Tesla, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to TESLA's Q1 2020 Financial Results and Q&A Webcast. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker, Mr. Martin Vieca, Senior Director for Investor Relations. Please go ahead, sir.

Thank you, Sherry, and good afternoon, everyone. Welcome to Tesla's first quarter 2020 Q&A webcast. I'm joined today by Elon Musk, Zachary Kirkhorn, and a number of other executives. Our Q1 results were announced at about 1 p.m. Pacific time in the update deck we published at the same link as this webcast. During this call, we'll discuss our business outlook and make forward-looking statements These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question and answer portion of today's call, please limit yourself to one question and one follow-up. Please press star one now if you would like to join the question queue. Before we jump into Q&A, Elon has some opening remarks. Elon?

Thank you. So Q1 ended up being a strong quarter despite many challenges in the final few weeks. This is the first time we've achieved positive gap net income in a seasonally weak first quarter. Even with all the challenges, we achieved a 20% automotive gross margin, excluding regulatory credits, while ramping to major products. What we've learned from this is that we've actually learned a lot here. After the Model 3 ramp from three years ago, Our new products get ramped faster and become profitable sooner. In Q1, we produced more Model Ys in the first quarter than Model 3s in Fremont in the first two quarters. Thus far, the Model Y ramp has been even faster than the Giga Shanghai ramp in Q1. Most surprisingly, in other words, we are ahead of the schedule that we were ahead of already. Most surprisingly, Model Y was profitable already in its first quarter of production, something we haven't achieved with any product in the past. Regarding autopilot, we released a new software update for traffic lights and stop signs to early access users in March and to all US customers with the full self-driving package just last week. Our cars will now automatically stop at each stop sign or traffic lights until the driver gets a confirmation to proceed. I should say that the car is actually capable of much more than this, but we are only exposing functionality that we feel quite good about and where we feel that it is probably a safety improvement. We are collecting data from over a million intersections every month at this point. This number will grow exponentially as more people get the update and as more people start driving again. Soon we will be collecting data from over a billion intersections per month. All of those confirmations are training our neural net. Essentially, the The driver, when driving and taking action, is effectively labeling reality as they drive and making the neural net better and better. I think that this is an advantage that no one else has. We're quite literally orders of magnitude more than everyone else combined. I think this is difficult to fully appreciate. It's the reason that it's very difficult to have a search engine that competes with Google because everyone is training Google all the time with their searches. So when you search for something and you click on a link, you're training Google every time you do that. It's just very difficult for any new search engine to compete on that basis. So all those confirmations are training on neural net, and soon cars will be able to drive through an intersection without a confirmation, as well as to make turns, and we really feel we're I feel extremely confident that it will be possible to do a drive from your home to your office most of the time with no interventions by the end of the year. So we can almost do this already with the leading-edge alpha builds that are driving in the car. So, let's see, on other technology fronts, we increased the range of Model S and X, yet again, this time to 391 miles for Model S and 351 miles for Model X. And it should be said that, actually, the real Model S range is 400 miles. But when we did the last EPA test, unfortunately, EPA left the car door open and the keys in the car. and they did this overnight. And so the car actually went into waiting for driver mode and lost 2% of its range. And as a result, it had a 391 test. As soon as the EPA reopens for testing, we'll redo the test and we are extremely confident that we will achieve a 400 mile or greater range with the Model S. But to be clear, the Model S, for the past two months, the true range of the Model S for the past two months has been 400 miles. And, of course, we're not stopping there. We'll always continue pushing for improved range over time and improving handling, acceleration, and all the little details that make a Tesla special. For Model Y, we introduced a revolutionary two-piece rear underbody casting that we're going to be making a single-piece casting later this year. meaning essentially the rear third of the body is cast as a single piece, which is no casting of this size of complexity has ever been done before. In fact, there isn't even anything that is on par with the two-piece casting for the Model Y. So we're really pushing the envelope on vehicle structural engineering and manufacturing. I'm very excited about this approach as it allows us to reduce the weight, the cost, and improve It's better in every way, essentially. For Model Y, we also introduced a revolutionary new heat pump, which allows the car to have a higher range. So the Model Y has remarkable range on par with, in fact, slightly better than, I guess, the Model 3. And just despite being a bigger car, that weighs more. And the heat pump is a key contributor to that. It is especially excellent at low temperature driving. And the feedback we're getting from customers who have received the Model Y thus far has been universally positive. We're confident this product will be our best-selling product ever. In conclusion, and just looking forward, I guess this is a forward-looking statement, we are absolutely continuing our Model Y capacity expansion at full speed at both Giga Berlin and Giga Shanghai, and here in Fremont when they will let us continue. Localized production in China and in Europe will bring the cost down, making our parts even more competitive over time. While many other companies are cutting back on investment, we are doing the opposite. We are absolutely pedal to the metal on new products and expanding the company. And we're really looking forward to being in sometime next year a truly global manufacturer with major factories in North America, China, and Europe, and a capacity of well over a million units a year. So there's a tremendous amount to look forward to, and we can't wait to tell you what's going to happen. Thank you.

