'llpassonansweringsuper-detailedquestionsabouttheXramp.ThethingthatreallymattersisnotlikewhenthefirstdeliveriesoftheXoccur,butratherwhendosignificantdeliveriesoftheXoccur.

FortheSwehadquitealongrampfrom--wehadlikesixmonthsfromtheveryfirstdeliveriestosignificantvolume.We'retryingtocompressthattomaybetwomonthsorthreemonthsatmost,cutthatinhalformorefortheX.

Wewanttomakesurewe'rereallydeliveringaproductthathasbeenthoroughlyvalidatedinhotandcoldweatherandthroughmillionsofmilesoftravelandeverything.Itwouldbeeasyforustodosome




initialdeliveriesinAugust.Thatwouldbeprettyeasy.

Butwe'donlyhave--wehavedoorhandleissues,likepeopleareawareofthatwiththeS.Wedon'twanttohavefalcon-wingdoorissueswiththeX.Wewanttoironeverythingironedoutandmakesureit'sgood,andthendeliverathighvolume.

Effectively,wewouldcreatelikeacaptivefleet,andironouttheissueswiththecaptivefleet'squitebig,severalhundredvehicles,basically.Maybethataddressesyourreleasecandidatequestion.

Justmakesurethatthoseseveralhundredvehiclesreallyworkwellinallcircumstancesbeforewestartdeliveringcarsenmasse.We'regoingtogofromjustoneofourcarstoathousandaweekprettyfast.


Asecondquestion,intheinterestoftime,andthenafinalquestion.Applehasstill,unofficiallyperhaps,beenmakinginroadsinthebuildingofitsvehicleengineeringandtransportationcapabilities,accordingtoalotofsources,andmakinginvestments,bothinphysicalandhumancapital.AreyoustartingtofeelagreatersenseofcompetitionwithSiliconValleypartiesversusyourabilitytoattractandretainkeysoftwareandautomotiveengineeringtalent?IfAppleweretogetintotheelectriccarbusiness,wouldyouseethisasapositiveforbroaderconsumeracceptanceofelectricvehicles?


IcertainlyhopeApplegetsintothecarbusiness.Thatwouldbegreat.Butno,wearenotreallyseeingsignificantattritionofengineerstoAppleforanything,carorotherwise.

Actually,anyonecanfigurethisoutbygoingonLinkedIn.LinkedIncanproducestatisticsonwhattherelativeflowofpeopleisfromonecompanytoanother.

Ithinkit'slikesomethinglike--ifyoulookatthetrailing12months,Intelhasrecruited5timesasmanyaspeopleasAppleasApplehasrecruitedfromTesla.It'slikesomefairlyhighnumber.


Thanksverymuch.

Operator :

OurnextphonequestionwillcomefromBrianJohnsonwithBarclays.

BrianJohnson (Analyst-BarclaysCapital):

Justreallywanttoaskaboutthebalancebetweenstationaryandautomotive.It'snotunusualforgrowthcompaniestochangetheirfocusastheyevolve.AtleastoneofthestoriesaroundPayPal,itwasgoingtobeacryptographicPDA-focusedcompanyuntilitrefocused,perhapsthroughyourhelp,Elon,onweb-basedpayments.

I'mhearingyoutalkaboutstationarystorageasbeingabletorampfaster,perhaps,althoughyoudidn'tanswerthis,maybewithalowerCapExandOpExratiothantheautobusiness.Yetatthesametime,autotakesalotofcapital,takesalotofOpEx.

SergioMarchionnepointedoutthereisalotofvalue-destroyingcapitalspentinthelegacyindustry.Isitconceivablethatinsteadofsavingssix70-30autobatteries,itcouldgotheotherway?





It'spossible.Wearereallysuperinguessworkterritoryhere.Allweknowrightnowiswehavedemandwellinexcessofourproductionramp.

Weknowrightnow,thethingweshouldworkonistryingtoincreaseourproductionramp,nottryingtoincreasedemand.Sothat'skindofliketheonlythingweknowforsurerightnow.

Ifyoulookreallylongterm,youcouldsay,what'sthetotalenergy--howmany--what'sthetotalterawatthoursofinstallation,offactoryinstallationthat'sneededtogotoafullyrenewableglobaleconomy,takingintoaccounttransportation,currentelectricalneeds,fullelectrificationoftransport,electrificationofallheatingandcoolingandthenthecurrentindustrialusesandcommercialusesofelectricity.Togofullyelectric,thetransportisabout0.5thesizeofeverythingelse.Thatwasourglobalmacrocalculations.

