Tesla (TSLA) Q1 2020 Earnings Call Transcript

Sharon: (00:00) 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 *1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press *0. I would now like to hand the conference over to your speaker Mr. Martin Viecha, Senior Director for Investor Relations. Please go ahead, sir. Martin Viecha: (00:36) Thank you, Sharon, and good afternoon everyone, and welcome to the 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 1:00 PM Pacific time in the update that 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 for the SEC. During the question and answer portion of today's call, please limit yourself to one question and one follow up. Please press *1 now if you would like to join the question queue. Before we jump into Q&A, Elon has some opening remarks. Elon? Elon Musk: (01:27) Thank you. So Q1 ended up being a strong quarter despite many challenges in the final few weeks. This is the first time we have 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 wrapping two 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 wise in the first quarter than Model 3 in Fremont in the first two quarters. Thus far, and Model Y ramp has been even faster than the Giga Shanghai ramp in Q1. More surprisingly, in other words, we're 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. Elon Musk: (02:29) 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 full stop driving package just last week. Our cars will now automatically stop at each stop sign or traffic light 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. Elon Musk: (03:07) We are collecting data from over a million intersections every month at this point. This number will grow exponentially as more people get the updates 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 annual net. Essentially, the driver when driving and taking action is effectively labeling reality as they drive and making the neural net better and better. I think this is an advantage that no one else has and we're quite literally orders of magnitude more than everyone else combined. I think this is difficult to fully appreciate. It's the reason, I have to say, 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're searching 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. Elon Musk: (04:12) So all those confirmations are creating a neural net and soon cars will be able to drive through an intersection without a confirmation as well as to make turns, and 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. We can almost do this already with the leading edge alpha builds that are driving the car. Elon Musk: (04:57) So let's see, on another technology front, or 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. It should be said that actually the real Model X range is 400 miles. But when we did the last EPA test, unfortunately the 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 had a 391 on the test. As soon as the EPA reopens for testing, we'll redo the test and we're actually in the 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 makes a Tesla special. For model Y, we introduced the revolutionary two piece rear underwater casting, that we're going to making a single piece casting a later this year. Meaning essentially, the rear third of the body is cast as a single piece, which no casting of the 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 the vehicle's structural engineering and manufacturing. I'm very excited about this approach, as it allows us to reduce the weight, the cost and improve NVH. It's better in every way, essentially. Elon Musk: (07:06) For the model I 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, probably slightly better than, I guess, the Model 3, 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 that this product will be our best selling product ever. Elon Musk: (07:55) So in conclusion, and just looking at looking forward, I guess this is a forward looking statement. We are absolutely continuing our model wide 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, but you can count on our products will be 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 at a capacity of well over a million units a year. So there's a [inaudible 00:08:59] to look forward to, and we can't wait to tell you what's going to happen. Thank you. Martin Viecha: (09:06) Thank you. And now to Zach's opening remarks. Zachary Kirkhorn: (09:08) 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 Ellen 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 Model 3 per our roadmap, which will positively impact ASPs in China. Zachary Kirkhorn: (10:06) On order rates, we did not experience much of an impact related to the exploration 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 growth margin, excluding the impact of regulatory credits remain 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 car makers, 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 it did not contribute to cashing Q1 and it's reflected in the accounts receivable on the balance sheet. Zachary Kirkhorn: (11:14) 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 longterm plans and technology roadmap. We are taking the near term actions that are 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. Zachary Kirkhorn: (12:06) 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 cashflows 