Tesla, Inc.

Good afternoon, everyone, and welcome to Tesla's third quarter 2022 Q&A webcast. My name is Martin Vieca, VP of Investor Relations, and I'm joined today by Elon Musk, Zachary Kirkhorn, and a number of other executives. Our Q3 results were announced at about 3 p.m. Central Time in the update that we published at the same link as this webcast. During the 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 Q&A session portion of today's call, please limit yourself to one question and one follow-up. Please use the raise hand button to join the question queue. But before we jump into Q&A, Elon has some opening remarks. Elon? Thank you, Martin.

So just to do a Q3 recap, Q3 was another record quarter on many levels. We had our industry-leading operating margin reach 17%, and our free cash flow surpassed $3 billion in Q3 and approached $9 billion in the past 12 months. As our factories ramp, we're looking forward to a record-breaking Q4. So it really, you know, Knock on wood, it looks like we'll have an epic end of year. So Q4 is looking extremely good. On the production ramp, Giga Berlin achieved another milestone of 2,000 cars made in a week with very good quality and is ramping rapidly. Giga Austin or Giga Texas should reach this milestone very soon. And In fact, just yesterday, if you extrapolate yesterday's hold rate, it would be 2,000. Our production of 4680 cells has tripled in Q3 compared to the previous quarter. We are finally gaining rapid traction on the 4680 cell. Its output is growing rapidly and we expect it to start incorporating cars and having it be a significant portion of our production here in Texas in the coming months. We also have our second generation of manufacturing equipment for 4680 sales in Texas, which continues to show great progress along with our original pilot line in Fremont. The Fremont factory team once again reached record production in Q3. and we intend to keep raising production in Fremont. Regarding autopilot, at the end of September, we hosted our second AI Day and showed the first prototype of our Optimus robot, the latest updates on our Dojo training computer, and a wide range of improvements of full self-driving software. Our vehicles have now driven nearly 60 miles in full self-driving beta mode, and the sound of it continues to grow exponentially. Our goal with that AI day was recruiting, and we've seen a massive influx of world-class artificial intelligence engineer and scientist resumes. So it generated tremendous amount of interest from some of the best AI researchers in the world. I can't emphasize the importance of this enough. because I think it finally has become clear to the smartest AI technologists in the world that Tesla is among the very best. So at this quarter, we expect to go to a wide release of full self-driving beta in North America. So anyone who has ordered full self-driving will have access to the FSD beta program this year, probably about a month from now. And then obviously anyone who buys a car and purchases a full self-driving option will immediately have that available to them. So the safety that we're seeing when the car is in FSD mode is actually significantly greater than the safety we're seeing when it is not. which is a key threshold for going to a wide beta. Let's see, with respect to demand, we've got a lot of questions about demand in recent weeks. I can't emphasize enough. We have excellent demand for Q4, and we expect to sell every car that we make for as far into the future as we can see. So the factories are running at full speed. and we're delivering every car we make and keeping operating margins strong. So we're still a very small percentage of the total vehicles in the road, other 2 billion cars and trucks in the road, but we only have about 3.5 million. So we've got a long way to go to even reach 1% of the global fleet. Let's see. Based on my... based on many things, but certainly questions I get on Twitter about buybacks, and I think everyone of our board members has gotten questions about buybacks. We've debated the buyback idea extensively at board level. The board generally thinks that it makes sense to do a buyback, but we want to work through the the right process to do a buyback. But it is certainly possible for us to do a buyback on the order of $5 to $10 billion. Even in the downside scenario of next year, even if next year is a very difficult year, we still have the ability to do a $5 to $10 billion buyback. This is obviously pending board review and approval. So it's likely that we'll do some meaningful buyback. So in conclusion, while the market themes revolve around the short term, it's very important to focus on the long term. I can't emphasize this enough with investors, and I think long-time investors obviously recognize this with Tesla. You have your sort of local ups and downs. But long-term trend has been extremely good. And several years ago, I said, I think on an earnings call, that I thought it was possible for Tesla to be worth more than Apple, which was then the highest stock cap company, I think, on the market. And Apple at the time, I think, was around $700 billion. And I said it required incredible executions at least some luck and we didn't even indeed achieve that because they went back our past uh apple's market kept time and um and now i'm of the opinion that we can far exceed apple's current market cat in fact i see a potential path which has to be worth more than apple and saudi aramco combined so now that doesn't mean it will happen or that will be easy in fact it will be very difficult to require a lot of work some very creative new products um madness expansion um and always some luck But for the first time, I am seeing, I see a way for Tesla to be, let's say, roughly twice the value of Saudi Aramco. And I think that's, I haven't quite seen that yet. I mean, this is the first time I've seen that potential. I mean, we have an incredible product portfolio. I think we've got the most exciting product portfolio of any company on Earth, some of which you've heard about, some of which you haven't. We're in the final lap for Cybertruck. We're building the Cybertruck line here at Giga Texas, Austin. And making a lot of progress in the Robotaxi platform design. And then with respect to batteries, we're moving as fast as possible to have to achieve 1,000 megawatt hours a year production capacity in the United States. vertically integrated. So anode, cathode, lithium refining, we're moving at a top speed to do that. So I think it's an incredibly exciting future and really an unprecedented future. But none of this would be possible without the incredible team that we have here at Tesla. So I'd like to give a huge shout-out to all of our factory employees, engineers, executives, and the whole Tesla team. You guys rock. You're the ones making it happen. Thank you. Thank you, everyone. Thank you very much.

