Tesla, Inc.

Good day, ladies and gentlemen, and welcome to the TESLA Q1 2019 Financial Results and Q&A webcast. My name is Cherie, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question and answer session. If you would like to participate in this portion of the call, please press the star, then one key on your touch-tone telephone. If any assistance is needed any time during the call, Please press star then zero and the coordinator will be happy to assist you. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Martin Vieca, Senior Director of Investor Relations. Mr. Vieca, you may now proceed.

Thank you, Sherry, and good afternoon, everyone. Welcome to Tesla's first quarter 2019 Q&A webcast. I'm joined today by Elon Musk, J.B. Straubel, Zachary Kirkhorn, and a number of other executives. Our Q1 results were announced at about 2 p.m. Pacific time in the update letter we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question and answer portion of today's call, please limit yourself to one question and one follow-up. Please press star 1 now if you would like to be added to the question queue. But before we jump into Q&A, Elon has some opening remarks.

Elon? Thanks, Morten. On Monday, we hosted our first ever Autonomy Investor Day, showcasing our new in-house designed full self-driving computer. and our AI-based software trained by more than 400,000 Tesla vehicles. All Tesla cars being built today have all the hardware necessary for full self-driving, and over-the-air updates will enable our customers to use the Tesla ride-hailing network fleet and generate income, which, as we said on Autonomy Day a few days ago, we think is somewhere between $10,000 and $30,000 a year. In some cases, perhaps more. We're the only company in the world producing our own vehicles and batteries, as well as our own in-house chip for full self-driving. We're in a position unlike anyone else in the industry. And in 2020, we expect to have a million robo taxis on the road with the hardware necessary for full self-driving. We believe we'll have the most profitable autonomous taxi on the market. Yeah. Last quarter, we experienced a massive increase in delivery volume in Europe, similar to what North America experienced last year, as well as a massive increase in delivery volume to China. As far as challenges go, this was a good one to have because we built vehicles and consumers bought them, but this rapid increase in overseas volume strained our logistics operation and resulted in over half of our global deliveries occurring in the final 10 days of Q1. This was the most difficult logistics problem I've ever seen, and I've seen some tough ones. So I'll say it again, like we literally delivered the half of all vehicles produced, or half all deliveries occurred in literally the final 10 days of Q1. As a result, a large number of vehicles the vehicle deliveries shifted into Q2, which caused Q1 net end count to be negatively impacted. As we said, we could not get the vehicles to customers physically in time. In response to this, we are in the process of regionally balancing our vehicle bills throughout the quarter. This will put much less strain on Tesla, result in a much better delivery experience for customers, and have a very positive effect on our working capital in the middle of the quarter. In Q1, Model 3 was yet again the best-selling premium car in the U.S., outselling the runner-up by almost 60%. It's worth just dwelling on that for a moment, just how absurd this is compared to predictions that were made several years ago. There were literally, to the best of my knowledge, zero predictions that this would happen if you go back just even five or six years ago. An electric car would be the best-selling premium car in the U.S., and we believe over time it will be the best-selling premium car throughout the world. In fact, in Norway in March, we... We set a record for the highest sales of any car, period, ever. And that'd be something similar in Switzerland as well. So these are really incredible achievements by the Tesla team. Since the introduction of standard range and standard range plus, nearly 70% of tradients from Model 3 have actually been non-premium vehicles, where people are actually pay more for a car than they have ever paid for a car. They never anticipated paying this much for a car, but because they want the Model 3 more than they've ever wanted a vehicle, they're willing to pay more to get a Model 3. Keep in mind, global expansion for the Model 3 has just begun, and this segment is vastly larger internationally than it is in the U.S., We're continuing to make significant improvements to our vehicle lineup, including updating the Model S and X production line to accommodate the next generation of powertrains. So we announced this yesterday. We're now in production with the significantly more advanced powertrain for the Model S and X, as well as an upgrade to the suspension system to have active adaptive damping in the suspension system and to enable charging at 200 kilowatts. which is, and there are a number of other small changes. If anyone is thinking about upgrading their Model SRX, this is a great time to do it. And we also introduced a loyalty program where if somebody is an existing Tesla owner and they buy a performance Model SRX, they get the ludicrous upgrade for free. So this is Yeah, as a thank you and appreciation to existing Tesla customers. So they have a longer range. The Model S now has a range of 370 miles. This is actually a range of 370 miles. And Motor Trend test drove the car a few days ago. and drove nonstop all the way from San Francisco to Los Angeles at normal highway speeds. And they said they could have even gone faster. And they were in a headwind as well. So this is pretty remarkable that an electric car can go nonstop between the two biggest cities in California. I mean, I remember back when I was driving gasoline cars, I always had to stop at the gas station. This is literally better than a gasoline car, with rare exceptions. And there's also an increase in power. It accelerates faster. It's just better in every way. And we're able to do this without increasing the size of the battery pack, which is a testament to the powertrain team for being able to improve the efficiency of the powertrain by such a significant margin. So with the recently announced product improvements on Model S and X, as well as continued expansion of Model 3 globally, we expect our order rate to increase significantly throughout the year and commensurate with our production levels. And in terms of other products, I'm very excited about the future for other products, especially for full self-driving, which will fundamentally transform transport as we know it, the Tesla semi-truck, Model Y, improvements to Powerwall, Powerpack, the solar route version 3 on the energy side, and no question in my mind that Tesla has the most exciting product roadmap of any consumer product company in the world. And finally, I want to thank our employees for their incredible work and our customers for their continued support.