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 and 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. Zachary Kirkhorn: (13:03) The Tesla team has done a great job here. We've also taken actions to eliminate or reduce noncritical expenses and optional investments while continuing to drive efficiencies throughout the business. Overall, we've modeled many scenarios into 2021 and remained comfortable that we have sufficient liquidity to proceed fully with our most important longterm 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. Martin Viecha: (13:48) Thank you very much. So we'll take the first questions from institutional investors compiled by safe technologies. The first question from an institutional investor is, "Most Tesla owners have yet to purchase or experience FSD, despite most vehicles having old unnecessary hardware, what levers could you pull to accelerate the adoption and deepen your data advantage? For example, could you consider offering FSD as a premium subscription?" Elon Musk: (14:17) I think we will offer full stop 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, as in our view, buying FSD is an investment in the future and we are confident that is an investment that will pay off to the consumer, to the benefit of the consumer, and in my opinion, buying the FSD option is something people will not regret doing. Zachary Kirkhorn: (14:56) I agree. And financially, rolling the upfront purchase of the FSD option into a loan in the vehicle or a lease is- Zachary Kirkhorn: (15:03) ... 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. Elon Musk: (15:09) Yeah. Zachary Kirkhorn: (15:10) We do understand that some customers who have ownership or have leased their vehicles did not purchase that option upfront, and so this will enable those customers to spread out the cost of ownership of FSD or subscription at the time. Elon Musk: (15:24) Yeah, absolutely. I should mention at a high level our overall goal is to maximize the area under the curve of customer happiness. That is our goal. We think that's the kind of thing that all companies should try to do. It's what results in long-term value creation and loyalty, the guest loyalty. Our goal is always really to do the best thing for the customers, and we're confident that if we were to behave like that then customers, in turn, will behave the same way to us. Speaker 1: (16:03) Thank you. The second question for Institutional Investor 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? Elon Musk: (16:24) Yeah. We are making rapid progress on lowering the production costs 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. 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. Zachary Kirkhorn: (17:00) Yeah, and on the manufacturing cost portion of the question, the cost of vehicles produced in Shanghai and Taiwan 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 a fixed cost absorption from higher production volumes, which are occurring in Q2 and will occur through the rest of the year, were 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. 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. Speaker 1: (17:44) Thank you. The next question is, Andy Grove once said that great companies are improved by crises. In which way has Tesla improved or is expected to improve coming out of Covid 19? Elon Musk: (17:58) 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. Just thinking about our core beliefs and what do we want to do, and we came to conclusion that the right move is actually to continue to expand rapidly, continue to invest in the future and new technologies, even though it is risky. We've talked to some of our key investors and they support that approach as well. I think that there's clearly an uncertain future ahead. It's a bit of a bumpy road, but I think the longterm prospects are extremely good. Anything you guys want to add? Zachary Kirkhorn: (18:52) 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. Elon Musk: (19:13) Yeah. Touchless delivery. Zachary Kirkhorn: (19:15) Touchless delivery, mobile service, touchless sales, has been something that we've been very focused on and made a lot of progress on. Elon Musk: (19:22) Yeah. The Tesla is the only car that you can literally order 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. Zachary Kirkhorn: (19:36) And many customers do that. Elon Musk: (19:38) 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 like quite an arduous thing. When the typical retail experience with buying a new car is more painful to people than having a root canal, then you have to say, whoa. For Tesla, it is completely as easy as ordering something from the Apple app store or ordering something on Amazon, except it's a car. Yeah. In five minutes. If you really went fast, I think you could order a car probably in 90 seconds. Speaker 1: (20:39) Thank you. 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? Elon Musk: (20:54) Yeah, actually. We don't want to preempt 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 would be one of the most exciting days in Tesla's history. 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. I'm 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. Speaker 1: (21:36) Okay. And the last question from Institutional Investors, could you please update on progress toward development and commercialization of Full Self-Driving? How much revenue have you recognized so far? Zachary Kirkhorn: (21:55) Just a couple of things on the financials for Full Self-Driving. 