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Tesla Earnings Call Q2 2019 (No Ads)

Tesla Earnings Call Q2 2019 (No Ads)


(lively music) (chaotic music) (lively music) (chaotic music) (lively music) (lively music) – [Latif] You for your patience. You’ve joined the Tesla Q2 2019 financial results and Q and A webcast. at this time, all participants
are in a listen-only mode. Later we will conduct a
question-and-answer session and instructions will
be given at that time. Should you require any
additional assistance during the call, please press star then zero
on your touch-tone telephone. As a reminder, this
conference may be recorded. I would now like to turn
the call over to your host, Senior Director of Investor
Relations, Martin Viecha. Sir, you may begin. – [Martin] Thank you, Latif,
and good afternoon, everyone, and welcome to Tesla’s second
quarter 2019 Q and A webcast. I’m joined today by
Elon Musk, JB Straubel, Zachary Kirkhorn, and a
number of other executives. Our Q2 results were announced at about 1:45 PM Pacific Time in the update letter we published at the same link as this webcast. During this call we will
discuss our business outlook and make forward-looking statements. These comments are based on our
predictions and expectations as of today. Actual events or results
could differ materially due to a number of
risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question-and-answer
portion of today’s call, please limit yourself to one
question and one follow-up. Please press star one now if you would like to
join the question queue, but before we jump into Q and A, Elon has some opening remarks. Elon? – [Elon] Thank you. So last quarter we delivered
more than 95,000 vehicles, which is a record for Tesla. Put that in perspective, it’s nearly an 80% increase in deliveries compared to the second
quarter of last year. Percentages are hard
for people to appreciate when you have a large manufactured item with a complex global supply chain, just how difficult that is. I’m incredibly proud of the Tesla team for being able to do that. I think this level of growth
is possibly unprecedented, might be the fastest that any large complex manufactured item has grown in history. So just, I think, really
great work by the Tesla team to achieve that outcome, and we expect growth to continue into the future at for several years to come
at the 50 to 100% level. So yeah, just like generally, that is not well appreciated
how difficult it is to grow at that rate. So anyway, but achieving
record number of deliveries is an important milestone and shows the rapid progress we’ve made in managing our global logistics and delivery operation at high volume, and as I said, all this was achieved thanks to the tremendous hard
work of the entire Tesla team. Model 3 was once again the best-selling premium
vehicle in the U.S., outselling all of its
gas-powered equivalents combined. In Europe, Model 3 is
approaching sales levels of its established premium competitors, and it was awarded a five-star rating from Euro NCAP earlier this month. This is in addition to Model 3 receiving an overall five-star
rating in the U.S. from NHTSA and including earning five stars in every category and subcategory, and achieving the lowest
probability of injury of any vehicle ever tested. Motor Trend also recently selected Model S as the best vehicle they have ever tested in their 70-year history
across all other cars. So Motor Trend, which is, arguably, the leading authority in evaluating vehicles, the Motor Trend Car of the
Year is the most coveted award. It’s pretty incredible that they would say that Model S in their entire 70-year history is the best vehicle they
have ever evaluated. This is despite Tesla not buying any
advertising in Motor Trend and I think speaks to their
journalistic integrity. That’s something special, and since the vehicle that they evaluated we’ve actually made, tremendous advancements in
both Model S and Model X, including our recent
update of a new suspension with active damping capability and an all-new drivetrain that’s capable of a 370-mile
range in the Model S and a 325-mile range in the Model X. We’ve also issued numerous
software updates and improvements that have made Model S
and Model X faster, safer, and added dozens of new features. Just like Model 3, Model S
and X have the hardware needed for future full self-driving capability. As we look ahead to the rest
of the year and into 2020, we remain focused on launching new vehicle
and energy programs further expanding our
manufacturing operations and continuing to
improve customer service. We remain focused on
international expansion because local production is essential to being cost competitive. By the end of this year, we expect to be producing
Model 3s in volume out of Gigafactory Shanghai, and as you can see from the
photos in our quarterly letter, the equipment installation
there is progressing well. We also have to finalize a location for our European Gigafactory
before the end of the year. Here in Fremont, preparations for Model Y
production have already begun. Since Model Y has high
component overlap with Model 3, it should be, and we expect it to be
a lot easier to ramp. It’s something on the order of three quarters of all the parts are common between Model 3 and Model Y, and we expect manufacturing
costs for Model Y, despite additional content, to be approximately the same as Model 3. This quarter we opened
25 new service locations and added more than 100
mobile service vehicles to our fleet, and although our fleets, our total Tesla fleet size has doubled in the past 12 months, which is, again, just kind
of a crazy thing to consider that Tesla is almost doubling all cumulative
production every year. This is a totally mad thing to make as many cars in a year as we’ve made in our entire history, and to have that be an ongoing trend. I think it is difficult for people to really feel an exponential. We didn’t evolve to feel an exponential. We can feel a linear, but we could only
understand an exponential at a cognitive level, but Tesla is expanding
at an exponential rate, and in fact, if you look at the Tesla
cumulative deliveries chart like year-over-year cumulative deliveries, it’s about the cleanest
exponential graph I’ve ever seen. So obviously, if that trend continues, results, I think, are
going to be pretty amazing, and I think that will continue. So we’ve been able to
improve service considerably. You can imagine that if, obviously, if we’re doubling our fleet every year, managing service is quite difficult. It’s like the total ’cause service scales as, not just with new production, but as the total fleet scales, service needs to scale, and we wanna scale service in a way that’s sensible
from a cost standpoint, but it’s really quite a