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

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

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

Jonathan, do you want to?

Hi, it's Jonathan Chang, the general counsel here. Right now we're just going through approvals with the SEC. There's not a whole lot of things holding it back. We're on schedule. We're on track. Right now we're looking to close in mid-May. Great. Thanks.

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

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

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

Sure. The challenge really is battery sales scarcity. As far as stationary storage is concerned, we basically need enough cells to support the vehicle production as well as for Powerwall and Powerpack. Last year, in order to have enough cells for Model 3, we actually had to convert all of the lines at the Gigafactory to produce cells just for the Model 3, as opposed to Powerwall and Powerpack. And so we're essentially scrounging cells from all around the world to at least continue some level of production on the Powerwall and Powerpack. This year, we think we'll be able to allocate at least... maybe 5% to 10% of cell output. Drew and JB, what do you guys think? Yeah. Yeah, something like that.

Between 5% and 10%, exactly.

Yeah. So there are far fewer cells in a Powerwall than in a car, so that translates to quite a decent number of Powerwalls. And then we will continue to use... cells from a variety of suppliers around the world. The Powerwall and Powerpack, because they don't have to go through vehicle homologation, are much more adaptable to using a variety of cells from other cell providers. So I would expect that Powerwall and Powerpack do see a very significant percentage growth this year, maybe on the order of 300 percent or some quite high number. Sorry? Yeah, 300. The team was just confirming, yes, 300%. So this is a very big percentage growth rate. It's much faster than an automotive. So over time, we would expect that sort of growth rate would hopefully be able to continue. And then factory storage will become a bigger and bigger percentage of Tesla's business over time. We're also planning a significant increase in retrofit solar this year. Because we believe we've finally refined the product offering to be something that's extremely compelling and much more cost efficient to deliver and install. It's a radically streamlined process from what was being done before. And we'll have more to say on that possibly next week. And then the solar roof tile, we're on version three of the design. That necessarily takes a while to scale up because we have to be confident that the solar roof is going to last for on the order of 30 years because of the warranties of 20, 25 years. The rate at which you can iterate on solar roof is necessarily slowed down according to the rate at which you can do accelerated aging on the roof. We want the installation process to be simple and easy, which is actually the Tesla Buffalo factory a few weeks ago. I was pretty impressed with the team, and we're looking forward to scaling that up significantly through the balance of this year and next.

Thank you very much. The next question comes from Jeffrey. When and where will the Tesla semi-production begin?

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

The prototypes are working amazingly well.

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

We even used them to deliver some Model 3s.

Yeah, that was fun. Yeah. So, yeah, we'll start production next year. The location is not yet set, but it's pretty clear that we make all the batteries and drive units in Reno.

Great. Thank you very much. It was Sparks, technically.

Yeah, it's Sparks, yeah. Northern Nevada. Yeah, Northern Nevada.

And perhaps the last question from Retail. How soon should current owners that purchase FSD get the new FSD computer?