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. Then cars going forward, once a feature is released, we can recognize that revenue. We reduce the amount of deferral and we can recognize that revenue within period. This is what we think will be one of the most powerful gross margin levers with time as the feature suite is rolled out. Elon Musk: (22:50) Absolutely. There's also a tremendous amount of untapped potential, with 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 support in-app purchase, or as we talked about earlier, towards the end of the year as a subscription. 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 which is likely to reach fruition. Speaker 1: (23:33) Thank you. 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 5 to 10 years? This would 4 million vehicles in 2025 and more than 20 million vehicles in 2030. Is 40% a more realistic target? Elon Musk: (23:57) Well, it's always difficult to predict what the macro situation is going to be. I think very few people would have predicted the unexpected sort of roundhouse that Covid came up with that sort of came out of nowhere. I think in the absence of some massive force majeure event, like quite massive, I think probably 50% is the likely number. It's possible that it's 40%. I would be very shocked if it's less than 40%, even with a force majeure, short of World War Three. Speaker 1: (24:50) 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? Elon Musk: (25:05) I think we'll announce the next Giga possibly as soon as a month. We may not as soon as next month. That's not a prediction. It's just saying that could happen. It will certainly be within three months, and possibly one month. That would be in the US. As for how many 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. Zachary Kirkhorn: (25:55) I'll also add that our Gigas have gotten bigger. Elon Musk: (25:59) Yes. And arguably could be start being called Tera. Zachary Kirkhorn: (26:03) Yeah. With multiple products, as well. The absolute number of Giga factories we may ultimately build might be less, but each one is larger, and that's under our belief that it shows 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. Speaker 1: (26:29) 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 installation's per weeks targets for the end of 2021? Elon Musk: (26:44) We were actually gaining interest 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, live-in-place. 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 longterm trend for solar roof is extremely good, and I'm confident that let's say within the next, I don't know, year or maybe even by end of year, we should be installing at a rate of a thousand a week. Elon Musk: (27:33) That's not in the middle of winter or something. Allowing for seasonality, it's hard to install on roofs that are covered in snow and ice, but in spring I think it's installing, which is the hard part. We actually have demonstrated the ability to hit a thousand a week gross 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 internally we want to have at least a thousand solar roof install teams, taking a week or perhaps a little less than a week to do an install, which gets you a thousand a week roof installations. We see demand is good, production is good, so it's really all about the install. Then, like I said, also building up the training, the very diverse group of companies in the roofing industry, to also install solar roof, that I think will allow us to scale far beyond a thousand a week. Elon Musk: (28:55) 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. We're confident that this will be a very significant product for the company over time. Speaker 1: (29:16) 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, whether you consider the heat-pump water heater market as well? Elon Musk: (29:32) Well as I said on Twitter, I'm personally extremely excited to build a kick ass HVAC system that also has a sort of hospital grade particle filtration, basically HEPA filtration, that filters out viruses, bacteria, pollen, fungi, and also neutralizes- Elon Musk: (30:02) ... and it also neutralizes acidic alkaline gases; that is quiet and efficient. And these are all things we've achieved in that car. 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 HEPA filters built in. They're very big, but you can get to a particle count that is insanely low with our cars. Drew Baglino: (30:33) And 3 and Y have like MERV 16 or 15 capable filtration also, which is- Elon Musk: (30:37) Yeah. It's not like Model 3 and Y... They're no slouches. Model 3 and Y, they're way better than any other car to the best of my knowledge. They're not quite as good as hospital operating room, but they're extremely good. Way better than any other normal car. And we're continuing to improve the filters on 3 and Y. I believe 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. Air quality is incredibly important, even in a non-COVID situation, extremely important. Elon Musk: (31:17) So taking all those things that we've learned and applying them to how a commercial HVAC would be just very exciting. And then if you're condensing water, like one of our goals is to have it be a water source. If you have water, you