Tesla (TSLA) Q4 2019 Earnings Call Transcript

Sherry: (00:01) Ladies and gentlemen, thank you for standing by, and welcome to Tesla's Q4 2019 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 one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker, Mr. Martin Viecha, Senior Director of Investor Relations. Please go ahead, sir. Martin Viecha: (00:38) Thank you Sherry. And good afternoon everyone. And welcome to Tesla's fourth quarter 2019 Q&A webcast. I'm joined today by Elon Musk, Zachary Kirkhorn and a number of other executives. Our Q4 results were announced at about 1:00 PM Pacific time in the update deck we published at the same link as these webcasts. 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 FTC. Martin Viecha: (01:15) During the question and answer portion of today's call, please limit yourself to one question and one followup. Please press star one now if you'd like to join the question queue. But before we jump into Q&A, Elon has some opening remarks. Elon. Elon Musk: (01:30) Thanks, Martin. Q4 was another strong quarter for the company. Deliveries reached over 112,000 vehicles in a single quarter. It's hard to think of a similar product with such strong demand that it can generate more than $20 billion in revenue with zero advertising spend. We do say that from time to time, and I think it's often overlooked, but to have the highest demand electric vehicle in the world with no advertising spend is, I think, quite remarkable and speaks to the nature of the product and the fact that the product itself is compelling enough to generate that demand without a bunch of advertising. Elon Musk: (02:13) At our Fremont factory, we were producing at a rate roughly the same as the NUMMI factory did in its record year of 2006. And obviously we expect to exceed that significantly this year. This greater production was achieved before we even started to produce the Model Y out of Fremont. So there's a lot of potential to go beyond that number. Elon Musk: (02:35) Well, the Shanghai factory, I'd like to say congratulations again to the team in Shanghai on launching Model 3 last quarter and achieving their first deliveries earlier this year. I'm really excited and optimistic about the potential for the Shanghai factory. I think it's going to be an incredible asset to the company. And we also broke ground on the Model Y factory in Shanghai. So a lot of good progress there. Elon Musk: (03:06) Regarding Model Y, it was only 10 months ago that we revealed the Model Y prototype, and now in January this year, we started producing Model Y in limited volumes already. This was thanks to a great effort of our engineering team. And we managed to achieve by far the highest energy efficiency of any electric SUV ever produced, at 4.1 miles per kilowatt hour, which means Model Y all-wheel drive got an EPA rating of 315 miles. This improvement is reflected on the configurator as of today. This is above what we previously stated by a pretty significant margin. And just with great acceleration and top speed, it's really just incredible specs all around. Elon Musk: (03:53) For the Cybertruck, a few months ago we revealed the Cybertruck. That went viral, and we've tried to build a product that is superior in every way without any preconceptions of how such a product should look. So it really just, from the standpoint of what's the most bad ass futuristic armored personnel carrier that kicks ass of any pickup truck, basically that's the goal. And we wanted it to look like something that just kind of came out of a sci-fi movie set from the future. Elon Musk: (04:31) And the demand has been incredible. I've never seen actually such a level of demand at this... we've never seen anything like it, basically. I think we'll make about as many as we can sell for many years. We'll sell as many as we can make. It's going to be pretty nuts. And I think actually the product is better than people realize even. They don't even have enough information to realize just the awesomeness of it. It's just great. Elon Musk: (05:13) And then stepping back, in 2018, from a financial standpoint, where free cashflow rate the breakeven. But in 2019, we managed to generate more than a billion dollars of free cashflow while building a factory in Shanghai in record time and while building parts of Model Y in production. So I think, first, to have this level of free cashflow while making massive investments in capacity, while developing new products, while improving the core engineering is a testament to the incredible performance of the Tesla team. And I'm just so proud to work with such a great team. Elon Musk: (05:51) I'd like to thank the whole Tesla team for their ongoing work on cost control, and that's what has allowed us to get to these compelling financial numbers while at the same time growing the company at an incredible pace. In conclusion, when I think of what we have in front of us the next couple of years, we've got Model Y. We've got Giga Berlin, Tesla Semi, Solarglass roof, Cybertruck, some very exciting improvements in battery technology, full self-driving. We've got the next-gen Roadster and a bunch of other products we'll come up with [inaudible 00:06:30] as well at the same time growing company at an incredible pace. Elon Musk: (06:37) In conclusion, when I think of what we have in front of us the next couple of years, we've got Model Y. We've got Giga Berlin, Tesla Semi, Solarglass roof, Cybertruck, some very exciting improvements in battery technology, full self-driving. We've got the next-gen Roadster and a bunch of other projects we'll come up with too. It's hard to think of another company that has a more exciting product and technology roadmap. Elon Musk: (07:04) So super fired up about where Tesla will be in the next 10 years. If you look back 10 years from today to 2010, we will produce approximately 1,000 times more cars in 2020 than we produced in 2010, 1,000. And we have also Solarglass and Solar Retrofit and Powerwall, Powerpack, all those other things too. So where will we be in 10 years? Very exciting to consider the prospect. Martin Viecha: (07:46) Thank you very much, Elon. And Zach has some opening remarks as well. Zachary Kirkhorn: (07:50) Yeah, thanks, Martin. This past year was truly transformational for Tesla, and I want to thank everyone who's been a part of making this happen. On 