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

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

Thank you. Our first question comes from Ryan Brinkman with JP Morgan.

Hi. Thanks for taking my question. Your guidance for 90,000 to 100,000 2Q deliveries when combined with the full-year outlook, it suggests somewhere between 35% and 45% sequential growth from the first half to the second. Can you talk about what is giving you the confidence to project that growth, and in particular what the order book or reservation list may be telling you?

Yeah. We do see strong demand for the vehicles, both SX and 3. The Standard Range Plus Model 3 with AutoPilot included at $39,500 is just an incredibly compelling vehicle and affordable to probably something on the order of the top 40% income owners in the US and Europe. I think we'll see a lot of interest and demand in that. We are. And then with the upgraded S and X, I think a lot of people were kind of anticipating that there would be an SX upgrade. And this really is kind of a game changer of an upgrade. So I think we are seeing an uptick in demand, and we expect to see that be quite significant. And we're also out of the seasonality of Q1, which people just generally don't like buying cars in winter. and we're getting past the overhang of the tax credit cliff, which for us ended in the U.S. on 7-31st. So these are all very positive factors. We also have just a lot of markets where we're not even tapped into demand, especially for Model 3. So we'll be releasing the right-hand drive Model 3 and I expect to see significant demand in right-hand drive countries. Overall, I feel really good about the way things are headed.

Okay, thanks.

And then my follow-up.

Sorry. I was just going to say, on a previous call, you indicated that the Y would not be built in Fremont because it was, I think you said, packed to the gills. I heard today that it is now a closed call between California and Nevada. Is anticipated demand for Fremont-built vehicles less than was previously thought, or have you managed to maybe find more capacity in Fremont, for example, with the tent or some other production method? Thanks.

Well, first of all, I obviously am a fan of tents. I mean, real, like, hardcore tents, not like, you know, Cub Scout tents, which are fine. But... This is actually a credit goes to a number of people in the Tesla team because they actually looked at how could we do this in Fremont if we had to. And we feel like we can actually append building space to the west side of the building and use a lot of internal space that's currently used for warehousing in our Fremont factory. And so we believe it actually can be done with minimal disruption to add Model Y to Fremont. Thank you.

Thank you. Our next question comes from Pierre Ferricu with New Street Research.

Hey, thank you for my question.

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

Yeah, I mean, I think something like returning to the $100,000 a year annualized demand for S&X is what we anticipate. That's to the best of our knowledge. We don't have a crystal ball, but that's probably our best guess. And sorry, what was the other part?

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

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

And then my second question was briefly on the... Sorry, I'll say if I would like to.

Yeah, just one thing I wanted to add to that, just on the production side of SMX. We did reduce production in Q1, as was noted. That was part of the retooling that we put in place to get the longer-range vehicle out with the improved suspension. And we're in the process of increasing production back up over the course of Q2. So just for the purpose of expectations, we will exit Q2 at a higher production rate than we did in Q1 on S and X, and then return back to a more normal volume in Q3.

It's already higher.

It's already increasing. Yeah, that's right, yeah.

Okay, let's have a second question. SX, yeah, or buying SX, yeah.

And my follow-up was really on Q2, like with 90 to 100,000 units, you're getting back to fairly nice volumes. And I'm surprised you don't, you still expect a loss. So maybe if you could take us through where we will see in Q2 pain points compared to Q4 and Q3. where you had a profit for similar volumes, how much of the loss in Q2 would be one-off cost, how much is price points coming down in the mix, and how much is related to pricing and other things?

If we didn't unwind what we call the wave, where we make cars in the first half of the quarter almost exclusively for Asia and Europe, and the second half almost exclusively for North America, and then actually even that is subdivided depending on whether it's West Coast or East Coast, then we could deliver more cars. But we think it is important to unwind this way because it ends up being sort of optimizing for one quarter, but really adding a lot of cost and difficulty and not just not being a good experience for customers and putting great stress on the sales team. So, you know, if we're to fully optimize for profitability in Q2, I think we could do it, but then we would be unable to unwind this crazy wave of deliveries. And it also helps our working capital within the quarter to not have the wave. And then, Zach, do you want to talk to some of the other items?