difficult challenge to scale. Nonetheless, we’ve made massive
improvements in service, especially in parts waiting, time to wait for parts
and in collision repair, and we’ve in-sourced a great deal of the
collision repair activities, which has had, I think,
quite a good effect on customer happiness, and this will continue
in the months to come. So a very important milestone, I think. We believe Tesla has is now at the point of being self-funding, and we expect to be cash flow free cash flow positive in future quarters with the possible temporary exceptions around the launch ramp of new product. From a profitability standpoint, we expect to be probably
around breakeven this quarter and profitable next quarter, so that’s, I feel pretty confident about that, and then, in terms of deliveries, we expect deliveries to be
between 360,000 and 400,000. We expect production to be a slightly higher number than that and demand to be a slightly
higher number than that. So people often confuse
deliveries, production, and orders for Tesla, and they’re actually
three different numbers. So yeah, you obviously cannot
deliver more than you make, and so typically we will
make more than we deliver, and then the demand generation activities kind of move in kind of like a, to get together with production, like it doesn’t make sense to put a lot of effort
into demand generation if production can’t meet
the demand, and likewise. So what what tends to happen is that we’ll solve the production issues. Then it’s like, okay, we
need to increase demand, address demand. Then it may increase production,
then increase demand, and like it’s like people get caught up in these details a lot, but if you look at the actual results, like I said, look at cumulative deliveries over time for Tesla: cleanest exponential I’ve ever seen. Extrapolate that curve. So there’s a tremendous amount
to be excited about at Tesla, and we’ll have more to share
in the coming weeks and months. Zach, is there anything you’d
like to say about our results? – [Zachary] Yeah, sure. Thanks, Elon. a few things I wanna highlight before moving into the Q and A. Overall, Q2 was a strong
quarter for Tesla. I’m extremely proud of the team
for the progress we’ve made. We’ve achieved record vehicle
production and delivery, record storage production and deployment, record services and other revenue, with a corresponding reduced loss. As we’ve mentioned a few times, we stabilized international logistics and delivery operations at higher volumes, and we saw gross margin improvement in nearly every aspect of the business, adjusting for the impact of
regulatory credit revenue. As a result of these accomplishments, we once again achieved
strong free cash flows, which is only partially attributed to working capital benefits. We also successfully raised roughly 2.4 billion in
net proceeds in May. Thus we exited the
quarter with five billion in cash and cash equivalents, the highest in our history. Our net loss reduced
significantly relative to Q1, aided by higher volumes in
progress on cost efficiencies. A few things to note: There’s 117 million within operating expenses
for restructuring. We had a sequential
reduction of 104 million related to regulatory credit,
which is inherently lumpy, and in our other income line
we saw a 66 million reduction. This is nearly entirely
due to foreign exchange, which we don’t hedge. GAAP automotive gross margin
only reduced slightly, despite the reduction in credit revenue and expected reductions in our vehicle average selling prices. Adjusting for the impact of credit, automotive gross margin
improved materially. For Model S and Model X, ASPs are impacted by pricing actions applied to inventory of vehicles built prior to the launch of our powertrain and
suspension upgrades in April, the majority of which were
sold and delivered in Q2. For Model 3, global ASPs
stabilized during the quarter at roughly $50,000, a
sequential reduction, yet gross profit per Model 3 improved, representing the continued success of our cost-management efforts. Note that we continue to defer a significant portion of revenue associated with full self-driving, which will be recognized in future periods upon the release of additional features. Operating expenses net of restructuring continues to improve as well, despite the increases in volume, reflecting the immense focus on improving our operating efficiency, and while operating expenses
and capital expenses may appear to be unnaturally
low this quarter, that’s not the case. Rather, these reflect continued
progress on cost efficiency and ability to scale our core
technologies and processes. If we take a step back here, I think it’s important to remember that Tesla is on a long-term journey and it’s difficult to see the full picture looking quarter-to-quarter. We committed that Model 3 would
be a transformative product, both through the industry
and our business. Three years ago we unveiled the Model 3. Two years ago we brought
the product to market. One year ago we demonstrated our ability to build the Model 3 at high rate. So far this year, we’ve
demonstrated our ability to manage global deliveries
and logistics at a higher rate, but the most important thing is that we’ve demonstrated our ability to generate significant organic demand as nearly all orders generated in Q2 were non-reservation holders, and thus far in Q3, our order pacing is ahead of where we were at this point in Q2, and as we noted in our Q2
production and delivery release, our order backlog increased
over the course of Q2. Ultimately, the Model 3 is accomplishing what our business needs it to do. It expanded our sales and customer base, enabling us to generate
cash we need to reinvest. In the process, we’ve appropriately managed
our operating expenses and have reduced the cost
of running the business. This is critically important because I feel as though
we’ve broken through a baseline fixed cost barrier, enabled by the success
of the Model 3 business. With continued focus on
execution and cost management, the next 12 to 18 months should
be the most exciting yet. During this time, we believe
that Gigafactory Shanghai will be producing at scale. Model Y will be in production, addressing the most
popular vehicle segment. Our European Gigafactory
will be well underway. Our autonomous driving features suite will continue to develop. Energy products business will grow, and maybe a few other
things along the way, and while there is inherent risk in any large and
ambitious set of projects, our intent is to grow and invest as fast as we can afford to. With the cash we have on hand and the stabilization of Model 3 across the key areas as I’ve noted, we believe we’re in great shape for this next phase of growth. – [Martin] Thank you very much. Let’s start taking some first questions. Sorry about that. Sorry, go ahead.