2019, a few key points I'd like to highlight. On demand, while we've mentioned this a few times, it's worth highlighting once again. Over the course of the year, we've transitioned entirely from generating Model 3 orders from a reservation backlog to generating new and organic demand. We've also seen a stabilization of Model 3 ASPs, even increasing slightly in Q4. And we've seen an increase in ASPs of FNF, after the launch of the longer range versions in Q2. Zachary Kirkhorn: (08:27) With respect to capacity expansion, we've greatly learned from the development and launch of Model 3 in Fremont and Reno. As a result, we've been able to bring new production capacity onboard faster and with less cost. This is evidenced by the launch of Model 3 in Shanghai, as well as Model Y in Fremont. Programs that were both launched in under one year. Zachary Kirkhorn: (08:48) Financially, we have demonstrated multiple quarters of strong cash generation, enabled through higher volumes, improvements to capital efficiency, progress on working capital management and continued improvement in our product and operational costs. And we were able to achieve positive gap net income in both Q3 and Q4 for many of the same reasons that enabled strong cash generation. Zachary Kirkhorn: (09:12) We've also made progress on recurring and software-based revenue with the implementation of premium connectivity and the beginning of upgrades available for purchase via the Tesla mobile app. Finally, on stock-based compensation, it increased sequentially by 82 million, driven almost entirely by an expense related to the next tranche of the CEO grant. This is a result of our improved expected financial performance of the company, which the CEO stock grant is tied to. Zachary Kirkhorn: (09:42) As we look ahead to 2020, this again will be an important year for the company. Our task ahead is to execute on the next phase of growth while managing cashflows to support that growth. On Model Y, we expect first deliveries in limited quantities later this quarter, and we'll ramp over subsequent quarters. As mentioned previously, we are forecasting higher gross margins on Model Y compared to the Model 3. Zachary Kirkhorn: (10:06) This year, for the Shanghai-built Model 3, we expect to achieve run rate production and delivery rates. In addition, we expect to have completed the majority of planned supply chain localization at the factory or in the region. This is one of the most important components to achieve lower production costs for the site. We are also seeing strong order rates for the locally built Model 3 and remained focused on continuing the production ramp and managing costs. We also anticipate significant progress on factory construction of the Shanghai and Berlin-built Model Y, which will result in continued increases in capital spending. Zachary Kirkhorn: (10:40) On operating expenses, I expect an increase over the course of the year to support our growing product pipeline and international footprint. However, op-ex growth should increase at a lower rate than top-line revenue. Overall, we believe this will set us up for our strongest annual financial performance yet, with sufficient forecasted cashflows to support investments related to our growth and further strengthening of our balance sheet. Zachary Kirkhorn: (11:05) For Q1, please keep in mind that the industry is always impacted by seasonality. Additionally, we are in the process of ramping two major products, Model 3 in Shanghai and Model Y in Fremont, which I expect will temporarily weigh on our margins. We are also in the early stages of understanding if and to what extent we may be temporarily impacted by the coronavirus. At this point, we're expecting a one to one-and-a-half week delay in the ramp of Shanghai built Model 3 due to a government required factory shutdown. This may slightly impact profitability for the quarter, but is limited, as the profit contribution from Model 3 Shanghai remains in the early stages. Zachary Kirkhorn: (11:45) We are also closely monitoring whether there'll be interruptions in the supply chain for cars built in Fremont. So far, we're not aware of anything material, but it's important to caveat that this is an evolving story. However, we have more than sufficient cash to continue our expansion plans while further strengthening the balance sheet. Thank you again for your support, and we will turn to questions. Martin Viecha: (12:06) Thank you. We are going to take the first questions from retail investors compiled by Say Technologies. So the first retail investor question is: Since solar is required for all new home constructions in California, do you have any substantial orders for Solarglass roofs from any of the large California home builders that you can share? What's the 2020 targets for the number of Solarglass roof installations in California? Elon Musk: (12:35) We are seeing, admittedly from a small base, exponential growth in demand and output for the Solarglass roof. So it's difficult to predict what that will be this year, except that the demand is very strong. And we are working also, not just through Tesla installers, but also through new home builders and through just the roofing industry in general, where there's in North America on the order of four million new roofs per year. So we see a lot of interest. Elon Musk: (13:13) So it's just a question of refining the installation process, getting lots of crews trained to do the installation. But over time, I would expect a significant percentage of new roofs to use Solarglass in one form or another. It's really going to be a choice of do you want a roof that is alive with power or dead without. I think people will want a live roof that generates power and looks good and lasts a long time, and it's the future we want. So it will be a significant product, but because it is a new and quite revolutionary product, and there's a lot of challenges to overcome. But they will be overcome, and this will be a major product line of Tesla. And the Buffalo factory is doing great. Martin Viecha: (14:15) Thank you. Now, second question from retail shareholders is: Will you release the Tesla ride-hailing network app before full autonomy and change the terms of Tesla Insurance to allow owners to be drivers on the network? If so, when will this happen? Might want to target California airports