Ultimately,wethinkthingswillgetthere,couldtakealongtime.Butthat'swherewethinkthingswillendup,andthat'swherewegettothekindof2billionPowerpacknumber.Whetherit'smadebyTeslaorothercompaniesorsomecombination,that'sthenumberyouneedtogetto,togofullyelectric.Buthowthingstrackbetweennowandthen,it'sdifficulttopredict.


IntermsoftheROIC,wouldyoubethinkingthatstationarycouldbeabetterROIC(inaudible)than,say,thenmassmarketormassaffluentautomotive?


Itmight.Itwouldbenicetogetmaybeacoupleofquartersofexperienceaftermakingthebigannouncementtoreally--beforewe--ourdegreeofuncertaintywilldiminishquitesubstantiallywitheachpassingmonth.Certainlyayearfromnow,we'dhavebrokenupareallygoodideaofit.

It'ssuperspeculativeatthispoint.Wejustknowthatlike,man,therejustnowaywecanmeetthedemandthatweareseeingrightnow.We'vegottoscalestationarystorageasfastaspossible.


YoumentionedlasttimethatsomeCapExwasgoingtoproductdevelopmentintheshareholdersletterforModel3,ifModel3wasn'tinthis.DoesthatmeanyoumightbedelayingsomeModel3investments,orjusttheotherthingskindofswampit?


Theotherthingskindofswampit.Weneedtomakesure--we'redoingquiteabitofadvanceworkonModel3.Thisdoesn'tcomeouttoalotofCapEx.

DeepakAhuja(CFO):

Justtoclarify,Model3spendintheinitialstagesismoreengineeringspend.


It'sbasicallydesignstudio.

DeepakAhuja(CFO):

Exactly.





It'sveryearlyengineeringprototypes.It'sjustnotverycashintensive.

DeepakAhuja(CFO):

CapExcomesatalaterstagewhenyouhaveallthedesignsfinalized,youarekickingofftooling.Weareintheearlystages,astobeexpectedatthispointintime.


Okay.Thanks.


Brian,youmightwanttoaskafollow-up.DoesthisimpactourModel3timing?Iwillthrowthatout.


Well,goahead.


WearehavingtoshowofftheModel3inapproximatelyMarchofnextyear.Again,don'tsuperholdmetothatmonth.

That'souraspiration.ThenbeinproductionwiththeModel3inthe--I'dliketosaymid-,butprobablyclosertolate2017timeframe.Late2017isprobablymorerealistic.


Inthemeantime,theGigafactorysoundslikeit'smayberampingupfaster,butperhapsthosebatteriescouldgonotjusttoFremontcarsbuttoFremontstationarystorage?Ortostationarystorage,notnecessarilytouchingFremont?


Yes,itwouldjustbe--actually,justrightthere,notevengotoFremont,really.ItwouldjustbebuiltattheRenofactoryorSparks,[technically]atSparks.ThentotheNevadafactory.Andgofrom--shipfromtheretocustomers.


StartingQ1nextyear,that'sourplanforallthestationary--alltheTeslaEnergyproducts.


Okay.Thankyou.

Operator :

OurnextquestionwillcomefromRyanBrinkmanwithJPMorgan.

RyanBrinkman (Analyst-JPMorgan):

Ihaveatwo-partquestiononcash.Firstly,onthelastcallyoumentionedreachingfreecashflowpositivein4Qthisyear.I'mjustwonderingwith1Qbehindyouhowyouthinkyouaretrackingrelativetothatgoal?Secondly,ifyoucouldperhapscommentonyourcapitalizationandliquidityoverall,andthepotentialfor,ordesirabilityofraisinganyadditionalcapital?Thanks.




DeepakAhuja(CFO):

WedoexpecttobefreecashflowpositiveinQ4.Thatdoesn'tchange.

Aswegoalong,clearlyweareoptimizingforefficiencywhichresultsinincreasedofourfinishedgoodsinventory.Itmakessenseforustothenestablishsomeassetpipelinesofcredit,whichisbackedbyourfinishedgoodsinventoryorrawmaterials.We'lltakethoseactionstomakesurewehaveasolidbalancesheet.


Yes.Ithinkit's--IthinkthingsarelookingprettygoodforQ4.It'shardtopredictfullquarterexactlybecausethat'sthewholequarterlyboundary,andwheredoestheexponentialrampofproductionfallexactlyonthatstartofQ4boundary?But,Ithinkit'sextremelylikelythatcashflowisreallygoodattheendofQ4.