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

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

Our next question is from Adam Jonas with Morgan Stanley.

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

I think we're just going to continue to report the absolute numbers. I think reporting the details just gives those who are opposed to Tesla sort of like data mine the situation and then try to turn a positive into a negative. So we're just going to keep reporting what we report. We do give some more detailed information to insurance companies to help with rates. And obviously, as we launch our own insurance product next month, we will certainly incorporate that information into the insurance rates. So we essentially have a substantial price sort of arbitrage or information arbitrage opportunity where we have direct knowledge of the risk profile of customers based on, you know, the car. And then if they want 5,000 insurance, they have to agree to not drive the car in a crazy way. Or they can, but then the insurance rate's higher. So we're just going to keep reporting, you know, the numbers at a broad brushstroke level, which I think is really what matters. Okay, I understand it.

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

Well, Smith, I don't want to surprise you, but I would prefer we were private. But unfortunately, I think that ship has sailed. So...

But is it important? I mean, do you think the company's value is maximized being public? Or is it just only so much you can do and you've got to, you know, play the hand that you're dealt?

Well, I mean, being public does feel like, you know, the sort of price of the stock is being set in kind of a meta-expressive way. And I think that Warren Buffett's analogy is just like, you know, being a public trade company is like, having someone stand at the edge of your home and just randomly yell different prices for your house every day. It's the same house. Yeah. So, you know, it's a bit of a distraction at times, but I'm not sure what to do about it.

Okay. I understand. Thanks.

Thank you.

Thank you. Our next question comes from Maynard Um with Macquarie.

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

In Q2, we think we are through supplier interruptions, at least there aren't any significant ones that we're aware of.

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

They really do seem to be different market segments.

And also, about only 3.5% of our trade-ins for Model 3 are coming from Model S. So from all the Model 3 trade-ins, Model S accounts for a super, super tiny portion.

Yeah, for sure. People who have bought a Model S just want to trade it in for another Model S, or maybe an X. Okay, let's go to the next question, please.

Thank you. Our next question comes from Dan Galps with Wolf Research.

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

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

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

I think we'll be fine. Yeah, I don't think that there's any major thing required. Okay, thanks a lot, guys.

Thank you. Our next question comes from Tony Sakonage with Bernstein.

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

I don't think raising capital should be a substitute for making the company operate more effectively. In that sense, I think it's important to have a strong financial discipline in the company and just to make sure we don't have extreme expenses and that we're just being frugal with capital. If we just keep raising capital every time, then we don't have the forcing function for improving the fundamental operation of the business. So I think it is healthy to be on a Spartan diet for a while. At this point, I do think there is some merit to raising capital. This is probably about the right timing, but yeah.

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

Yeah, first of all, I should say that I don't think that capital has been a constraint on our growth thus far. And if I thought there was a fundamental constraint on growth, we would have faced capital before now. But I think it is very important as the company scales to make sure we are on a solid foundation and that we have the appropriate financial discipline throughout the company and are spending money very efficiently. At this point, I think we are doing that. Not that there isn't more work to do, but Tesla today is a far more efficiently operating organization than it was a year ago. We've made dramatic improvements across the board. And so I think there's merit to the idea of raising capital at this point.

Just to add to that, the journey we've been on for the last 12 to 18 months on being more efficient in how we spend money has really changed the culture inside the company. It's enabled us to accelerate a number of cost reductions on the COG side of our products and then make improvements in operating expenses as well. And then as we look forward to capital investments for Giga Shanghai and Model Y and ultimately a European facility, our capex per unit of capacity has come down significantly through the work from the team here. So I think it has been a very productive journey for us.

And technically, we did raise some debt capital in China for the Shanghai Giga on the order of $500 million. So we wanted to make sure that we didn't have to draw upon global capital to fund the Shanghai factory.

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

Thank you. Our next question comes from Alex Potter with Piper Joffrey.