first, also a good place to add Superchargers. Elon Musk: (14:38) Sorry, that sounds like more question than one. Martin Viecha: (14:41) Yeah, it's a bit of a bundle, yeah. Elon Musk: (14:44) Well, I think it probably will make sense to enable car-sharing in advance of the giant robotaxi fleet because the car-sharing can be done before a full self- driving is approved by regulators. So it's probably something that we would enable before the full robotaxi is enabled. And it sounded like there were some other questions bundled in there. Martin Viecha: (15:15) Superchargers at airports. Elon Musk: (15:17) Oh, sure. Yeah, probably will have Superchargers in airports. Will have Superchargers wherever we see that there is a need for Superchargers. Zachary Kirkhorn: (15:25) And then on the insurance part of the question, it is our intent to allow people to put their cars into ride-sharing or the FSD network using Tesla Insurance. That's not currently the case, but by the time that this is available, it's our intent to get that ready. Martin Viecha: (15:41) Yeah, thank you. The next question from retail investors is: How many California owners are currently insured with Tesla Insurance? What's the target for Tesla Insurance in 2020? When will you start to significantly leverage the data you have from the fleet to lower the cost of your coverage? Will we get premium discount of certain percent? Elon Musk: (16:07) Yeah, I mean, go ahead, Zach. Zachary Kirkhorn: (16:09) Yeah, so Tesla Insurance is currently available in California. A couple of things that we're working on on this front, the first is to expand it to other locations. And we are preparing our processes to go through the regulatory processes in those location. We're also working on the processes to continue to adjust our rates in California, which also have to go through regulatory processes as insurance is quite heavily regulated. And that's where we're spending our time focusing on Tesla Insurance right now. There's a significant amount of innovation as we've discussed before in this space. Exactly getting to the intent of what the question here is, using our technology to reduce rates. And this will be rolled in over time. Martin Viecha: (16:58) The last part of the question was will there be a discount for using autopilot with our cars? Elon Musk: (17:02) Oh yeah, yeah, yeah. There will be. Zachary Kirkhorn: (17:06) The rate card for California Tesla Insurance already considers the safety features associated with autopilot. Elon Musk: (17:13) Right. But I think it would make sense for us to close the loop on higher use of autopilot fully reduces the insurance cost. It lowers the probability of injury. So I think insurance is going to be, I think, quite a major product of Tesla over time. The amount of money that people spend on car insurance is a remarkably big percentage of the cost of a car. You can lease a Model 3 right now for $400 a month, but a typical owner in California will be paying somewhere between 100 and $200 a month in insurance. So we're talking about something which is maybe a quarter to half of the cost of the lease of the car is insurance. Elon Musk: (18:06) And a lot of that insurance cost is just because the insurance companies don't have good information about the drivers. And that there's no good way to provide feedback where... it's a very poor feedback mechanism, not in terms of insurance rates versus the actual way that the car is being driven. Whereas we can do that in real time. It's a fundamental information advantage that insurance companies don't have. Martin Viecha: (18:40) Thank you. The next question is: You set expectations that you would be feature complete on FSD by the end of 2019. Can you please provide an update on when will we see this with end users? Where are you in retrofitting the FSD computer to older models? Elon Musk: (18:57) Well, I mean, to be precise, I said I was hoping we would be complete with FSD by the end of last year. We got pretty close. It's looking like we might be feature complete in a few months. Feature complete just means it has some chance of going from your home to work with no interventions. So it doesn't mean the features are working well. It means it has above zero chance. Elon Musk: (19:31) I think that's looking like maybe it's going to be a couple months from now. And what isn't obvious regarding autopilot and full self-driving is just how much work has been going into improving the foundational elements of autonomy. The core autopilots and Tesla autopilot software and AI team just is, I think, very strong and making great progress. Elon Musk: (20:01) ... very strong and making great progress. We're really only beginning to take full advantage of the autopilot hardware, the FSD hardware. I think the apparent progress as seen by consumers will seem to be extremely rapid, but actually what's really gone over my head it seems, like I said, is just having the foundational software be very strong, having a really strong foundation. Then a really fundamental thing is moving to video training. In terms of labeling, labeling with video and all eight cameras simultaneously, this is a really, I mean in terms of labeling efficiency, arguably like a three order of magnitude improvement in labeling efficiency. For those who know about this, it's extremely fundamental. We're making great progress on that. Martin Viecha: (21:11) Thank you. The last retail investor question comes from [Kendall 00:00:21:14]. It says, "Most retail investors seem to understand Tesla better than analysts and are risking a larger part of their own personal wealth on Tesla. Doesn't it make sense to take mostly questions on these earnings calls from us via [inaudible 00:01:29]? Do you even have to take answer questions from analysts? Elon Musk: (21:36) Well, I guess we don't have to. I do think that a lot of the retail investors actually have deeper and more accurate insights than many of the big institutional investors and so may have better insights than many of the analysts. It seems like if people really looked at some of the smart retail investor analysts and what some of the smaller retail investors predicted about the future of Tesla, you would probably get the highest accuracy and remarkable insight from some of those predictions. Martin Viecha: (22:18) Okay. Now let's switch to