possibly could then heat the water and have a water heater as well. Drew Baglino: (31:39) Yeah, use it as a heat source if you need it instead of the outdoors when the outdoors is really cold. Elon Musk: (31:44) Yeah. Drew Baglino: (31:44) Or the other way around. So lots of options. Elon Musk: (31:46) And it could be a hell of a product. So we just have to... At Tesla we have a real tendency to bite off more than we can chew on the car front. So we've got to make sure... We have a lot of irons in the fire here for new products like the Cybertrucks, Semi, new Roadster, and the Gigafactories in various parts of the world, and this brilliant Model Y, and Autopilot, and the solar roof and- Drew Baglino: (32:18) New technologies. Elon Musk: (32:19) Yeah, exactly. Powerwall, Powerpack, Megapack. We are seeing tremendous demand for stationary storage. More than we can supply, at least for 2020. [inaudible 00:02:35]. Male moderator: (32:37) Thank you. And the last question from the retail is, when will Tesla start acquiring utilities like the Hornsdale Power Reserve and Moss Landing instead of selling them battery storage? Does it make sense for Tesla to buy peaker plants and convert them? Elon Musk: (32:52) Well, we haven't really thought about that yet. So it's not out of the question, but our brain is full. Excuse me, sir, our brain is full. I saw 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. Elon Musk: (33:27) But we don't have like specific market share goals or anything like that. It's just to the degree that we can accelerate the advent 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 as a goal in and of itself. It's just the faster this happens, the better off the world is. Male moderator: (33:53) Thank you very much. And I think now we can can move to analyst questions. Female announcer: (33:59) Thank you. Our first question will come from Adam Jonas with Morgan Stanley. Please go ahead. Adam Jonas: (34:08) Thanks everybody. I hope everyone's safe and healthy. I got one question; 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. Elon Musk: (34:19) Exactly. I mean, it really is... Yeah, exactly. Adam Jonas: (34:25) Yeah. It's a big problem, actually. It's a big problem. Elon Musk: (34:28) It's crazy. Yes. Adam Jonas: (34:30) A different conversation. Adam Jonas: (34:33) Zach, first for you, any real-time update on company liquidity at the end of April? Some companies have, 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. Zachary Kirkhorn: (34:47) Yeah, it's a fair question. I don't have any additional color to provide. 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. Zachary Kirkhorn: (35:12) And 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 liquidity position of the company. Elon Musk: (35:46) Yeah, 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 3 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, but that's my opinion. And erasing people's freedoms in ways that are horrible and wrong and not why people came to America or built this country. What the fuck? Excuse me. People... The outrage, it's just an outrage. Elon Musk: (36:44) But 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. 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 just causing a lot of strife to a lot of people. Yeah. Adam Jonas: (37:14) Well, Elon, on that point, you mentioned people that gave their lives to build the country. My thought's for you on this. There've been a lot of comparisons drawn to the state of the US 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 US Highway Act. And when JFK launched the Apollo Program, which you could say was influenced by the Cold War, clearly, and you've benefited from, and our space program benefited from. Adam Jonas: (37:44) What would be your message to US lawmakers on this call as we, in addition to your opinions on shelter-in-place, but thinking of longer term, your message to US lawmakers coming out of the crisis? Specifically around EV infrastructure and a chance to kind of work with taxpayers to support sustainable transport, renewable energy. I'm wondering if you see this as a chance to make the crisis and all the loss and lives lost, not be in vain. Thanks. Elon Musk: (38:15) I think it's high time we invested in infrastructure in this country. We have a lot of crumbling highways and bridges. And frankly, 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 that the US 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 a question of will. And as soon as we spend a lot of money on these things, but what do we gain for it? Elon Musk: (38:58) And yeah, we really need to be thinking about what is the transportation of the future and not the transportation for the past. If this was 1920, do you want to be investing in steam engines or internal combustion engines? Obviously 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. It's just like, 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 freedom. Male moderator: (40:13) Okay. Let's go to the next question, please. Female announcer: (40:16) Thank you. Our next question comes from Emmanuel Rosner with Deutsche Bank. Please go ahead. Emmanuel Rosner: (40:22) Hi. Good evening. Question on Model Y. I was hoping you can 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 commonality with the Model 3? What other factors should we think about and what does that mean