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

No, they would actually receive their cars sooner. It just means that instead of building cars in batches where, say, the first half of the quarter is just dedicated to China-Europe cars and the second half is dedicated to North American cars, that we blend vehicle production for customers throughout the world throughout the quarter. And this puts much less strain on the system. We don't want a situation again like we had in Q1 where essentially all the cars were arriving at customers worldwide at the same time. We literally delivered half of the entire quarter's deliveries were in the final 10 days of Q1. That's insane. So I think we need to unwind that. It's also just not a great customer experience because we're shorthanded, and then we have to redeploy people that are working in sales, HR, legal, engineering everyone just to fill up our cars, and then they can't do their regular jobs. So it just makes sense to just blend the production according to demand throughout the quarter.

Okay. That makes sense. And the second question, uh, I guess on go to market, there was some, a period of time there where the company was focused on closing storefronts, a fair amount of noise made around that. And then it looked like some of the commentary was hedging that strategy. Um, was just wondering if there's any update there. Um, and if you have one that'd be, that'd be helpful. Thanks. Sure.

Um, you know, I think, um, I mean, Tesla specifically, I didn't, didn't handle the messaging that well. Um, And then that's amplified by, you know, we make a statement and it's sort of taken to an extreme where there's a misunderstanding. We certainly will continue to have stores and we will continue to add stores provided they are in locations where there is high foot traffic and for people that are in our target market. So we actually will continue to add stores in locations that are no-brainers. But we will close stores in locations where they're incredibly hard to find and the foot traffic of potential buyers is very low, such that it does not support the cost of the store and the people in it. So I think there's just common sense. And then all sales online just means that Even if you go into a store, we guide you to order the car on your phone. So the store is essentially like they're like information centers, a place you can get a test drive and buy some Tesla merchandise, that kind of thing. But all sales online doesn't mean all stores are closed. It just means that when you buy a car, you always do it on your phone in the store or at home or anywhere. People took all orders online to mean all stores are closing. That's not what's meant.

Okay, very good. Thanks.

Thank you. Our next question comes from Philippe with Jefferies.

Yes, thank you for taking the question. I was just wondering if you can comment on the agreement you seem to have reached with FCA on the possibility of selling your CO2 credits to them in Europe. and what that means to your potential cash inflow, when that might start occurring, and if there is by any chance any of those things already in the Q1 cash position.

It's a confidential deal with FCA, and we agreed with FCA not to comment on it publicly, so we must abide by that. Right.

Can I ask you a question of going back to what Adam was saying about the drama that surrounds your stock, unfortunately? Why don't you reduce some of it by disclosing maybe on a monkey basis your deliveries and also maybe disclosing early your greenhouse revenue in terms of ZEV so we get right away a better view on some of these details that kind of move the stock?

I think that would actually be counterproductive. because people read too much into what occurred in a month. I mean, even at a quarterly basis, things can be lumpy. And so the more granularity that's provided, let's say at a monthly level, the people would reach all sorts of conclusions that don't make sense. It's like literally like sales to a particular country, say overseas, are affected by when the ship arrives. And so if a ship arrives, you know, on the 31st of the month or the 1st of the next month, this will make it look like something dramatic has happened, but actually the ship was just a day late. So people read, that would increase the drama, not decrease it. And we're filling the ship 100%. Okay. Thank you. We're filling the ship 100%, so it's like, it just ends up being lumpy. Okay. It's something like if you calculated GDP of a country outside of the U.S., GDP on Sunday is extremely low, and GDP on Monday is extremely high. But it does not mean nothing's really changed.

Okay, thank you.

Let's go to the next question.

Thank you. Our next question comes from David Tamburino with Goldman Sachs.

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

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

Okay. Well, then my second question will just be if you anticipate a further price adjustment with the next level of U.S. credit phasing out July 1st.

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

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

Thank you. Our next question comes from Colin Rush with Oppenheimer.

Thanks so much. Could you comment on whether you'll be battery constrained at 100,000 vehicles a quarter in 2Q?

Self-constrained, you mean? We don't have to be self-constrained at 400,000?

Okay. And then as you look at the Maxwell technology and integration, you know, post-close, how quickly do you think you'll be able to integrate that technology into the battery production? And, you know, could you comment on potential for chemistry and form factor changes as that gets integrated?

I mean, you're really asking some secret sauce questions here. Yeah, I think we'll have a – I think we'll probably have an investor day, like we had autonomy day, maybe later this year or early next, just to go over the cell and battery technology and future strategy. I think that will be very informative. But we do recognize the criticality of this.