institutional shareholder questions. The number one question is, "You have spoken previously about Shanghai Giga being 65% lower CapEx per unit of capacity. Have you learned to do anything better or different from an OpEx perspective? If yes, what kind of impact might we expect on the longterm gross margin?" Elon Musk: (22:47) Sorry, go ahead. Go ahead. Drew: (22:47) Yeah, the Shanghai factory has been a quite remarkable cost experience across all line items of cogs for the Model 3 there. We have talked a lot about the capex per unit of capacity being lower, but you can basically run down the entire list of cogs between labor cost and material cost due to localization. It's opening up suppliers that would not have made economic sense from the States. Localizing the supply chain flows into inbound logistics and outbound logistics costs as well so we're not shipping cars from California over to China. Then that has a corresponding savings on our lower import related costs. There's a slide in the shareholder letter that shows the layout comparison between our Fremont facility here in California and also the Model 3 factory in China. The simplification in terms of the flow is pretty evident from that layout. That cascades itself into all sorts of savings for the operations of the facility. Drew: (23:53) If you add all of this up, our internal estimates are a pretty significant reduction in the cost of Model 3 in China relative to Fremont, but I think it's also important to keep in mind that the cost of the Standard Plus that we're selling out of Shanghai is also lower than that of the similar car coming out of Fremont, from a price perspective. I've said this on previous earnings calls, I think it's fair to expect the margin coming out of the Shanghai facility to match the same margin for the vehicle in Fremont. Elon Musk: (24:24) Yeah. I think there's a pretty big fundamental efficiency gain that Tesla has by just making cars, especially the affordable cars, the 3 and the Y, at least on the continent where the customers are. It kind of makes sense, but what we're doing or what happened during the past was really pretty silly in making cars in California and then shipping them halfway around the world to Asia and Europe. This created a lot of cost, because you got to ship those cars so you've got a lot of finished goods sitting on the water or waiting at the port or going through customs. You've got tariffs, transport. Then the factory complexity in California is very high because you've got different regulatory requirements in China, North America and Europe, sort of three different types of cars that are being built. It's very complex. Just having a factory in China, a factory in North America, a factory in Europe, just that alone is a massive improvement in our fundamental operating efficiency that I think may not be fully appreciated. Drew: (25:42) Also on working capital. Elon Musk: (25:43) Yeah, absolutely. Speaker 1: (25:44) We're reducing OpEx here too, not only in China. Martin Viecha: (25:50) The next question from institutional investors is, "Given the recent run in the share price, why not raise capital now and substantially accelerate the growth in production, i.e., build a Giga factory? It's an investment in Supercharger and customer service." Elon Musk: (26:04) Well, we're actually spending money as quickly as we can spend it sensibly. If there's any sensible way to spend money, we are spending it. There's no artificial hold back on expenditures. Anything that I see that looks like it's got good value for money, the answer is yes immediately. We're spending money, I think, efficiently and we're not artificially limiting our progress. Then despite all that, we are still generating positive cash. In light of that, it doesn't make sense to raise money because we expect to [inaudible 00:26:52]. Drew: (26:54) No, I completely agree with that. I think some of our learnings during the Model 3 launch period, where we grew too quickly and with too much complexity, and it held back our ability to continue to scale. Part of the journey that we've been on in 2019 is to unwind a series of unintentional bad processes that kind of accumulated in the company over time. That's kind of what contributes to the reduction in OpEx over the year as we get smarter about that. Now we've laid a good foundation, I think. I agree with Elon that we're not holding back on the growth. I mean, we have two vehicle products launching right now. That will consume much of the bandwidth of the company to stabilize those over the course of the year. Then looking into next year we have even more products launching, more factories. Elon Musk: (27:47) Right. Yeah. Drew: (27:49) We want to be smart about how we spend money and grow in a way that's sustainable so we don't fall victim to the mistakes I think we made a year and a half or so ago. Elon Musk: (28:01) Yeah, absolutely. Martin Viecha: (28:04) Okay. The next question we've already answered regarding autopilot timelines. The following question would be, "Can we please talk about the cost control and OpEx sustainability in terms of growth versus gross profit growth? How did we achieve the recent OpEx trends and how should we think about OpEx needs as we grow both vehicles and geographic workloads?" Drew: (28:29) Yeah, I commented briefly on this in my opening remarks. We did see an increase in operating expenses from Q3 to Q4, even excluding the portion of that attributed to stock based compensation. When you double click into that growth, it's supporting the Model Y program and also a Shanghai program as well. I think we, as a company, are now at the point where we've learned a lot on cost efficiency, as I've just mentioned, and we've unwound a number of the processes that were not in the right place, including automating the things that need to be automated. We'll continue on that journey, but I think we're at a point now where OpEx will start to tick up, at least if you look annually from 2019 to 2020, to support our international footprint and then the growth of the company. Our job is to grow that significantly slower than the pace of growth of revenue to improve the operating leverage, which we're very, very focused on. Martin Viecha: (29:29) Okay. The last question from investors is, "To sales of Model S and X have stayed flat for several quarters. The