– Yes, thanks. So an important update is JB Straubel, our cofounder and chief
technology officer, will be transitioning to a
senior adviser from the CTO role, and Drew Baglino will be taking over most of JB’s responsibilities. Like to thank JB for his fundamental role in creating and building Tesla. Thank you, JB. – [JB] Thanks, Elon. – [Elon] If we hadn’t had lunch in 2003, Tesla wouldn’t exist, basically. – [JB] It’s been, yeah, it’s been quite an adventurous 16 years. – [Elon] Yeah, lunch was you and Hal Rosen at, what, McCormick &
Schmick’s in El Segundo. That’s the reason Tesla exists. – [JB] I remember it well, and maybe just to add a bit more to that, I’m not disappearing, and I just wanna make sure
that people understand that this is not some lack
of confidence in the company, or the team, or anything like that. I love the team, and I love
the company, and I always will. So Drew and I have worked closely together for many, many years, and I have total confidence in Drew, and I’m not going anywhere if there’s anything I need
to do to be helpful to Drew, or the whole team, or any
of the ongoing projects, so yeah, I mean, I’m actually really happy with how we’ve kind of
phased and transitioned some of these different
projects and people in, and I feel like this is a
super-good process overall. Drew, you wanna say anything? – [Drew] I’ll just say,
obviously, big shoes to fill, JB, but we have been working closely. In fact, we were even
talking about this project back in 2003 all along, and– – [Elon] But you guys talked
about it in 2003 as well? – [Drew] Yes. – [Elon] Wow, 2003 was a good year. (everybody laughs) – [Drew] I was graduating
and I didn’t know what to do, so I was like, oh, let’s
do this project, but no, I feel exactly as you feel that we are well set-up, that we know how to get help
where we need to from you, and that we’re very excited
about the big road ahead of us, myself and the whole team. – [JB] And I’m excited to stay involved in some of our core
technologies, and all that, and help where I can, just in less of an
operational, obviously less, not an executive type role. – [Elon] Sounds good. Well, JB, thanks again
for your integral role in creating this company, and Drew as well. (laughs) So that’s cool you guys
talking about it in 2003. Yeah, sounds like the right year. – [JB] Good year. – [Elon] Good year. – [Drew] It was, the technology was ready. It was the time.
– Yeah, lithium ion was like finally ready. Just needed to be put in a car, AC Propulsion, Al Cocconi, Tom Gage, Cesar. You gotta give those guys
a lot of credit, yeah. – [JB] Yeah, they did
some pioneering work. – [Elon] Yeah. Great. Some questions now? – [Martin] Thank you very much. So we have some first questions from our retail shareholders from say.com, and the first question is, it has been stated that
Tesla is supply constrained, not demand constrained. Can you help us shed some light on why Tesla is lowering car
cost if supply is constrained? – [Elon] Sure, there’s a number
of things to consider here. There’s really two key
dimensions for demand. There’s value for money, and
then there’s affordability. Obviously, if somebody simply
does not have enough money to buy the car, it doesn’t matter how much the value, how good the value for money is. You can have infinite value for money. If somebody does not have
the funds to buy the car, they simply can’t get it. So it’s just very important
to parse those two, and I think there’s like, there’s a tremendous amount
of desire to buy our cars, but people obviously, if they don’t have enough
money to buy them, they cannot. So we have to make the
cars more affordable, and effectively, like in the U.S. our cars got almost $2,000 more expensive with the expiry of the
tax credit on July 1 or partial expiry, and we only dropped the price of the Standard Range Plus Model 3 by $1,000, or actually, yeah, about $1,000. So the base Model 3 actually got $8,000 more expensive, which seemed like a reasonable compromise. So that’s essentially what I mean. People sometimes just have these sort of pretty
absurd notions, like, if demand is high, can’t
you just charge any price? Like no, you cannot charge any price. I think making our cars more affordable is also a fundamental
part of the Tesla mission. So, yes. Anything you wanna add? – [Zachary] Yeah, I’ll just add
to that: I agree completely. What I’ll add is that, generally speaking, within the Model 3 lineup, the pricing adjustments
for our higher trim cars were slightly more than
that for the Standard Plus. So we’ll see how the
data plays out on this as we take in more orders, but the expectation is
that our mix will move towards higher trim, to some extent, offsetting some of the ASP adjustments from the pricing changes, and one other thing I’ll add is that we are focusing on
a couple of markets as well, to target identify some of our sales and so some of our pricing adjustments reflect those elements of that strategy. – [Elon] Yeah, essentially, we
expect average selling prices to be the same within a
few percentage points. – [Zachary] That’s correct. – [Elon] Yeah. – [Zachary] Yeah, generally on ASP, as we noted in the letter, it was roughly, even over
the course of the quarter, stabilized around $50,000, and we have good visibility