for the ampler, for the eventual gross margin on Model Y? Elon Musk: (40:49) Zach? Zachary Kirkhorn: (40:50) 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 trends that we had with Model 3 when we launched that product in Fremont two years ago. Zachary Kirkhorn: (41:27) On the cost side, and I think you hit on a couple of the buckets. The commonality is huge. It's very important. And in addition to that, the manufacturing processes are very similar to Model 3 as well. And so we have experienced 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 built in the first quarter is quite limited relative to where we'll go. Elon Musk: (42:05) Yeah, it's good. It will take cost out of the car and make the product better. Zachary Kirkhorn: (42:07) Exactly. Elon Musk: (42:08) So, it's not make the part worse. Any fool can take cost out of a car, make it worse. We want to take cost out of the car, figure out how to make it lighter and simpler. And so, it's we want the car to just incrementally improve as well as incrementally lowering cost. But for a five-seater Model Y, we expect the marginal cost of that car to be comparable to the Model 3 once we have reached say [pap 00:42:42] to 10 or 20,000 units or something like that. And have gone- Female announcer: (42:51) Speakers, you're back online. Male moderator: (42:54) Hi, sorry we got disconnected for some reason. What was the question again? Male moderator: (42:58) Okay. Now let's go to the next question please. Female announcer: (43:00) The next question comes from Ben Kallo with Baird. Please go ahead. Benjamin Kallo: (43:05) 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 then what we think in Germany. And so how are you looking at that going forward? Benjamin Kallo: (43:30) And then if you could just talk about Mr. Mizuno and that board addition and kind of the process with adding into the board. Thank you. Drew Baglino: (43:42) Sure. From a sales perspective, 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 on battery investor day, how we're approaching all of it. But yeah, I mean, we don't have one model we're restricting ourselves to pursue, we're just trying to find what's best for the products and in the long run. And then the other question about the board, I wasn't able to hear it. Male moderator: (44:22) Sorry, we couldn't hear the second part of the question. Drew Baglino: (44:29) Yeah. I was asking about Mr. Mizuno entering the board and kind of the process behind that and what he brings to the board. Elon Musk: (44:34) Oh, I think... Well, we all need a Hiro. But obviously he brings a 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 funder of any kind in the world. And- Elon Musk: (45:02) Of any kind in the world. And generally the conversations over the years, he's just shown an incredible insight into how the securities or the global security markets work and what he thinks is where the areas for reform. He just looks like to have a strong philosophical underpinning about how to make the future better. And shares that view regarding the environment, and just a very sensible, smart person who brings a lot to the board and I think is generally recognized as such by many people. Benjamin Kallo: (45:51) I guess looking into the Panasonic relationship, maybe just how is that relationship going here? And is there any readthrough on bringing him onto the board? Thank you. Elon Musk: (46:05) No, I think this is [inaudible 00:46:07] with the Panasonic relationship. I mean I have a great relationship with Panasonic CEO. We meet regularly one-on-one and talk all the time and so that relationship is strong. He would bring more of a broader and a global strategic view to the board. Moderator: (46:35) Thank you. Let's go to the next question please. Speaker 2: (46:38) Our next question will come from Gene Munster with Loup Ventures. Please go ahead. Gene Munster: (46:43) Congratulations on the progress, you talked about full autonomy by the end of the year. I would love for you to walk through the roll out 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? Elon Musk: (47:04) Well, it's pretty much going to play out as it has played out, which is will release more and more functionality. Before we release any functionality, it goes through extensive testing and of course we ramp up a simulations team that has a very good simulation of the real world. So we run any code changes through a battery of tests in 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, real world play out, the differences between the real world and the simulation which are very many because the world is very complex. And then we release it to a small group of private beta 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. Elon Musk: (48:16) 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 vast than what people are seeing. So there's just got to go through a very rigorous safety process. So essentially we need to figure out is if they're very good at complex intersections, they're very good at complex turns in intersections, and things like busy malls in a parking lot, or office park or special events and sporting events, that kind of thing, when those eventually come back. But yeah, those are extra hard cases but it's all tracking very well. I feel like the auto pilot engineering team is, we just have an extremely talented group and I'm deeply