main reason is that they still use 18650 batteries. When will S and X use 2170 batteries? Manufacturing capacity of 18650 may be used for battery storage systems instead." Elon Musk: (29:50) Sure. Well, actually the core chemistry inside the 18650 cell has improved many times over the years. It's really just a form factor as opposed to a core technology. I think we're pretty happy with the energy content of the cell and the improvements in efficiency of the vehicle. We're rapidly approaching a 400 mile range for the Model S, for example. It won't be long before Model S has a 400 mile range. Drew, is there anything you want to add? Drew: (30:37) No, other than to say that the 18650 lines have been running smoothly for a really long time. In a world where cell supply is fueling growth, we're part of the fuel of growth. I don't see a reason to turn that cell supply off. Elon Musk: (30:56) Yeah. Actually, the Model S and X actually have more range than we are currently stating on the website. We just haven't gotten around to updating I guess, the EPA sort of [crosstalk 00:31:10] number, but the actual range of the Model S and X are above what the website says they are. Speaker 1: (31:17) That's true. Elon Musk: (31:17) Yeah. Speaker 1: (31:21) The existing cars. Elon Musk: (31:22) Huh? Speaker 1: (31:22) The existing cars. Elon Musk: (31:23) Yeah, the existing cars that are being made. Drew: (31:25) Actually been that way for [crosstalk 00:31:27]. Elon Musk: (31:30) Yeah, it must be somewhere in the 380s or something like that. [inaudible 00:31:35], yeah. Martin Viecha: (31:36) Thank you very much. [Sheree 00:00:31:38], let's go through the Q&A on the phone. Sheree: (31:41) Thank you. Again, ladies and gentlemen, to ask a question, please press star one. We ask that you please limit yourself to one question and one follow up. Our first question comes from Adam Jonas with Morgan Stanley. Adam Jonas: (31:54) Hi, everybody. Actually I agree, I think the retail questions were excellent actually. Elon, do you see potential for Tesla vehicles to be fitted with user terminals that are compatible with the Starlink constellation in the near or medium term future? Elon Musk: (32:15) Well, it's certainly something that could be happening in coming years. There's no plans for it this year. The focus of Starlink is really for high bandwidth, low latency connectivity for homes and businesses and I guess aircraft and boats and that kind of thing, but the antenna for that high bandwidth, low latency thing is sort of about the size of medium pizza, which you could put on a car, but I think is more bandwidth than you would really need. I mean, technically, you could buy one and just stick it on the car. Yeah, it'll work. I think it's a great antenna. Adam Jonas: (33:00) Maybe just as a follow up for my follow up, how would, assuming that we get the antenna form factor and cost down to a point where that could be integrated into the roof of a car, for example, cost-effectively and aerodynamically, et cetera, how would compatibility with a Starlink architecture theoretically improve the Tesla customer experience or the capability of the network? Elon Musk: (33:27) Well, I think actually it's most possible we'll just use the cellular connectivity, just use 5G would be the recommendation, certainly in like any cities or something like that, but if you're out in the countryside and there's not good cell connectivity, then maybe you could connect with the Starlink antenna. You don't need to like have like gigabit level connectivity. Probably like 20, 30 megabits is probably fine and then you can have a much smaller antenna. Yeah, I guess it could be good for making sure there's connectivity outside of major cities and that kind of thing, but I mean, that's sort of, I'd say, relatively obtuse. I'm not thinking about it very much, to be honest. Martin Viecha: (34:13) Thank you. Let's go to the next question. Sheree: (34:15) Thank you. Our next question comes from Dan [Gowns 00:34:18] with Wolf Research. Dan Gowns: (34:20) Hey, good afternoon. Thanks. I'm hoping you could give us some guidance on what CapEx is going to be this year. As I look to model out the business longterm, is there a rule of thumb that we can use for capital expenditures per unit of production capacity or some sort of rule of thumb like that? Elon Musk: (34:51) I don't think we want to say what our CapEx is going to be this year, not necessarily, except to say like, as I said earlier, we're spending money as fast as we can spend money in sensible ways. It's definitely not artificially limited. We will spend a lot of money this year, for sure. The challenge comes in like finding efficient ways to actually deploy the capital, but that's the harder part than sort of deciding on a CapEx number really. Speaker 1: (35:28) I think we always find ways to become more CapEx efficient per unit of capacity. Elon Musk: (35:34) Yes, exactly. Yes. Speaker 1: (35:34) We challenge the teams to always become more efficient. We see a reduction per unit in term of CapEx. Elon Musk: (35:44) Absolutely. Drew: (35:46) We just don't have the right metric. Elon Musk: (35:47) Yeah. Yeah. I think that there's so much [inaudible 00:35:52] that the core technology is improving radically that maybe you wouldn't necessarily notice as an end customer, or some of them where you'd notice, some of them you wouldn't, but it's just there are these things that have a big effect on the efficiency of the company, like our total applications team that kind of builds the Tesla internal operating system and approves the sort of core automation of the company. That makes a big difference to our productivity, but you wouldn't necessarily ... You would see it effectively in healthier financials, but you wouldn't necessarily notice it as like an end customer. Dan Gowns: (36:36) Okay. Got it. Maybe I could follow up. I mean, your kind of operating cashflow EBITDA is annualizing at four and a half billion right now. As I look out to the future, I'm kind of guessing that that could fund somewhere around 200 to 250,000 units of capacity a year, which would be maybe a 30% CAGR over 5 years. I mean, is that something that's feasible for you guys to execute on on a consistent basis, a level of capacity building that large? Drew: (37:16) Yeah, I think- Elon Musk: (37:17) [inaudible 00:37:17] for