into where ASPs are going based on order data, so that gives us one to two months of lead as to where our actual
recognized ASPs will be, and so I would expect some
adjustment to our Model 3 ASPs as a result of this pricing change, but the trim mix will offset some of that, and we continue to make great
progress on cost efficiencies, and so, overall in net, our expectation is that
the Model 3 gross margin will continue to grow. – [Elon] Yeah, on the gross margin point, full self-driving is just, is an extremely important part
of the margin calculation, and the features for
full self-driving are, only a portion of them have rolled out, so the revenue recognition on
the full self-driving option is limited at first until those features roll out, and also the demand for the full self-driving
package is limited because the features
are mostly prospective instead of current, but as those features roll out, I would expect the take
rate for full self-driving to increase significantly, as well as the recognition, revenue recognition for self-driving, to, obviously, the car match
the rollout of the product. So the gross margin over time will be really quite compelling when factoring in the
full self-driving option, which is, yeah, added to seven K in mid-August, and that number will increase over time. – [Martin] Thank you very much. The second question is, many of us who follow Tesla closely are incredibly excited about Battery and Powertrain Investor Day and its technology implications. Can you provide us any more detail on when this will be and
what will be covered? – [Elon] Yeah, I think for Battery Day, we’re gonna do a comprehensive
review of cell chemistry, module and pack architecture, and a manufacturing plan that has a clear roadmap to a terawatt-hour per year. The timing for this probably is about six months, like maybe
February or March next year. Show and tell. (chuckles) – [Martin] Great, thank you very much. The next question is, you stated on the Q4 2018 earnings call that customer service was a
personal priority for 2019. Can you update us on what
has been done to date to ensure that all owners are receiving an industry-leading
customer experience? – [Elon] Sure, I meet
with the service team multiple times a week and get daily updates on the
reliability of the vehicle. The best service, of
course, is no service. That’s the vehicle just
reliability and quality being so good that service
is rarely required. That’s what the main goal is like: eliminate the need for service, and, in terms of increasing
service resources, we’re opening service
centers as fast as we can, and have already opened 25 new service locations this quarter, and that will increase, the rate of service center opening will increase dramatically and through the course of this year, as well as more Mobile Service. Mobile Service is really great ’cause it’s like we just come to you and fix the car wherever you are, and it’s hard to beat
that for convenience. For parts delivery, we’ve made vast improvements to logistics for getting parts to service centers. Hey, Jerome, do you wanna? Jerome is helping manage the service global service and… – [Jerome] Yeah, as you pointed out the best service is no service, so we’re trying to continue improving the quality of the cars, and we track this daily, and fewer and fewer
service visits are required for the most recent cars
that we’re building, so we’re on a good trend there. We also need a lot fewer work to finish the cars in the factory. Besides that, we store way many more parts at all the service centers and
we ship everything same day, pretty much so that people
don’t have to wait for car, uh, for parts, and we accelerate service, and we increase capacity. There’s a lot of improvements that we’ve already implemented, and many more on the way, so I’m relatively optimistic and I’m happy to help
with the service team. – [Elon] Yeah. We had the regional
service heads in the U.S. at the factory last week, and it was incredibly helpful, just a closed loop on, for what service, and production, and with the software team, and for example, a lot of service visits are just questions about
how to use the car and– – [Jerome] It’s the number one visit. It’s the number one visit is, how to use Autopilot, yeah. So, yeah, every bit of
education there helps. – [Elon] Like if we, how to turn it on. – [Jerome] Yeah. (laughs) – [Elon] Like, it’s good. (laughs) It’s like, how do I turn it on? Okay, so just providing better feedback on user interface and virtually
how do you turn it on, and yeah, a whole bunch of things
that are quite elementary to reduce service load. – [Martin] Okay, the next question is, in April, Gigafactory 1 had efficiency of about 23 out of the 35 gigawatt hours theoretical capacity. Has this been improved yet? And is Tesla still cell-constrained? Are there any near-term plans to increase the plant
theoretical capacity? – [Elon] Drew? – [Drew] We have seen improvements in the 23 gigawatt hour number. We’re in the high 20s now with the trajectory continuing upward. We’re not– – [Elon] So about 28-ish? – [Drew] Yeah, 28-ish, yeah. I would say we’re not still constrained for any of our activities at the moment. – [Elon] Cell volume is approximately matching
the production ramp rate. – Yes.