Thank you. And now to Zach's opening remarks.

Yeah, thanks, Martin, and thanks, Elon. I'm very proud of the accomplishments of the Tesla team this past quarter. A few things to highlight and add to what Elon just mentioned. We successfully launched, ramped, and demonstrated profitability of the Model Y, as Elon mentioned, significantly ahead of schedule. And this is our second large-scale product launch since Model 3 in 2017, and it's evidence to the progress we've made on cost control and ramp efficiency. It's hard to understate the significance of demonstrating profitability of this program in its first quarter of production. Our Shanghai Model 3 margins improved dramatically since Q4 of last year, nearing equivalence of Model 3s built in Fremont. This is despite not yet running at full capacity while also managing through the production shutdown in early February. We also announced a long range and performance variant of the Model 3 per our roadmap, which will positively impact ASPs in China. On order rates, we did not experience much of an impact related to the expiration of government incentives at the end of Q4. In fact, we exited the quarter with our highest ever backlog yet again. Aided by these accomplishments, we are able to achieve our first-ever Q1 profit. Automotive gross margin, excluding the impact of regulatory credits, remains strong for all products, despite charges taken in Q1 associated with production downtime. We continue to make progress on OPEX efficiency, as well as our service and other margins. Our energy business was impacted as well by shutdown activities in Q1, limiting deployments. We also experienced expected launch inefficiencies associated with our third version of the solar roof, which impacted overall profitability. As I've noted before, we expect regulatory credit sales, which are credits we sell to other carmakers, to generally increase with time. This can be seen by the increase from Q1 relative to Q4. And note that most of the credit revenue did not contribute to cash in Q1, and it's reflected in the accounts receivable on the balance sheet. Our free cash flows were impacted by the temporary increase in end of quarter inventory for all our products, resulting from the abrupt suspension of production and delivery operations. Had these interruptions not occurred, we were pacing towards a record quarter of deliveries and strong free cash flows. As Elon mentioned, it is extremely important that we remain on track to achieve our long-term plans and technology roadmap. We are taking the near-term actions required to continue those investments. Model Y in Shanghai and Berlin are proceeding as planned, and we're making progress on improving capacity for Model Y in Fremont and Model 3 in Shanghai. In the near term, our Shanghai factory remains operational, contributing an increasing level of cash flows and profitability to the company. In Fremont, we're working towards restarting production as soon as that's possible. We are also continuing to deliver cars that we were unable to deliver at the end of the first quarter. Our vehicle inventory balance increased by 14,000 units at the end of Q1, which was a headwind to free cash flows in Q1, but it's helpful in Q2. Note that one of the most important aspects of Model Y in Fremont and Model 3 in Shanghai is the dramatically improved cash conversion cycle by locally producing and delivering vehicles. While sales and delivery operations have paused in many areas of the world, we are still receiving many online orders, despite inability for our customers to experience the product prior to ordering. However, unavoidably, the extended shutdown in Fremont will have an impact on our near-term financial performance, and we will need to work through how quickly we'll be able to ramp production to prior levels. More broadly, we remain focused on ensuring our cash flows are managed appropriately. Working capital management, in particular raw material inventory, is the single most important lever in managing our cash flows during this time. The Tesla team has done a great job here. We've also taken actions to eliminate or reduce non-critical expenses and optional investments, while continuing to drive efficiencies throughout the business. Overall, we've modeled many scenarios into 2021 and remain comfortable that we have sufficient liquidity to proceed fully with our most important long-term investments. It's important to note that Tesla remains an extremely agile and dynamic company, and this is aided by the substantial work we've done over the last year to improve our cost efficiency and productivity. And we have the ability to quickly adjust our spending and planning as required. So thank you again to the Tesla team for success in Q1, and we will turn to questions.