more than 30% percent, yeah. Drew: (37:21) Yeah. I think the math ... I'm not sure the math that you've done, but I think our eternal plans are for faster. Just back on your first question, we will have additional detail on CapEx in the 10K, but back to the growth rate. I mean, one thing to keep in mind is that the Shanghai facility, we do have a loan facility in place to support that growth, so that helps. Then as our production volumes increase, that generates more cash from the business as well that allows us to continue to fund additional factories. I wouldn't necessarily view it as limited as you described it. Elon Musk: (38:01) Yeah, I think a few years ago I said I ... Yeah, I don't know when it was, but years ago I just said my estimate is that Tesla would grow at an average rate of in excess of 50%. My soul holds that belief. Martin Viecha: (38:22) Thank you. Let's go to the next question. Sheree: (38:23) Our next question comes from Gene Munster with Loup Ventures. Gene Munster: (38:29) Good afternoon and congratulations on the progress. First question related to Cybertruck, you mentioned you'll sell as many as you can make. Can you remind me how many of you think you can make and any thoughts on the cost of production for making those Cybertrucks? Elon Musk: (38:49) Yeah, I think we don't comment on those detailed numbers, except the demand is just far more than we could reasonably make in the space of, I don't know, three or four years, something like that. The thing we're going to be really focused on is increasing the battery production capacity, because that's very fundamental, because if you don't improve battery production capacity, then you end up just shifting [inaudible 00:39:19] from one part to another, and you haven't actually produced more electric vehicles. That's probably the reason why we have not, for example, really accelerated production of the Tesla Semi because it does use a lot of cells. Unless we've got a lot of battery cells available, then say like accelerating production of the Tesla Semi would then necessarily mean making fewer Model 3 or Model Y cars. We've got to really make sure we get a very steep ramp in that battery production and continue to improve the cost per kilowatt hour for the batteries. This is very- Elon Musk: (40:03) Cost per kilowatt-hour for the batteries. This is very fundamental and extremely difficult. So there we're going to do kind of a battery day, just to kind of explain more about this and what our plans are. I think, probably, it's going to make sense to do that after the end of this quarter because I think this is going to be kind of an intense end of quarter as it was last quarter. So you know, tentatively, sort of in the April timeframe, what we'll do is do a battery day and kind of go through what the challenges are, you know? How do you get from here to, I don't know, a couple thousand gigawatt hours a year or something. Speaker 3: (40:48) Great. I'll look forward to that battery day. You also mentioned in your prepared comments about other products that may come up, and the only vehicle not announced for master plan part two is a high passenger-density vehicle. Any light that you can give us regarding that project? Elon Musk: (41:06) Yeah. Going back to what I just said, we've got to improve the total battery capacity. Otherwise, we add complexity, but we do not improve the number of vehicles on the road. Will we do some sort of high capacity vehicle at some point? Probably, but we need to make sure we've got the batteries to make cars that we've already got, already on our plate. Elon Musk: (41:36) And it's just generally true... I've seen some sensible comments by our ARK Invest, pointing out that, really, people do prefer to drive in their cars mostly by themselves. I mean, the average number of occupants in a car, I think, is like 1.2? Maybe with autonomy, maybe it'll go to 1.4. Maybe, but I'm not sure if it even goes there. Elon Musk: (42:09) So will it make sense for us to do sort of a minivan or sort of Sprinter-like van at some point? Probably, but, like I said, we've got to solve this battery... We've got to scale battery production to crazy levels that people cannot even fathom today. That's the real problem. Speaker 3: (42:33) Thank you. Let's go to the next question, please. Speaker 2: (42:35) The next question comes from John Sager with Evercore ISI. John Sager: (42:40) Hey, guys, thanks for taking my call. I want to talk about the differences between the Model 3 and the Model Y, beyond the sort of 10% rule of thumb just around cargo and size. Are there other features that are going to differentiate the two models? And then, as a follow onto that, you've talked in the past about how [inaudible 00:43:00] sales grew with the introduction of Model X. So are you planning on setting up your production facilities to align with that thesis, that essentially Model 3 sales will expand alongside the introduction of Model Y? Elon Musk: (43:18) We're not quite sure what's going to happen, but it is true that the instruction Model X actually increased Model S sales, because people would come in, they'd look at the Model X, and they're like, " Okay, I'd prefer the sedan." And we're worried that X sales would cause S sales to drop. They actually closed the increase. So from my standpoint, I... We're not too worried about demand, we're worried about production. Just make sure we get that production ramp going, and reach volume production as soon as possible with the Model Y. And talk to the... [inaudible 00:43:58] predict what that... The exponential part of the S-curve of production, the production pretty much always follows this S-curve, or it's kind of a herky-jerky S-curve. Elon Musk: (44:12) And you can use it to predict what it's going to be like in the beginning because it's slow, and it's used to predict what it's going to be like at the end. But that intermediate portion, the S-curve is very difficult to predict. So that involves a massive amount of hard work and just reacting fast to issues that arise. Yeah, I think we're just going to go as fast as we can with the Model Y and make sure it's a great product. Elon Musk: (44:40) I think there are some things that will differentiate it, but that's not something we're going to talk about in this call. I think when people do a tear down of the Model Y, I think