Okay.That'sgreattohear.


Yes.


Thankyou.

Operator :

OurnextphonequestionwillcomefromthelineofTripChowdrywithGlobalEquitiesResearch.

T ripChowdhry(Analyst-GlobalEquityResearch):

Aquickquestion,twoquickquestions.FirstisregardingtheresidenceswhichmaynothavethesolarpanelsandsaythatresidencegoesandbuystwoPowerwalls.Doesthatcustomerhavetobuytwoinverters,oroneinverterissufficientforasmanyPowerwallsthecustomerbuys?


It'sbasicallywhateverthecapabilitythatinverteris.Sotypicallytheinverterwouldbecapableofhandling--oneinverterisprobablycapableofhandling,dependingonthesituation,uptomaybefourorfivePowerwalls.


ThesecondquestionIhadwasregardingthedouble-backtouryouhadin10cities.Andthatwas(inaudible)indicativeofverysuccessfullywentwiththereservationsinautosreallyskyrocketing.

IthinkitwasonlyCanadaandUSA.Wonderingifyoucouldexpandthattourtoothercontinents?


Yes,absolutely.WejustdidabigthinginEuropethroughGermany.Therewasactually--Ithinkthere'squiteabigtourhappeningfromSlovenia,Ithink,throughmostofEurope.There'sactuallyquitealot--ourthesalesinEuropelatelyhavebeenprettygreat,reallystrong.




DeepakAhuja(CFO):

TheydidthetourinGermany,too--andEurope,too.Sorry.


ItinfactisbeenabighitinEurope.


IfIcanaskonelastquestion.IwasatyourLathropfactorytheotherday.Andtherewassomeinterestingconstructionhappeningbehinditwithhugemetallicframesbeinginstalled.Whatkindofproductioncouldbehappeningthere?

Itseemslikethefactorysizehasincreasedbyalmost40%.Whatishappeningthere?

Anypartsyoucansharewithus?That'sallforme.


We'reestablishingabigcastingfoundryandmachiningfacilitythere.That'sintendedtosupportactivityinFremont.That'swhat'shappeninginLathrop,primarily.

Operator :

OurnextphonequestionwillcomefromthelineofPatrickArchambaultwithGoldmanSachs.

PatrickArchambault (Analyst-GoldmanSachs):

Thanksforsqueezingmein.I'llbequick.Justwantedtobuildon,IthinkRonBrinkman'squestion,onthefourthquartercashflowguidance.Doesthatincludeincomefromthosewarehousefacilitiestooffsetleasedvehicles,oristhatexclusiveofthat?

DeepakAhuja(CFO):

Inourprojection,asElonsaid,wastheendofthequarteraswerampupproduction,weshouldbefreecashflowpositiveonapuresense.Frankly,ouroperationsshouldbelookedatwithouttheimpactofleasing.Andthat'sapurermeasureofoperations,whichisalowerthreshold,Igetit.Butthat'sauniqueoradistinctdecisionwe'vemadetobeinthatbusiness.


(Multiplespeakers)Holdonasecond,Pat.Deepak,dowanttoexplainabouttheclassificationofcashinflowswithinthestatementofcashflows?

DeepakAhuja(CFO):

IfyoulookatourQ1cashflows,forexample,wereceived$155millionfromeitherthewarehouselineorbankingpartnersrelatedtoourleasingbusiness.Thatcashflowdoesnotshowupasanoffsetinourcashflowfromoperations.Itshowsupinourfinancingactivities.

Ourcashflowfromoperationsshowsup$131millionnegative.Butifyouoffsetthatagainstthe$155millionthatwereceivedintheleasingbusiness,wewereslightlybetterthanbreakeven,purelyonanoperationsbasis.SoourrealcashflowinQ1wasdrivenbythestrongCapExspendaheadoftheModelXlaunchesthewaywetendtolookatthebusinessinternally.





Okay.Gotit.Appreciatetheclarification.

TheotherquickquestionIhadisjustIwasalittlesurprisedbythe--Ithinkyouguyshadobviouslyverygoodgrossmarginsthisquarterrelativetosomeoftheheadwindsthatyouwerefacing.IguessIwassurprisedtoseethatex-ZEVtheygofrom26%to25%.

WithsomeoftheincreasesinpricingthatyouareputtingthroughandsomeofthecomponentsthatyouarebuyingoutsideoftheUSwithastrongerdollarnow,whichwheretherewasalittlebitofalag,Iunderstand,thatseemedabitconservative.Idon'tknow,maybeittiesbackintoRob'searlierpointaboutmix.ButIguessthatwasoneareathatIwasalittlesurprised.

DeepakAhuja(CFO):

Justtoclarifythepriceincrease,thatwe'veannounced,it'snotgoingtohelpusinQ2,givenourbookofbusiness.It'sgoingtoprimarilyaffectusinQ3.AlsoinApril,formostofApril,thedollarwasprettystrong.

Isjuststrengthenedinthelastweekor10daysorso,andwewerecontinuingtodelivercars.ThatstrongdollarimpactdoesrolloversequentiallyintoQ2forus,despitethelageffectofgoodnewsfromastrongdollar.

Aswesaidintheletter,wefullyexpectthemiximpacttobeoffsetbycostreductionsthatwewillachieve.It'sreallyrelatedtoFXthatweseethesequentialdrop.


TheFXwasreally--thatwasareallytrickythingtodealwith.WehadquitestrongEuropeansales.

ThentheFXimpactwasquitesignificant.Soobviously,ifyou'vegotacarthatis,likelet'ssay,25%grossmarginandyouseea20%changeincurrency,it'slike,wow,okay.That'snotsupereasytomakeupthatdifference.

DeepakAhuja(CFO):

Toyourpoint,andmaybethisisabroadercommenttomake,thataswelookatourQ1non-GAAPlossthatwehaveof$45million,abigchunk,ormostofit,couldbeattributedtothedollar'sstrengththathashappenedoverthelastsixmonths.Aswe'veindicated,ourQ1toplinecamedownbyaboutthreepercentagepoints,andthenwehadthe$22millionunrealizedlossesfromcurrency.

Youcombinethosetwoandthere'sanoffsetingrossmarginduetolowercostofpartswebuyinforeigncurrencies.Youconsiderthiswholemix,andyoucanseetheforeigncurrencychangeoverthelastsixmonthscanexplainmostofthelosseswehadinQ1.


Maybejustlikethatlastpieceiskindofinteresting.Howmuchareyouabletotakeadvantageofthatnaturalhedgeyoujustdescribed,right?Youarebuyingcomponentsincurrenciesthathavealsodepreciated,right?Batteriesareoneobviousthing.I'msureyouaresourcingalotofstuffinMexico.Areyoucloselyoptimizingthat?Oristhatsomethingthatcanbeexercisedmore?


Forbetterorworse,onecanlookatitasaprooracon,dependingonthesituation,basicallyabout60%ofthecar,maybealittlemorethan60%,isUSandCanada.




Wemayhave--wecertainlyhavelotsof,say,Europeancompaniesthatsupplyus,buttheywillsupplyusfromplantsintheUSorCanadaorsometimesMexico.Sothat's--thisreallyisn'taNorthAmerican-builtcar,atleastnotforreal.

So,it'slike,asDeepak'ssaying,it'sslightlyhelpfulifthedollarstrengthensrelativetotheyen.ButthensincewehavequitestrongEuropeansales,thisis--Ithinkit'slike5%ofourpartsorsomethingcomefromEurope.It'sprettylow.

DeepakAhuja(CFO):

Right.


Ifoursalesare30%inEurope,thenobviouslyit'snotasmuchofanoffsetasonewouldlike.Iactuallythoughtitwouldbehigherthanthat,butit'slike--becauseI'mlookingatthenamesofthesuppliers,butnot--whatmattersiswhere--notthenameofthesupplier,iftheirheadquarter'sinGermany,butwhereistheplant?


Gotyou.Okay.Thankyouforthehelpfulcolorthere.


Allright.I'vegottoruntoanothermeeting.


Wehavetwomorequestion-askers.Ifwecanquicklygo.Hughie?

Operator :

OurnextquestionwillcomefromthelineofBradEricksonwithPacificCrestSecurities.

BradErickson (Analyst-PacificCrestSecurities):

Thanksfortakingmyquestion.Justaquickfollow-upfromthelastoneontheautomotivegrossmargins.Iguessex-currency,canyouquicklytalk,maybeacoupleexampleswhereyouarelookingtoremovemorecostfromthecarsitself?

Ithinkwecanallappreciatethere'scontinuedscaleadvantagesovertime.IfyoucouldtalkbutothercostsavingopportunitiesweshouldbethinkingaboutwithboththeSandtheX,andwhatinningwearein,intermsofachievingthosesavings?Thankyou.