Thank you very much. So we'll take the first questions from institutional investors compiled by SAFE Technologies. The first question from institutional investor is, most Tesla owners have yet to purchase or experience FSD, despite most vehicles having all the necessary hardware. What levers could you pull to accelerate adoption and deepen your data advantage? For example, could you consider offering FSD as a premium subscription?

I think we will offer full self-driving as a subscription service, but it will be probably towards the end of this year. I should say, it will still make sense to buy FSD as an option. In our view, buying FSD is an investment. in the future, and we're confident that is investment that will pay off to the consumer and to the benefit of the consumer. And in my opinion, buying the FSD option is something people will not regret doing.

I agree. And financially, rolling the upfront purchase of the FSD option into a loan in the vehicle or a lease will be the least expensive way on a monthly basis to own, plus you preserve the option value of increased value with time.

Yeah.

But we do understand that some customers who have ownership or have leased their vehicles did not purchase that option up front. And so this will enable those customers to spread out the cost of ownership of FSD or subscription over time.

Absolutely. At a high level, our overall goal is to maximize the area under the curve of customer happiness. That is our goal. And we think that that's the kind of thing that all companies should try to do. And it's which is what results in long-term value creation and loyalty against loyalty. So our goal is always really to do the best thing for the customers. And we're confident that if we behave like that, that the customers in turn will behave the same way to us.

Thank you. The second question from investors is, China recently announced changes to its NEV subsidy program that disqualifies Tesla vehicles from benefiting from the subsidies. To what extent is there room for Tesla to lower manufacturing costs in China and pass those savings to buyer so they can qualify for the subsidy?

Yeah, so we are making rapid progress on lowering the production cost in China, and we're actually excited to announce on this call that we will be reducing the price of the standard range Model 3, basically tomorrow China time. So the day after tomorrow California time, but tomorrow China time. And that will be a price below the subsidy limit. We feel confident that that will still be a vehicle that delivers a good gross margin.

And on the manufacturing cost portion of the question, The cost of vehicles produced in Shanghai and Q1 is already lower than the cost to produce the Model 3 in Fremont, and there's still significant opportunity left to take cost out. So fixed cost absorption from higher production volumes, which are occurring in Q2 and will occur through the rest of the year. We're not fully localized on the supply chain yet, and so while a lot of the supply chain is localized, it's not complete, and there's additional opportunities there. And so we'll continue to bring the price down and expand margin, cost down and expand margin, even with this reduction in price that Elon mentioned on the standard range version of the vehicle.

Thank you. The next question is, Andy Groh once said that great companies are improved by crisis. In which way has Tesla improved or is expected to improve coming out of COVID-19?

Well, it has caused us to look closely at our cost structure and to be more efficient as a company. One always has to do that in a crisis. And to think about our core beliefs and what do we want to do, and we came to the conclusion that the right move is actually to continue to expand rapidly, continue to invest, in the future in new technologies, even though it is risky. And we've talked to some of our key investors, and they support that approach as well. So, you know, I think there's clearly an uncertain future ahead. It's a bit of a bumpy road, but I think the long-term prospects are extremely good. Anything you guys want to add?

Yeah, I agree with that, Elon. The prioritization on the key projects will enable us to execute more efficiently and faster on them, which I think is great. The other one that I would add is it's always been our vision at Tesla to improve the customer experience and make that as digital as possible.

Yeah, touchless delivery.

So touchless delivery, mobile service, touchless sales has been something that we've been very focused on and made a lot of progress on.

Yeah, but Tesla's the only car that you can You can literally order it in less than five minutes on your phone. You can order a car and have it delivered to your doorstep with all the paperwork and everything done. That's it. Effortless.

And many customers do that.

And they're doing it, yes. In fact, a big part of it is just trying to communicate to people that this is something you can do because normally buying a car is quite a pain. For most people, They would rather go to the dentist than buy a new car. Actually, my dentist is great, but it's really quite an arduous thing. When the typical retail experience for buying a new car is more painful to people than having a root canal, then You have to say, well, and for Tesla, it is completely as easy as ordering something from the Apple App Store or ordering something on Amazon and it's just a car. Yeah. In five minutes, if you're really going fast, I think you could order a car probably in 90 seconds. Yeah.

Thank you. And the next question from institutional investor is, can you give us a brief preview of the battery day by generally highlighting steps Tesla is taking to improve cell energy density and timeline for introduction?