they'll be impressed about some of the things they see. Drew: (44:54) And just to add to that, I think it's important to keep the Model Y launch in context of the next 18 to 24 months. What we're working on here between Berlin and Shanghai and Fremont is to have 3 and Y locally produced in all locations, and so Model 3 is expanding as Model Y is expanding. There may be ups and downs in various factories as we get to the journey of having these products on all the major continents. Elon Musk: (45:20) Yeah. Speaker 4: (45:21) Also, the rule of thumb of 10%, I think you need to see it. When you see the car, you'll realize that it's not just a 10% different car. It's not just ... There's more change happening to the customer's perspective, as well. [crosstalk 00:45:37] Speaker 3: (45:41) Thank you. Let's go to the next question, please. Speaker 2: (45:43) Thank you. Our next question comes from Colin Rush with Oppenheimer. Colin Rush: (45:47) Thanks so much, guys. Can you speak to the pricing strategy in light of the China price reductions as well as the mission to increase UVA adoption? Is there a target for gross profit or operate profit on a per vehicle basis that we should be thinking about, or how should we really frame that for ourselves? Elon Musk: (46:05) Yeah, I mean we're trying to make the cars as affordable as possible, as fast as possible, while maintaining reasonable... While still being at least a little bit profitable, and growing the company like crazy and having good free cash flow and accumulating a cash balance. Anything you want to... Drew: (46:25) No, I think that's very fair. Elon Musk: (46:27) Yeah. Drew: (46:27) I mean, our order rate supports the pricing that we have right now. We're working very hard to reduce costs and expand production because it made me feel, from the data, it's pretty clear that there's a lot of interest in our products. And so what we're working on is to increase production, increase of availability of the products with time. And the price reduction in China... Kind of the first step towards this global localization, more accessible price, and we'll continue to work on cost reductions in China as we do in Fremont and grow production. Elon Musk: (46:59) Yeah, I mean, the thing that's really going to, probably just have a profound effect on our financials, is I guess high volume and high margin, obviously. And that high margin part comes from autonomy. So do people buy the full self-driving package or not, and do they buy it worldwide or only in certain places? For example, our autonomy is not as good in China as it is in the U.S., so fewer people, or a very small percentage of people, buy the FSD package in China. But as we fix that, then we'll see a much higher percentage of people buying it. And as we get closer to full self-driving, that's just going to become more and more compelling. So that's, from a financial standpoint, that's the real mind blowing situation is high volume, high margin, because of autonomy. Colin Rush: (47:47) Okay. And then, just shorter term, there's significant discussion in the industry around moving to higher voltage on the powertrain and then some challenges around the supply chain's preparedness to support that. Separate from the battery pack, since we'll talk about that in a couple of months, can you speak to the areas of focus on powertrain technology-driven cost reduction over the next 12 to 24 months that we should be thinking about? Elon Musk: (48:09) Well, our powertrain is pretty damn good. I mean it's way better than anything else out there by a country mile. It's worth noting, for example, that the Model S has a 100-kilowatt-hour pack. The Taycan has a what, like 95-kilowatt-hour pack. The Model S is steadily approaching 400 miles of range. The Taycan has 200 miles of range. So we must be using that energy pretty efficiently, and the powertrain is a big part of that. Speaker 3: (48:41) I would just say the focus is on costs on the powertrain. One more thing about technology innovations, it's how do we continue to drive the cost down? Elon Musk: (48:49) Yeah. Speaker 3: (48:50) And that's through voltages. Maybe one angle, but there are certainly others that just enable more power density and lower cost. Elon Musk: (48:59) Upside? Powertrain is mind blowing, I think. Yeah. Elon Musk: (49:07) Coming out later this year, end of the year probably, that's our goal. Get the powertrain out, end of the year, and then it's going to be like, "This is like alien technology." It's insane. Speaker 3: (49:19) It's all about that. Elon Musk: (49:20) I didn't even think we could do... Yeah, I mean honestly I thought it was no way. But it's kick ass. It's engineering team. Just tells a little about hardcore engineering. Speaker 3: (49:31) Great. Let's go to the next question please. Speaker 2: (49:33) Our next question comes from Emmanuel Rosner with Deutsche Bank. Emmanuel Rosner: (49:38) Hi, good evening, everybody. So, in your slide deck you had the comments around average selling price being stable or thereabouts in 2020. Can you maybe walk through some of the puts and takes [inaudible 00:49:53] the metric evolve? Obviously you have the Model Y which probably would have initial higher pricing, and then, but the China Model 3's at a lower price. So, I guess, what are the puts and takes for what you would see as sort of like stability [inaudible 00:50:08] in 2020? Elon Musk: (50:11) [crosstalk 00:50:11] Yeah, but we don't really ever comment on prices and stuff. I think we'll adjust according to what the demand looks like. I mean, right now, it looks pretty good. Maybe that'll change, who knows? Yeah. Speaker 3: (50:33) But I think the way you described it is fair. So I mean, relative to the current Model 3, China Model 3 pricing is slightly lower, and our Model Y pricing is public on the website. So you can see that it's clearly slightly higher than what Model 3 is out of Fremont. How the mix of those three products, and that's out over the course of the year, we'll see. But I think it's probably fair at the moment to assume the mix of those stays fairly stable in terms of ASP when you average them together. Elon Musk: (51:03) Yeah. I mean, the affordability of our car in China improved radically because of tariffs mostly going away, which is tax exemption, local parts supply. Not having to spend a bunch of money to