– Yeah. – [Martin] All right, thank you very much, and the last question is what
is the new Lathrop facility? – [Elon] Nothing major. It’s just a parts distribution warehouse. – [Jerome] Yeah, we’re
optimizing the real estate, trying to conciliate
everything under one roof, reduce the cost. There’s really nothing special there. – [Martin] Okay, thank you very much. Latif, we can start the Q and
A question queue on the call. – [Latif] Yes sir, our first question comes from the line of Dan
Galves of Wolfe Research. Your line is open. – [Dan G] Hey, thanks very
much for taking the questions, and congrats on the 5 billion cash number. I’m halfway expecting
some headlines tomorrow of Tesla’s got too much
cash on the balance sheet. I was wondering if you could update us on Gigafactory China. I don’t have a great sense of what delivery volumes in China are for Model 3 at the moment. Some sources are around maybe
3,000 or 4,000 per month. What have you seen in terms
of order flow and demand since you announced
pricing at a local product that gives you confidence that you can get to 3,000 per week type of demand in that market? – [Elon] Yeah, I mean,
don’t wanna talk too much about detailed price plans, but, I mean, are you asking what do I think the long-term
demand for Model 3 is in Greater China region? I think it’s about, meaning
from Shanghai Gigafactory, I think it’s actually, long-term demand is about 5,000 a week. – [Dan G] Okay, and, sounds good, and have you considered potentially sourcing cars to Europe from that China plant at all? – [Elon] No, our plan is to source cars to Greater Europe
area from Fremont, California, until we have European
Gigafactory operational, but that’s probably a
couple of years before, it’s probably 2021 before we have an operational
Gigafactory in Europe, and so at that time we will
source from California. Yeah, it’s like this speculation,
it’s my opinion, but so what I think, say, long-term demand is for Model 3, it’s probably 15,000
units a week globally, something like that. – [Dan G] Okay, thanks
for taking my questions. – [Elon] Yeah. – [Martin] Thank you, let’s go
to the next question please. – [Latif] Our next question comes from the line of Toni
Sacconaghi of Bernstein. Your line is open. – [Toni] Yes, thank you. I was wondering if you can comment about whether you felt that Q2 benefited from consumers in the U.S. sort of rushing out to buy Model 3s in advance of the declining federal tax credit, a phenomena that you sort of saw in Q4, and part of the reason I ask is, at least by my analysis, it looks like maybe 70% of the
Model 3s sold in the quarter were in the U.S., which is sort of higher than your normalized
percentage of U.S. sales, and so do you feel that that phenomena may have occurred in Q2? And are you still confident that Q3 deliveries can improve sequentially? And beyond the data point
that you provided on the call, that the orders quarter data
are better than last quarter? Is there anything else you can point to that provides that confidence? – [Elon] Yeah, I think we’ll… Demand in Q3 will exceed Q2. It has thus far, and I think we’ll see
some acceleration of that, and then I think Q4 will
be, I think, very strong, so we expect that
quarter-over-quarter improvements. I think Q1 next year will be tough. I think Q3 and four will be good. Q1 will be tough. Q2 will be not as bad, but still tough, and then I see like Q3 and Q4
next year will be incredible. – [Zachary] Yeah, just to add
on the tax credit step-down, so the step down from Q2 to Q3 was significantly lower than
the step down from Q4 to Q1. It’s also important to keep in mind that there’s seasonality
in the auto business in Q1, which also was part of the impact, but generally speaking, our
order rate so far this quarter is higher than where we
were at this point in Q2, and we haven’t seen a significant impact on U.S.-based orders as a
result of the step-down. – [Toni] Okay, thank you for that. If I could just follow-up. Elon, I’m wondering if you can comment on whether you believe Model 3 is having any cannibalization impact on S and X sales or why you think that, or why else there might be
sort of a structural step-down in the demand and delivery levels relative to what we’ve seen
over the last five or six years? – [Elon] Actually, we were
just talking about this earlier today. We’re not quite sure ourselves. I think that there’s some cannibalization, like there may be a false
expectation in the market that there’s like some big
overhaul coming for S and X, which then causes people
to hesitate to buy if they think there’s like
some radical redesign coming, which is why I’ve emphasized publicly that this is not the case. The Model S and X today are radically better than the ones that, when we first started
production, especially S. Like, say, like 2013 or 2012 Model S compared to today’s
Model S: night and day. In fact, I still run into people I know who have like 2013 Model S, and they think it hasn’t changed, and I’m like it is dramatically
better in every way, but we don’t do model years. We just roll in improvements as they come, but I think there is maybe
a communications issue, where people don’t realize just how much better the S and X are today than when we first started, and we actually wanna address
that communications issue, and just get a better
understanding from the front lines. Demand should be higher
for S and X than it is, and we’ll get to the
bottom of it and fix it. – [Martin] Okay, thank you very much. Let’s go to the next question. – [Latif] Next question
comes from Emmanuel Rosner of Deutsche Bank. Your line is open. – [Edison] Hey, it’s
Edison on for Emmanuel. Just first question on the guidance. I know previously there
was a target out there of 25% kind of on the S/X, and Model 3. Just wondering is the updated one, is that suggesting that that’s no longer in play for the year or kind of what are the
implications with today’s update? – [Elon] Well, if you factor in the full self-driving option, I think it is in the pipe for the year. We just need to get the futures done, make sure they’re great, roll them out, and recognize revenue, and increase the take