Yeah, actually, we're just, we don't want to preempt a battery day. We want to leave the exciting news for that day, but there will be a lot of exciting news to tell. And I think It'll be one of the most exciting days in Tesla's history. And we're just trying to figure out the right timing for that. We think probably the right timing will be probably the third week of May. Not giving a firm date, but we think that probably that's the right timing. And depending upon what we're allowed to do, it'll either be in California or Texas.

Okay. And the last question from institutional investors, could you please update on progress towards development and commercialization of full self-driving? How much revenue have you recognized so far?

So just a couple of things on the financials for full self-driving. And so currently in North America, it's sold for $7,000 as an option. We take roughly half of that as revenue, and the other half of it goes into deferred revenue. That's associated with features that will be released with time. Our deferred revenue balance is continuing to grow. It's a little bit over $600 million. And so as we release features with time, at the end of every quarter, we take a look at what features have been released, associated value, and then we can release that from the deferred revenue into our financials for that quarter. And then cars going forward, once a feature is released, we can recognize that revenue. So we reduce the amount of deferral and we can recognize that revenue within period. So, I mean, this is one of what we think will be one of the most powerful gross margin levers with time as the feature suite is rolled out.

Absolutely. There's also a tremendous amount of untapped potential in the fleet out there that could upgrade to turn on autopilot, basic autopilot, or full self-driving. And that's something we will enable. just as a simple in-app purchase, or as we were talking about earlier, just towards the end of the year as a subscription. So that's just a lot of untapped potential there. That's not in the deferred revenue line, obviously, but is certainly a great deal of deferred potential that we think is a large portion of which is likely to reach fruition.

Thank you. And now let's go to questions from retail investors. Question number one, Elon has mentioned a 50% compound annual growth target for Tesla in the past. Is this still in line with Tesla's ambitions for the next five to 10 years? This would be 4 million vehicles in 2025 and more than 20 million vehicles in 2030. Is 40% a more realistic target?

Well, it's always difficult to predict what the macro situation is going to be. I think very few people would have predicted, you know, the unexpected roundhouse that COVID came up with that sort of came out of nowhere. So I think in the absence of something, some massive force majeure event, but quite massive, I think 50% is the likely number. It's possible that it was 40%. I would be very shocked if it's less than 40%, even with force majeure, short of World War III.

Okay. The next question from retail investors, when will you announce the next giga? How many gigas do you have planned for the next five years?

I think we will announce the next giga possibly as soon as a month. We may not as soon as next month. This is not a prediction. It's just saying, yeah, That could happen. It will certainly be within three months and possibly one month. And that would be in the U.S. So as for how many it will be in five years, I don't know right now what that number would be. I guess several more than there are today, but I'm not sure. what exactly it would be in five years, but some number more than today.

I'll also add that our gigas have gotten bigger.

Yes.

And... Arguably, we start being called Terra. Yes. With multiple products as well. And so, you know, the absolute number of gigafactories we may ultimately build might be less, but each one is larger. And that's under a belief that just significant efficiencies by having as much as possible... and similar product lines under the same roof and as much vertical integration as possible all in one facility.

Thank you. The next question is, can you give us an update on solar roof ramp? How many are you currently able to install per week? What is your installations per week's target for the end of 2021?

We were actually gaining momentum with the solar roof before COVID, and COVID essentially shut us down, both from the ability to install and the ability to get permits. The permit offices were closed, and we were shelter-in-place all over the place. So we obviously cannot install if you can't get permits and you can't physically do it. It's physically impossible. But I think the long-term trend for solar roof is extremely good. And I'm confident that, let's say, within the next year or maybe even by end of year, we should be installing at a rate of 1,000 a week. That's not in the middle of winter or something. It's taking seasonality, allowing for seasonality where it's hard to install in roofs that are covered in snow and ice. say, spring, I think it's installing, which is the hard part. We actually have demonstrated the ability to hit 1,000 a week burst build rate for the solar glass roof already. So that's not a problem. It's building up the install teams, building up the third-party channel installers, the roofing industry installers. And And internally, we want to have at least 1,000 solar roof install teams and taking a week or perhaps a little less than a week to do an install, which gets you 1,000 a week roof installations. We see demand is good, production is good, so it's really all about the install. And then, like I said, also building up the training, the very diverse group of of companies in the roofing industry to also install a solar roof that I think will allow us to scale far beyond 1,000 a week. We're also seeing a lot of interest outside of North America, so we do expect this to be a product that is international and actually seeing a tremendous amount of interest from China on the solar roof. So we're confident this will be a very significant product for the company over time.