Abigfactorislaborhourspervehicle.Thathassteadilyimproved.ItwasquitebadinQ4,particularlywiththeP85Dramp.We'vemadegoodprogressinQ1.We'llcontinuetomakegoodprogressonthatthroughtherestoftheyear.Soit'slaboranddirectoverheadinthefactory.

DeepakAhuja(CFO):

We'refocusedacrosseverylineitemofourCOGS.Somaterialcostreductions,freightbothinbound.Wespokealittlebitaboutoutboundfreightefficiencies.





Wehadalotofexpediting.

DeepakAhuja(CFO):

Yes.


Thatbigportstrikewassuperunhelpful.Thatalsohurtprettybadly.

Itwaslikethe,Ithink,theworstportstrikeofthe21stcentury.Wealsoaresoldieringthroughthat.Wehadtoairfreightatonofstuffwhileeveryoneelsewassimultaneouslytryingtoairfreightabunchofstuff.

DeepakAhuja(CFO):

Itcostusseveralmilliondollars.


Justtoairfreight,yes.Cuttingbackonairfreightisreallyhelpful.Youhaddirectlaborhours.

DeepakAhuja(CFO):

Wecontinuewithseveralengineeringandcommercialactionsonmaterialcosts.It'salonglist,notappropriatetogothrough.AsaCompany,wearefocusedonModelX,butSisalsocertainlypullinggrossmarginthereaspartofourpriorities.


Yes.

BradErickson (Analyst-PacificCrestSecurities):

Gotit.That'sgreat.Thankyou.

Operator :

AndourfinalquestioninthephonequeuewillcomefromthelineofTylerFrankwithRobertW.Baird.

Unidentif iedPart icipant :

Thisis[Ben].Hey,guys.Veryquickly,youmentionedtheGigafactory,andthenalotoftalkaboutstationarystorageandincreasingoftheGigafactory.Doesthatchangeinanywayyouarelookingatpartnerships,greenpartnerships?Andthenmaybeanupdateontimingthere.

AndthenElon,youtalkedabouthavingafleetofacoupleofhundredXtogetoutontest.AndyoumentionedModel3,showingitnextMarch.Whenshouldweseeit,theModelXinitsfinalversion?Thanks,guys.


Well,noparticularchangetothepartnershipmodelfortheGigafactory.Ithink,asElonsaid,it'searlydaysontryingtomakesomeofthosechangesindirection.Largely,it'sjustabiggerscopeofopportunityforalotofthepeoplewearealreadyworkingwith.




Itiscontinuingtogowell.WeareactuallybeginningtohireoperationalpeopleattheGigafactory,andbeginningtostepuponthataheadofstartingtotrainandthenrampupproductionofthestationaryproductsearlynextyear.


Anythingelse,Ben?


JustontheModelX,whenwecanseethat?


Elon,youwanttotalkaboutModelX?Havehadanumberofquestionsfrominvestors,andBen'squestionhere,aboutwhenyouwillbeabletoconfigureModelXonline,whenwe'llshowthattothepublic,howthatactuallydeploy?


Yes.Probablythreemonthsfromnow--no,actually,I'msorry.We'reinMay.Soit's--thisis--probablyJulyiswhenwillaskpeopletodotheconfiguration.ItwillbeverysimilartotheS.It'snotgoingtobesuper--nobigsurprisesthere.VerysimilartotheS.Wecertainlyhavealotofcustomerswho'vebeenwaitingalongtime.Sotherewillbequitetheneedtogetthecar.


Welookforwardtothat.


Thisisreallyagreatcar.Becauseithasalowcenterofmass,ithandleslikeasportscareventhoughit'sanSUV,withbatterypacksintheoilpan.It'sgotincredibleaccelerationbecausethereisbasicallyaperformanceversionofit,likethereisfortheP85D.Theperformanceissurreal.It'slikenothingelseiscomparable.


Great.Thankyou,everyone,forjoiningusthisafternoon.Everybodyhaveagreatnight.Hughie,thanksforyourhelp,andwetalktoyouallnextquarter.Bye-bye.

Operator :

Pleasure,sir.Ladiesandgentlemen,thiswillconcludetoday'sconference.Thankyouforyourparticipationandhaveawonderfulday.

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Tesla Motors (TSLA) Earnings Report: Q1 2015 Conference ...s.t.st › media › xtranscript › 2015...

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