rate on full self-driving. There’s also, for the existing fleet, there’s a very significant opportunity to upgrade the existing
fleet to full self-driving since most the fleet has not
purchased this option yet. So there’s a significant margin potential for the existing fleet to
upgrade to full self-driving, which most of the fleet can. So, yeah, I absolutely think long-term we are talking 25 to 30%, long-term meaning like a year. Long-term, in Tesla vernacular, that 30% gross margin is,
I think, quite likely. – [Zachary] Yeah, and we continue to take significant
cost out of the Model 3 in particular, as well, and Jerome can comment further on this, but every week, nearly every week we hit record lows on labor
content to build the vehicle, and we saw an ASP adjustment, net reduction in Model 3 from Q1 to Q2, yet the gross profit on
the vehicle expanded, attributed to the cost reduction
efforts that are underway. – [Jerome] Yeah, labor costs
are more than 50% reduction in one year. Yeah, it’s progressive every quarter. – [Elon] Yeah, I just want, like, just say what the labor hours
were quarter-over-quarter. – [Jerome] Yeah, reduced in half, yeah, since the Q3 last year, but it’s also all the effect associated, the spares, the scrap is
reduced to pretty much nothing, reduced 90% year-over-year. Spares are just more than
half, also, so we’re, our goal is to make the
car more affordable, and so we’re pushing every day, yeah, and every week we beat
records on most lines, yeah, in terms of output and
cost per unit, yeah. We’re in very good dynamic and a level of fiscal
discipline that I have not, we have not had in the past. – [Elon] Agreed, yeah, so like, for a core financial health standpoint, I think I’d just like
to echo Jerome’s words. I think Tesla’s fiscal
discipline is dramatically better than at times in the past. – [Latif] Thank you. Our next question comes from the line of Joseph
Osha of JMP Securities. Your line is open. – [Joseph O] Hello, hello. Listen, listening to
you talk about mix here, and the fact that you’re
running a single shift, your S and X facilities in Fremont, I’m wondering is there
maybe some potential to reconfigure the
floor space there a bit? And is that something that
you’re thinking about? – [Elon] Well, we are
reconfiguring the floor space in Fremont, and there’s quite a lot of factory space that’s currently taken up with the S/X parts warehousing, parts for the S/X line, and we don’t really need that, so that’s where we’re putting
a lot of the Model Y activity. Jerome, do you wanna? – [Jerome] Yeah, we are improving the material delivery for S and X just like we have done for Model 3. I’ve seen some radical improvements. We reduced production
part warehousing costs by, again, 90%, nine
zero, since Q3 last year, and so we’re making a lot of room. We’re much more efficient
with parts delivery. It helps that we’re increasing
production, actually, and so that space that we cleared out, I’m looking at it right now in Fremont, we’re just gonna put
Model Y stuff in there, so every, if you visit the factory from, I would say, every six months, you’d have a hard time
recognizing and finding your way. Yeah, it’s constantly
changing and evolving, yeah. – Just as a follow–
– Yeah, so we need– – [Joseph O] I’m sorry, go ahead. – [Elon] Yeah, I was gonna say, just the efficiency of this
factory, both Fremont and Giga, is like just the rate of improvement, which is not slowing
down, has been incredible. I mean, it’s like you’re just like you can feel it and see it. – [Joseph O] And just as a follow-on then, could we see you manage to make 8,000, or 7,500, 8,000 Model 3s in Fremont by the end of the year, you think? – [Elon] Yes. – [Joseph O] Okay, thank you very much. – [Elon] I mean, I feel confident it’s, let’s just say that the
trend is very clearly towards being able to get
to 10,000 vehicles a week, of which that would be, there’s rough numbers like 8,300 to 8,600 Model 3s and the balance in S and X, so sort of 1,600 to 1,800 S/X (mumbles). In round numbers 8,500
3s, 1,500 S/X per week, but probably a bit more than that. – [Latif] Thank you, our next question comes from the line of
Dan Levy of Credit Suisse. Your line is open. – [Dan L] Hi, great, thanks
for taking the question. I wanted to ask about your reg credits, in particular the non-ZEV piece. You’re not disclosing
the ZEV piece anymore, but just a couple of questions on this. First, how can we think, is there any quarterly
cadence to think about this? And then, what’s the composition of this? Is this going purely to European OEMs? There’s obviously one automaker
that you’ve agreed with. I don’t know if there are any
others that you’re looking at, and lastly, to what extent can you, or are you willing to
sacrifice pricing in Europe to sell higher volumes to
generate more reg credits? And are you having discussions with other automakers on this front? – [Elon] Zachary. – [Zachary] Yeah, on your question about the cadence of regulatory credits, generally, as I’ve commented in the past, we expect regulatory credits to become a more meaningful
part of our business. On a quarter-to-quarter basis, it’s very difficult to forecast to them, as you saw from Q1 to Q2, that declined, and so, as you model
regulatory credits in Q3, I would not expect a significant increase
in regulatory credits, although it’s hard to forecast exactly. The regulatory credits composition is a mixture of those particular
deals that are one-time. There’s also some that are
production-based over time. The production-based ones
are easier to forecast because it’s based on cars that we build and we get an offset to that. The deal-specific ones are lumpier, which makes it more difficult, and then your final question was on does it make sense to sacrifice pricing to drive regulatory
credit in certain markets? It might. I’m not sure if we’ve specifically gone
into the details of that, but generally, we’re
selling cars in markets at the prices we think are appropriate, and the regulatory credits is
something that’s additional. We generally try not to run the business based on regulatory credit revenue. – [Elon] The regulatory
credits is, I mean, it’s a relatively small part