Thank you. The next question is, can you elaborate on Tesla's plan to enter the residential and or commercial HVAC market? Can you provide some basics of how your system will work? Will you consider the heat pump water heater market as well?

Well, as I said on Twitter, I'm personally extremely excited to build a kick-ass HVAC system that also has you know, sort of hospital-grade particle filtration, basically HEPA filtration that filters out viruses, bacteria, pollen, fungi, and also neutralizes acidic alkaline gases that is quiet and efficient and These are all things we've achieved in our cars, by the way. In fact, I don't know if a lot of people realize, but the Model S and X are the only cars in the world that have a hospital operating room grade, like, HEPA filters built in. They're very big. So you can get to a particle count that is insanely low with our cars.

And 3 and Y have, like, MERV 16 or 15 capable filtration also, which is.

It's not like Model 3 and Y are, they're no slouches. Model 3 and Y are also, they're way better than any other car to the best of my knowledge. They're not quite as good as possible operating room, but they're extremely good. Way better than any other normal car. And we're continuing to improve the cultures on 3 and Y. These actually have a big effect on health, even in normal, just day-to-day living. It's reducing particle count. and it has an effect on allergies and all sorts of things. So it's really, air quality is incredibly important. Even in a non-COVID situation, it's really important. So taking all those things that we've learned and applying to home HVAC and commercial HVAC would be just very exciting. And then if you're condensing water, like why not also have it be a water source? If you have water, possibly could then heat the water and have a water heater as well.

Yeah, use it as a heat source if you need it instead of the outdoors when the outdoors is really cold or the other way around. So, lots of options.

It could be a hell of a product. So, we just have to, you know, Tesla, we have a tendency to buy the one that we can chew on the product front. So, we've got to make sure we get a lot of irons in the fire here for new products with the Cybertrucks, MI, New Roadster, and the Gigafactories in various parts of the world, and it's brilliant, Model Y, and Autopilot, and Solar Roof. New technologies. Yeah, exactly. Powerwall, Powerpack, Megapack. We are seeing tremendous demand for stationary storage, more than we can supply, at least for 2020.

Thank you. And the last question from the retail is, when will Tesla start acquiring utilities like the Hornsdale Power Reserve and Mos Landing instead of selling them battery storage? Does it make sense for Tesla to buy peaker plants and convert them?

Well, we haven't really thought about that yet. It's not out of the question, but our brain is full. Excuse me, sir. It's not out of the question. Our overarching goal is to help accelerate the advent of sustainable energy. And the three elements of that are sustainable power generation, then you've got to store the power, stationary storage, and then you've got to have electric transportation. And We don't have, like, say, specific market share goals or anything like that. It's just to the degree that we can accelerate the advance of sustainable energy, we think that's a fundamental good for the world, and we want to do that as fast as possible. But it's not, like I said, market share growth. You know, it's gold in and of itself. It's just, you know, the faster this happens, the better off the world is.

Thank you very much. And I think now we can move to analyst questions.

Thank you. Our first question will come from Adam Jonas with Morgan Stanley. Please go ahead.

Thanks, everybody. I hope everyone's safe and healthy. I've got one question and one follow-up, and I'll point out I've had a root canal before, and I would agree, Elon, it was less painful than buying a car. Exactly.

I mean, really, it's – yeah, exactly.

It's a big problem, actually. It's a big problem. It's crazy.

Yes.

Different conversation. Zach, first for you, any real-time update on company liquidity at the end of April? Some companies have, you know, given the circumstances, gone out of their way to give a little color on that. Just wanted to give you a shot at that. And I got a follow-up.

Yeah, it's a fair question. I don't have any additional color to provide. So 8.1 billion in cash and cash equivalents at the end of Q1. We're managing it very closely. As I mentioned in my opening remarks, we do have an increase in inventory of vehicles that we were unable to deliver at the end of Q1, so we're making progress delivering those through April, which is helpful for liquidity. Yeah, it's a fair question. I don't have any additional color to provide, so 8.1 billion in cash and cash equivalents at the end of Q1. We're managing it very closely. As I mentioned in my opening remarks, we do have an increase in inventory of vehicles that we were unable to deliver at the end of Q1, so we're making progress delivering those through April, which is helpful for liquidity. As we've been looking at liquidity, we've been looking at this over the next 18 months, and there's ups and downs to the liquidity. Currently now, as we're not producing, we still have payables from Q1 that we're paying off, but then In a couple of months, we'll quickly be through that, and then we'll have a gap in payables since we don't have any parts coming in. So it does go up and down a little bit. But in looking at the long-term horizon, which is how we're managing it right now, we feel pretty comfortable with the position of the company.