transport it over the ocean. So the affordability was night and day for our car in China. Speaker 3: (51:27) Thank you. Let's go to the next question, please. Speaker 2: (51:29) Thank you. Our next question comes from Dan Ledy with Credit Suisse. Dan Ledy: (51:34) Hi, good evening. Thank you for taking the questions. Just want to follow up on the question on capital raise. So given the cheaper cost of capital, and this is a real competitive advantage for others, why wouldn't it make sense to raise capital to either pay down debt or to pursue acquisitions? Especially bolt-ons that could help you accelerate capabilities in autonomous or battery technology. Elon Musk: (51:59) All right. If you know of any acquisitions, we'd love to hear about them. Yeah, sure. Sounds great. Who should we acquire? Dan Ledy: (52:08) Well, given the importance of autonomous, I imagine that this is an area that you would want to accelerate if you view it as a crucial competitive advantage. Elon Musk: (52:19) We're not aware of anyone that we'd want to acquire. Dan Ledy: (52:23) And debt paydown? Elon Musk: (52:28) Letting the company to pay down debt doesn't sound like a wise move. Dan Ledy: (52:33) Okay. Yeah. Speaker 3: (52:34) I think the broader... There's been a couple of versions of this question over the course of the call, and I think what we're saying more broadly is that, as we look forward on the cash generation from the business relative to what our plans are, we are not constrained. Elon Musk: (52:49) Yeah. We're going to pay down the debt, just as time goes by, and we paid down half a billion dollars worth of debt last quarter. So we'll just keep steadily paying it down, and yeah. So... Elon Musk: (53:05) But yeah, I don't think we have anything more to say on that front, really. Speaker 3: (53:18) Okay. Thank you. Let's go to the next question, please. Speaker 2: (53:20) Thank you. Our next question comes from Pierre Farrago with New Street Research. Pierre Farrago: (53:27) Hey, thank you so much for taking my question. I wanted to come back on batteries and if I look at the end of this year, you should have [inaudible 00:53:36] and then you have your [inaudible 00:53:47] It means you need plenty north of 16 gigawatt-hour of battery production capacity. So where do you stand now and how do you get there? And then it [inaudible 00:53:58] like your competitors or groups who would like to compete, because you seem to be struggling to grow a battery capacity. So if you can just take us through what you're doing differently. Why you have confidence you can do that if it looks like nobody has done. Elon Musk: (54:18) Well, I guess a lot of people sort of made fun of us for not being able to grow both cars and both capacity and it's like now it turns out actually even the pros have trouble with it. You know, it's pretty hard. So you know, but the fact is we've already demonstrated massive growth and cell production capacity at our Gigafactory in Nevada, and you have to go from the cells to the modules to the pack. So they've started at cell capacity but also module and impact capacity. So we've just gotten pretty good at that, and it worked well with [inaudible 00:55:03] like Panasonic how's our relationship has been, it's been excellent. They've been a great partner with us for many years. We've added some additional partners at a smaller scale. Elon Musk: (55:15) We are with LG and CATL, and I will have more to talk about the Sindh detail on the battery day. Like I said, probably April. We've got a very compelling strategy. I mean, we are super deep on cell, and cell through battery. So. So module battery. [inaudible 00:55:40] anything you want to add to that? Speaker 3: (55:42) Thanks, but you've said it all. Elon Musk: (55:43) We are super deep. Rabbit holes. That rabbit hole goes down pretty far seven days a week working out its own days, weekend after production. Man, do we know a lot about batteries. Geez. Speaker 3: (56:00) I think I can see that. The only thing that I would add is, you know we, we do have a decade plus of experience of not just what a cell should be, but how to integrate it into the product and that's really helped. Elon Musk: (56:13) Yeah, absolutely. And how to manage those, the cell and the module and the battery and through different weather conditions and different environmental and different charge regimes and wow, we really know a lot about batteries. Yeah. The next level. Pierre Farrago: (56:30) Yeah. Okay. Thanks. Maybe a quick, [inaudible 00:56:37] for you, you guys arrived. Can you give us a sense of the impact of the rent of Shanghai on your [inaudible 00:56:43]? Speaker 3: (56:46) yeah, we were negative stress margin on the products that we built in Q4, but the team in China, I think, did a great job managing costs during the launch, and so there was a slight drag associated with it but not terribly significant. Drew: (57:03) Okay, and let's go through the last question please. Speaker 3: (57:06) Thank you. Our last question will come from Joseph Osha with JMP Securities. Joseph Osha: (57:15) Further to the conversation around the cell technology... I was just wondering if you can comment on what the plans are for the Maxwell technology that you acquired, either as a capacitor or dry cell or what have you. Thanks. Elon Musk: (57:29) Well, like I said, we're going to talk about this on battery day, which is probably April, and then a lot of these questions will be answered. I think it's going to be a very compelling story that we have to present. I think it's going to actually blow people's minds. It blows my mind and, you know, I know it. So it's going to be pretty cool. Speaker 3: (57:50) Maxwell's... Maxwell, that ultra cap technology is kind of part of the plan. Elon Musk: (57:57) It's an important piece of the puzzle. Yes. I think some of this, those sort of retail investors have managed to put together several pieces of the puzzle. They seem to have the most insight. Joseph Osha: (58:11) I shall have to read the blogs more. Thank you. Elon Musk: (58:13) All right, you're welcome. Speaker 3: (58:16) Thank you very much for everyone, for all of your good questions, and we will speak to you in another three months. Thank you. Elon Musk: (58:23) Thank you. Drew: (58:23) Thank you. Speaker 2: (58:24) Well, ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.