of the equation for Tesla. I think the ZEV credit situation, I think, really needs reform ’cause the market for ZEV
credits is negligible. Now, some of what’s happening here is the other manufacturers
are kind of like waiting to see how their EV sales do before buying any credits from Tesla, and so it kind of
depends on how that goes. If they sell more EVs, then there’s not really a
need to do a deal with Tesla, and if they sell fewer, then there is. – [Martin] Great, let’s go
to the next question, please. – [Latif] Thank you. Our next question comes on the line of Colin
Rusch of Oppenheimer. Your line is open. – [Colin] Can you walk us through the plan for battery sourcing in China? How many, how much of the supply is gonna come from internally
produced batteries? How much is coming from externally? And what’s your expectation around cost per watt-hour
as you start to ramp? – [Elon] I mean, I don’t
know if we wanted to talk about the details of battery supply, but we believe we’ve a good handle on. We don’t expect to be
self-constrained in China for the next year, I don’t know. Drew what do you think? – [Drew] Yeah, that’s what
our plan looks like right now. In terms of internal versus external, I think we should wait until we have our
discussion early next year, but yeah, we have agreements in place with all the, we’re good for the next
year as you said, Elon. – [Elon] Yeah, I mean, I think we probably need
to just do a reset like, wanna say master plan part three, but it’s sort of like, to some degree, like Battery Day will be kind of like
master plan part three, which is like, okay, how do we get from, kind of in the tens of
gigawatt-hours per year to multiple terawatt-hours per year. That’s a pretty giant scale increase. That’s like increase
by sort of roughly 100, like if we’re at 28
gigawatt-hours right now, well, actually, there’s more than that when you count the factories in Japan, so a little over 30 to 35
or something like that, and how do we get to like
two terawatt-hours a year? Which is like two orders
of magnitude increase. – [Zachary] That’s the way
you have to think about it ’cause that’s what you need to do. – [Elon] Yeah, exactly, and in order to really
make a fundamental shift in the world’s energy usage and really transform things to
a sustainable energy future, if you’re not in the terawatt-hour range it’s like it’s a nice news story, but it’s not fundamentally
changing the energy equation. – [Colin] Okay, and could
I have a follow-up question around Model S and Model X saturation? Obviously, you guys have some ideas around how big that market is. How should we be thinking
about sustainable volumes and pricing on those volumes? Obviously, we’re seeing
some lower numbers here, and I think that’s a core element of what’s going on with the story that, as we see pricing
drop and volumes drop, what are the right numbers
to think about for you guys, from a planning standpoint
in terms of sell-through on both the Model S and Model X? – [Elon] Yeah, I think there’s probably a bit too much focus on S and X, and the S and X are, they’re nice, but they’re not, and it’s like without them
we couldn’t spell sexy. The main reason, well, not the main reason, but (laughs) a reason is we wanna keep spelling sexy, so that is a reason, I should say, not the main reason, but a reason to keep
going with the S and X, but the story for Tesla in the future is fundamentally Model 3 and Model Y, and I think my guess is like long-term sales of, long-term meaning couple
years type of thing, demand for, sales demand for 3 is like on the order of three quarters
of a million units a year, and it’s probably 1 1/4 million units a year for Model Y, so the combined is like maybe two million from those two vehicles alone, and then S/X is like maybe 80 to 100K a year, so it’s like four or 5%
of the volume of 3 and Y, and then you could throw
like a truck in there, pickup truck and the semi, but it just gets smaller and smaller, so they’re great products, but they’re, from a volume standpoint, they’re not all that
important in the long-term. – [Martin] Thank you. Let’s go to the next question please. – [Latif] Next question
comes from Pierre Ferragu of New Street Research. Your line is open. – [Pierre] Hey, thank you
for taking my question. I’d like to ask you,
Elon, about distribution. So you made like, you guys made a big change
at the beginning of the year going from like an almost 100%
online distribution model. You tried to push back on test drive and get people to buy the car, try it and return it
if they don’t like it, so could you give us an update
on how it is progressing? Do you see Tesla becoming like a mostly like an online distribution, following an online distribution model? And I saw you opened 25 new retail locations in the quarter, so how do you see your retail
footprints evolving over time? – [Elon] Actually, I’ll say, we’ve opened 25 service locations. I think, really what we find is that the word-of-mouth
for Tesla is incredibly good, so once there’s a nucleus of
customers in a particular area, they love the cars, and they talk to all
their friends about it, and that’s really what drives sales, so you can think of like, a retail location is kind of
like a viral seed in an area. It would grow organically by itself, but the retail location,
essentially, is like a viral seed. It’s not, they aren’t
needed, they are just, they’re like an accelerant. What is needed for
sales in any given area, and I’d say this is worldwide, frequently we’re told
this country is different or that country is different. I’m like, people around the world pretty much want the same
thing in my experience, but you have to have a service location that’s convenient, so it can’t be like you’ve gotta drive five
hours to a service location. So you have to have service. You have to have supercharging
and charging well sorted out. Gotta have good consumer financing, and then the price must make sense, and anyplace where those
four things are true, our sales are great. So we’re rolling out
service centers like crazy. Service centers are the key to sales, not the retail locations. – [Zachary] Yeah, and
we’re going city-by-city on the service center point. We’re looking at where our populations are of existing customers. We’re mapping driving time from those customers