Yeah. I should say we are a bit worried about not being able to resume production in the Bay Area, and that should be identified as a serious risk. We only have two car factories right now, one in Shanghai and one in the Bay Area. And the Bay Area produces the vast majority of our cars, all of S and X, and most of the three and all of the Y. So the extension of the shelter-in-place, or frankly I would call it forcibly imprisoning people in their homes against all their constitutional rights, that's my opinion, and breaking people's freedoms in ways that are horrible and wrong, and not black people came to America or built this country. What the fuck? Excuse me. Outrage. Outrage. So, it will cause great harm, not just to Tesla, but to many companies. And while Tesla will weather the storm, there are many small companies that will not. And all people's everything people have worked for their whole life is being destroyed in real time. And we're going to have many suppliers and are having many suppliers that are having super hard times, especially the small ones. And it's causing a lot of strife to a lot of people. Yeah.

Well, Elon, on that point, you mentioned people that gave their lives to build the country. My fault for you on this. There have been a lot of comparisons drawn to the and save the U.S. economy to the early 1930s when Roosevelt began a series of new deals and infrastructure projects, or post-World War II when Eisenhower launched the U.S. Highway Act and when JFK launched the Apollo program, which you could say was influenced by the Cold War, clearly, and you benefited from and our space program benefited from. What would be your message to U.S. lawmakers on this call as we, in addition to your opinions on shelter in place, but thinking longer term, your message to U.S. lawmakers coming out of the crisis, specifically around EV infrastructure and a chance to kind of, you know, work with taxpayers to support sustainable transport and renewable energy. I'm wondering if you see this, you know, as a chance to make the crisis and all the loss and lives lost not be in vain. Thanks.

I think it's high time we invested in infrastructure in this country. We have a lot of crumbling highways and bridges and And frankly, you know, when I visit China, I see their infrastructure as being much better than ours. It's great. Europe has better infrastructure. It's really quite sad. The U.S. infrastructure, especially sort of roads and highways, is where it is today. And our airports, in a lot of cases, are an embarrassment. And it's not just a question of money. It's not just a question of money, it's a question of will. Sometimes we spend a lot of money on these things, but what are we getting for it? We really need to be thinking about what is the transportation of the future and not the transportation of the past. If this was 1920, do you want to be investing in steam engines or internal combustion engines? not steam engines so this is a time to think about the future and also to ask is it right to infringe upon people's rights as what is happening right now I think the people are going to be very angry about this and are very angry somebody should be If somebody wants to stay in their house, that's great. They should be allowed to stay in their house and they should not be compelled to leave. But to say that they cannot leave their house and they will be arrested if they do, this is fascist. This is not democratic. This is not freedom. Give people back their goddamn freedoms.

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

Thank you. Our next question comes from Emmanuel Rosner with Deutsche Bank. Please go ahead.

Hi, good evening. Question on Model Y. I was hoping you could elaborate a little bit more on the drivers of how the gross margin is already positive at such low volume. How much of it is a function of the criminality with the Model 3 What other factors should we think about? And what does that mean for the outlook for the eventual gross margin on Model Y? Dan?

Sure. A couple of thoughts there for Y. The first is it does carry a higher ASP. So on the revenue side, it carries a higher ASP than Model 3. And the deliveries that we started with were of the higher ASP versions of the cars. So we started with deliveries of performance initially. And so that helps create some of the margin. And that will come down with time as more variants are released and we have more of a steady state mix. But it's similar to the ASP trend that we had with Model 3 when we launched that product in Fremont two years ago. On the cost side, I think you hit on a couple of the buckets. The commonality is huge. It's very important. And in addition to that, manufacturing processes are very similar to Model 3 as well. And so we have experience with that, both with Model 3 in Fremont and then as well in Shanghai. And it helps to have an existing factory with existing workforce and knowledge here as well. So the ecosystem to support and launch the product is there. There remain a lot of opportunities to continue to take cost out of the car. The number of vehicles that we've built in the first quarter is quite limited relative to where we'll go.