And Zach, as I'm offering remarks as well. Yeah, thanks, Martin. Just to continue on Elon's theme, I just want to thank and congratulate the Tesla team for achieving record vehicle deliveries, production, and storage deployments in the third quarter. On automotive profitability, our gap operating margin was 17.2% with automotive gross margin at 27.9%. Operating margin is one of our best yet with improvements in operating leverage. However, Austin and Berlin ramp costs weighed on our margins, particularly if you compare it to Q1. Removing regulatory credits and Austin and Berlin, our operating margins would have been our strongest yet, and auto gross margin would have been nearly 30%. Note that while small and growing, each car we build in Austin and Berlin is contributing positively to profitability. We also continue to experience margin headwinds associated with macroeconomic conditions, as we've discussed at length on prior calls. In particular, raw materials, logistics, and foreign exchange was a big part of this past quarter. On energy profitability, we achieved our strongest gross profit yet for this business, driven primarily by record volumes of our mega pack and firewall products. Our free cash flows were also a record, despite an increase in cars in transit at the end of the quarter, which has a negative impact on working capital. Specifically on cars in transit, as noted in our press release on October 2nd, we've started to experience limits on outbound logistics capacity, which we didn't anticipate. This issue is particularly present for ships from Shanghai to Europe and local trucking within certain parts of the U.S. and Europe. Our historical operating pattern of batch building by delivery region leads to extreme concentrations of outbound logistics needs in the final weeks of each quarter. Just to put this in perspective, roughly two-thirds of our Q3 deliveries occurred in September and one-third in the final two weeks. As a result, we've begun to smooth regional builds throughout the quarter to reduce our peak needs for outbound logistics. We expect this to simplify our operations, reduce costs, and improve the experience of our customers. As we look ahead, our plans show that we're on track for the 50% annual growth in production this year. although we are tracking supply chain risks which are beyond our control. On the delivery side, we do expect to be just under 50% growth due to an increase in the cars in transit at the end of the year, as noted just above. This means that, again, you should expect a gap between production and deliveries in Q4, and those cars in transit will be delivered shortly to their customers upon arrival to their destination in Q1. Austin and Berlin ramp costs will continue to weigh on margins, although we expect the impact to be less than what we saw in Q3. And as Elon mentioned, we are continuing to build as many cars as possible while also maintaining strong operating margins. Thank you. Thank you very much.