involved with the team. So we talk every week and meet every week when we can, [inaudible 00:49:44] physical meetings difficult. Elon Musk: (49:48) So I have quite a deep understanding of where we are, where we're headed, and I feel like we have a tremendous amount of momentum and we'll have the functionality [inaudible 00:50:00], full self driving, by the end of the year. Then after that functionality is released, there's still another step which is to improve the reliability of it. Once it's released to kind of full self driving with humans supervision, 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. Elon Musk: (50:46) 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. [crosstalk 00:51:03]. Gene Munster: (51:00) So to summarize, we're going to get owner's full autonomy, some level of that by the end of the year. And then a human in the loop, Tesla Network app sometime, is it first half of next year? Would that be the hope? Elon Musk: (51:19) Do you mean like when can the car drive with no person? Gene Munster: (51:24) No, with a person. Initially a person to observe. Would that be, with the Tesla network app, would that be early part of the year? 2021, is that the hope? Elon Musk: (51:38) If described as a hope, I would say that's probably a fair description. Gene Munster: (51:42) Okay. And then 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 start when we started seeing robo taxis? Elon Musk: (52:03) I think it's quite likely in my view, [Danek 00:52:10] would say- Gene Munster: (52:10) 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 start seeing robo taxis? Elon Musk: (52:25) I think it's quite likely, in my view, Danek would say I could be wrong, as you've seen [inaudible 00:52:38] we are 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 mid point, not the point with lots of margin. If this is normal distribution, I'd give you the 50th percentile, not the [inaudible 00:08:02], optimistic or pessimistic. So then that really means at least half my predictions will be wrong and half will be right. Or might be right but offset by a few weeks to a few months, in some cases a few years. But I believe everything I've ever said would come true, did come true. It may come true late, but it did come true. Elon Musk: (53:28) So punctuality is not my strong suit, but I always come through in the end. So I think we could see robo taxis in operation with network fleet next year. Not in your market, but it's been in some. Moderator: (53:52) Thank you. Now let's go with the last question please. Speaker 2: (53:55) The last question will come from Pierre Ferragu with New Street. Please go ahead. Pierre C. Farragu: (54:01) Hey, thanks for taking my question. One on gross margin first, and your [inaudible 00:54:07] in Q1. So there are three moving parts that they went from credits of course, the model Y ramping, even if it broke even, it probably took average cost margin down. And of course you had like Fremont being closed, shut down the last week of the quarter. It probably was this 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 a couple of points sequentially. So I wanted to check with you, if that estimate would make sense? And then I would have it for the energy storage. Thank you. Zachary Kirkhorn: (54:50) Yeah. So the three things that you mentioned, it's been a little bit of a hard time hearing the full question here because we're having a bit of network difficulty in the room but I'll do my best here. So when we look at margin, we do exclude credits 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 Y. And Fremont also weighed on margin and the Shanghai margin was below the average as well. Even though it's increasing quickly and approaching model three, it's still 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 gross margin? I haven't specifically calculated that, but I think your intuition is right. Zachary Kirkhorn: (55:43) We saw a strengthened gross margin across the board as I mentioned, and in particular SNX gross margins continue to improve despite slightly lower volumes there and higher fixed cost limitation. So there's good progress happening both on the ASP side and the cost reduction side for our products and production. And I think this also lends itself to the power of the gross profit contribution to the company. Once we get through these ramping 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, and so we're very optimistic about that path going forward. Pierre C. Farragu: (56:27) Thanks and I had a quick follow up on energy storage, if you can hear me well. I think I can't remember, I think from the very first days I heard you on the calls, you've always mentioned that demand for energy storage is always outstripping supply and you have more orders than you can make, 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 the high level, how are you thinking about that inflection point in terms of timeline. Drew Baglino : (57:12) 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 cell investments. And so that's what we've been focused on. And I think, not to give too much away, but that'll be one of the things we address in battery and investor day is how we're focused on that. And when we have that in the place we want, it'll be a lot easier to scale that business. Moderator: (58:02) 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.