It's good. We take costs out of the car and make the product better. Exactly. It's not make the product worse. Any pool can take costs out of a car and make it worse. We want to take costs out of the car, figure out how to make it lighter and simpler, and so we want the car to just incrementally improve as well as incrementally lower in cost. But, you know, for a five-seater Model Y, we expect, you know, marginal cost of that car to be comparable to the Model 3 once we have, you know, reached, say, about 10,000 or 20,000 units or something like that.

Hello?

Ladies and gentlemen, please stand by your conference will resume momentarily. Thank you. Speakers, you're back online.

Hi, sorry, we got disconnected for some reason. What was the question again?

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

The next question comes from Ben Callow with Baird. Please go ahead.

Hey, thank you very much. Just wondering about the cell strategy. In Reno, you have obviously integrated there, but you're buying cells, I think, in Shanghai and what we think in Germany. And so how are you looking at that going forward? And then could you just talk about Mr. Mizzuno and that board addition and kind of the process with adding him to the board? Thank you.

Sure. From a sales perspective, you know, with all the partners we've had historically and in the future, we're just looking for competitive technology and competitive pricing. I think we'll talk a little bit more about this at Battery Investor Day, like how we're approaching all of it. But, yeah, I mean, we don't have, like, one model we're restricting ourselves to pursue. We're just trying to find what's best for the products in the long run. And then another question about the board. Okay.

Sorry, we couldn't hear the second part of the question?

No, I was asking about Mr. Mizuno entering the board and kind of the process behind that and what he brings to the board.

Oh, I think we all need a hero.

And obviously, he brings tremendous amount of experience investing at the highest levels in the world and has done incredible work at the Japan Pension Fund, which is the largest fund of any kind in the world. And generally, at the conversations over the years, he's just showing incredible insight into how the global security markets work and what he thinks is where the error is for reform. It just seems like a strong philosophical underpinning about how to make the future better. And he shares that view regarding the environment and just a very sensible, smart person who brings luck to the board and I think is generally recognized as such by many people.

I guess linking in to the Panasonic relationship, maybe just, you know, how is that relationship going here, and is there any read-through on bringing it on to the board? Thank you.

No, I think this is set 92 with the past. I mean, I have a great relationship with the past. We meet regularly one on one and talk all the time. And, you know, so that that relationship is strong. And, you know, you'd bring more of a broader and a global strategic view to the board.

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

Our next question will come from Jean Munster with loop ventures. Please go ahead.

Congratulations on the progress. And you only talked about full autonomy by the end of the year. I would love for you to walk through the rollout strategy of the Tesla network app and how that's going to look prior to the robo taxi stage. Are you going to gradually take over human routes with autonomous capable routes over time? Or how do you see that playing out?

Well, it's pretty much going to play out as it has played out, which is we'll release more and more functionality. Before we release any functionality, it goes through extensive testing. Of course, we have a simulations team that has a very good simulation of the real world. So we run any code changes through battery tests and simulation. Then we have a global QA team, which I'm on, actually. I'm on the global QA team. And we test the releases in the real world, find out the differences between the real world and the simulation, which are very many because the world is very complex and weird. And then we release it to a small group of private data testers within the company. then to a larger beta audience, including people outside the company, then to early access, Tesla owners, and then finally a broader release. And so there are many stages that these things go through. So by the time something is going to wide release into the US, it has gone through all of those stages. And the software that's at the very early stage is much more advanced than what people are seeing. So, but it's just got to go through a very rigorous safety process. So, you know, essentially, we need to figure out, you know, get very good at complex intersections, get very good at complex turns in intersections, and, you know, things like busy moles in a parking lot or office park or special events and sporting events, that kind of thing, when those eventually come back. Those are extra hard cases. But it's all tracking very well. I feel like the Water Pallets Engineering team is, we just have an extremely talented group. and uh i'm deeply involved with the team um you know so we talk every week and meet every week when we can because now physical meetings difficult um so i have a quite a deep understanding where we are where we're headed and um i feel like we have tremendous amount of momentum and we'll have the functionality that's very cool full self-driving by the end of the year. Now, after that functionality is released, there's still another step, which is to improve the reliability of it once it's released. So you can have full self-driving supervised by the driver, and then we keep improving the reliability to the point where it no longer needs to be supervised by the driver, and we provide a vast body of data to regulators to show them that this was the case. And then presumably the regulators, depending on which jurisdiction it is, would give approval for fully autonomous cars that can drive with no human on board. Obviously, the regulatory approval process, that's difficult for us to predict with accuracy because it's out of our hands. But for the rest of it, I feel very good about where we are.