Okay. Thanks so much, guys. Thanks.

Thank you. Our next question comes from Joseph Spack with RBC Capital Markets.

Thanks. First question is really just a clarification in the outlook, the 25% non-GAAP gross margin that you're targeting. Is that over the midterm, or is that something you expect to hit by the end of this year? And if so, what gets S&X back higher, given the price cuts?

Yeah, this is Zach here. That's guidance that we're targeting for the end of the year, although internally we're working towards S&X non-GAAP gross margin, achieving that sooner. The biggest lever there is kind of two components. One is as we increase volume back on our S and X production lines, there's just a natural benefit there from the fixed cost absorption, which will help us. But we also have a number of cost reduction projects in place that we're executing on over the course of the year. And then the third piece, you know, which applies to S and X but also Model 3, you know, we're seeing an increased take rate on our full self-driving offering. And, you know, there are revenue deferrals associated with that, given that the full suite of functionality is not there. And as that option becomes – approaches feature complete and we roll out more, we'll be able to collect more revenue on that. And so all of those things together, you know, within our internal plans gives us confidence.

Yeah. We should perhaps mention that the upgraded powertrain for S and X was actually – was also in a – significant cost down because we essentially took the high volume rear drive units of the Model 3, which is extremely efficient, the semi-permanent magnet motor and power electronics and everything. And we made a version of that for the front drive unit of S and X. And so we're actually able to get a cost reduction while improving range and performance of the car. That's just one example.

Okay. And the second question is just, you know, looking at the 10K, you've continually noted this $4.9 billion purchase obligation, which I think is primarily related to Panasonic, Agiga One, and then Elon. In some of your communication, you've indicated production constraints. So I guess the question is, does that 4.9 billion correlate to reaching that 35 gigawatt hour rate? And if you can't hit that because of production constraints, does that adjust?

Yeah, so this is Evhub. So the purchase obligation, the 10K, is basically for the entire contract which we have for Panasonic. It's not something that we need to make the purchases tomorrow. So this is going to take a couple of years.

Okay.

Thank you. Our next question comes from Colin Langan with UBS.

Oh, great. Thanks for taking my question. I mean, it sounds like from the tone of the call that you don't see that there's a demand issue for some of the products, but margins seem to be under pressure, and typically automakers cut pricing when there is a demand issue. So what is the logic of the price cuts during the quarter?

I mean, our goal, as we've been very clear about from the beginning of the company, is to make our cars as affordable as possible and We felt it was important to offer the $35,000 Model 3 and then to create a sort of a bundled package for the Model 3 with the increased range. Because we think actually that the difference between $220,000 and $240,000 is quite important, more important than people realize in range. And, you know, having a partial premium interior and then bundling autopilot. So we thought those, like, we wanted to create a product that really just nails the sweet spot, which I think the $39,500 Model 3 has just really nailed the sweet spot, and we're seeing consumer response accordingly. And people can still buy the $35,000 version of the Model 3 that just doesn't have autopilots and has a software range restriction and that kind of thing. It's slightly more inconvenient to buy. You just have to make a phone call or visit a store. So it's not like you have to complete the... optical course or something. But we see very few people actually taking us up on that $35,000 offer, but it is there and will remain there.

And as a follow-up, you're still targeting the China facility ramp by the end of the year. Are you still confident in the $3,000 per week? And do you have a battery supplier yet? Because it's getting pretty close to that point.

Yeah, The Shanghai Gigafactory progress is going incredibly well, a testament to the outstanding execution of our team on the ground there. I get daily emails with Delta pictures from one day to the next from Tom Zhu, who leads the Gigafactory program. And, you know, so we're literally discussing it. We're getting updates. So seven days a week. So the midnight Gigafactory email. In terms of execution, it's outstanding, but of course, the production goes as fast as the slowest item. It's always very important to bear in mind. We have 99% of things in good shape, but 1% is missing, and you still can't make a car. That said, it looks like we'll reach volume production at the end of this year with a let's say more than 1,000 cars a week, maybe 2,000 from Shanghai Giga at the end of this year. That's what it looks like to be the case right now. If it's not then, it'll be shortly thereafter. And then we expect to have multiple sales flyers for Shanghai Giga.

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

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect, and have a wonderful day.