So to summarize what we want, we're going to get owners full autonomy, some level of that by the end of the year, and then a human-in-the-loop Tesla network app sometime in the first half of next year. Would that be the hope?

Do you mean like when can the car drive with no person on board?

With a person, initially a person to observe, would that be with the Tesla network app, would that be – early part of the year of 2021. Is that the hope?

If described as a hope, I would say that that's probably a fair description.

Okay. And then, you know, kind of take it to its end stage, the robo taxi stage, any high level thoughts, understand the regulatory is a massive unknown, but if you're going to put a guess on it, where would we, when we start seeing robo-taxis?

Well, I think it's quite likely, in my view, Dana could be wrong. As you've seen, we're ahead in some areas and we're behind in others. Because when I give a guess, I give the guess that I think is the likely midpoint, not the point with lots of margin. If this is normal distribution, I give you the 50th percentile, not the three-segment, you know, optimistic or pessimistic. So then that necessarily means at least half my predictions will be wrong and half will be right. Or they might be right, but offset by... you know, a few weeks to a few months, in some cases a few years. But I believe that everything I've ever said would come true, did come true, it may have come true late, but it did come true. So, you know, punctuality is not my strong suit, but I always come through in the end. So, you know, I think we could see in operation with the network fleet next year. It's been in some.

Thank you. And let's go to the last question, please.

Our last question will come from Pierre Ferru with Newstreet. Please go ahead.

Hey, thanks for taking my question. One on gross margin first, and your impressive performance in Q1. there are three moving parts, the tailwind from credits, of course, the Model Y ramping, even if it broke even, it probably took average gross margin down. And of course, you had like Fremont being closed, shut down the last week of the quarter. It probably was a sort of an extra cost. And so when I looked at how gross margin evolved sequentially, excluding these three moving parts, I felt like your auto gross margin could have been up like a couple of points So I wanted to check with you if that estimate would make sense, and then I would have a follow-up on energy storage.

Thank you.

The three things that you mentioned, I had a little bit of a hard time hearing the full question here because we're having a bit of network difficulty in the room. I'll do my best here. So when we look at margin, we do exclude credit, as you have, so I agree with that. Model Y ramping, bringing down overall gross margin, I agree with that as well. So it was lower than the overall average, and that will increase with time. And shutdown inefficiencies in both Shanghai and in Fremont also weighed on margin. And The Shanghai margin was below the average as well, even though it's increasing quickly and approaching Model 3, it still is below the average. And so I think the sentiment of your question was if you were to remove those factors, was there a sequential increase in the gross margin? I haven't specifically calculated that, but I think your intuition is right. We saw strength in gross margin across the board, as I mentioned, And in particular, S&X gross margins continue to improve despite slightly lower volumes there and higher fixed cost amortization. So there's good progress happening both on the ASB side and the cost reduction side for our products in production. And I think this also lends itself to the power of the gross profit contribution to the company once we get through these rampant efficiencies, we get Fremont up and running again, we increase capacity so we can spread out fixed costs, and continue to execute on cost reductions on our products. We feel very optimistic about that path going forward.

Thanks. And I had a quick follow-up on energy storage, if you can hear me well. I think, like, I can't remember, I think from the very first days I heard you on the call, you've always mentioned that demand for energy storage is always outstripping supply, and you have more orders than you can meet. And so I'm kind of thinking there should be an inflection point in that business at some point, and it's going to be driven by your ability to add much more manufacturing capacity, like battery manufacturing capacity. And at a high level, how are you thinking about that inflection point in terms of timeline?

In terms of timeline, I think what we've been doing with both our partners and internally is looking at how to reduce fundamentally the cost of investments in new cell capacity. Because when you look at a car, a vehicle product, there's a lot of things in the vehicle besides the cells. When you look at an energy storage product, it's really just the cells. And so to really grow the energy storage business It's all about sell investments. And so that's what we've been focused on. And I think, you know, not to give too much away, but that will be one of the things we address in Battery Investor Day is how we're focused on that. And when we have that in the place we want, it will be a lot easier to scale that business.

Thank you very much for all your great questions. Unfortunately, this is all the time we have today, and we'll speak to you again in three months' time. Thank you very much and have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.