to the service centers inclusive of traffic to improve densification
of our service centers in the locations in which our
customers currently reside. We do have areas that are underrepresented
for service centers, where the drive time is too long, or there are populations that
don’t have appropriate access to charging or service centers, and we’re working as fast as we can to get places up and
running in those areas, so it’s very systematically
being mapped out with a focus on service and supercharging as opposed to a retail presence. – [Elon] Yeah. Supercharging is
incredibly important to us. You can’t just have like 80% of the routes that somebody wants to take. You need 100% of the routes,
’cause a car is like, it’s really freedom to travel. Anything that inhibits freedom of travel, it impairs the fundamental
value of the product. – [Zachary] Or perceived. – [Elon] Yeah, exactly: real
or perceived freedom of travel. – [Martin] Thank you. Let’s go to the next question please. – [Latif] Our next question comes from Joseph Spak
of RBC Capital Markets. Your question please. – [Joseph S] Thanks, so Elon,
you mentioned the importance of full self-driving for gross margin. You’ve also mentioned
the importance of China. Do you expect to be able to offer the full self-driving suite that you plan to offer
in the U.S. and China? And I guess, even in Europe, where they’ve been also been a little bit
tougher on regulating. – [Elon] Yeah, we expect
to be able to offer full self-driving actually everywhere except EU, because there’s just some committee rules that were put in place years
ago that needs to be changed. It’s not from a technical standpoint. It’s very doable, but we just need to work through
the regulatory committees to get the regulatory
approvals and rules changed, and it’ll just take a bit
longer than other places, but I think we’ll see a lot of pressure from our customers in Europe
to have these rules changed, so they can have access
to full self-driving, and I think at the end of the day, the regulators will answer to the public, so I think that’s just a temporary thing, and it’s quite specific to the EU rules, and we were just not present, really, when those rules were drafted, so that’s (mumbles) got put in place, but they don’t make a ton of sense, but we just gotta work through
the process to change them. – [Joseph S] Okay, and then
the second question is, you mentioned service a number of times. There’s obviously been some, I think, growing frustration with owners, and you mentioned parts availability, and you’ve eschewed the dealership model, but I guess how do you plan on
increasing parts availability without the corresponding
working capital commitment that would be required as
the fleet continues to grow? – [Elon] It’s actually
just taking the parts that were stored in a bunch of warehouses, and just moving them
to the service centers, and kind of just, the thing that make sense is to, I think, to have the service centers where the parts are
kind of all on the wall and it’s like a supermarket. Like, you know, you always know where
like the Cocoa Puffs are, and you can just go
immediately, and go and grab it, and then you just replenish
the shelves with parts, and so what we’re
basically putting all parts that are used more frequently
than like six weeks literally on the walls on service centers. There’s no ordering of the part. You just go take it off the
shelf and put it on the car. Really wanna get to, not
merely same-day service, but same hour, sort of like Jiffy Lube, but
applied generally to service. – [Zachary] Yeah, and specifically on the working capital piece of this, we actually have a significant amount of service parts inventory. The challenge is, it’s just
not at the service centers, and so a lot of the lag
that is experienced is, we have to get the part from the distribution center
to the service center, and so by moving, by localizing the parts, I don’t expect that to be a large working capital
drain on the company. It might actually be the reverse, (Zachary drowns out speaker) yeah, where we don’t need to
store as many parts centrally. – [Elon] Yeah, and
also, just having parts, if they’re made at, if we make them internally or
if they’re made at a supplier, just sending them directly
to the service center, instead of like having them go through a bunch of distribution outlets. It’s, in fact, like when I
was in China, on my last trip, I was asking the China team, “Hey, is there anything
silly that we’re doing “that we should fix?” and they said, “Yeah, well, “several of the parts
that require replacement “are literally made in China, “and then we end up
shipping them to New Jersey, “and then back to China, “and could we please just ship them “like literally across the road?” and like, yeah, no problem. There’s all these like
crazy things that happen. If you’re like, if you have
a 45,000-person company, and then just kind of basically
stop doing silly things. It’s a lot of what is needed for improvement. – [Zachary] And as the scale
of the business increases, the economics of localization, of things like parts distribution
make a lot more sense. Whereas in the past, when
the company was smaller, having centralized centers was easier from a cost perspective. So the business, because the
company’s growing so fast, as Elon has mentioned, we have to continue to
redesign processes and systems to re-stabilize ourselves
on a new plateau of volume, and then we’ll grow again and we’ll need to rebuild those processes. – [Elon] Yeah, I mean, Tesla is the only company making things in volume that is fully vertically integrated all the way through sales, and service, and charging, and everything, so we really just need to look
at total system efficiency and say, in the limit, if
Tesla was the auto industry, how would we do it to
maximize economic efficiency? And that’s, we gotta kind of like
recalculate that optimization as we achieve greater scale. I’m confident we can achieve a fundamentally better economic efficiency than the rest of the auto industry. – [Martin] Thank you, okay. Unfortunately, that’s all
the time we have for today, so thank you so much
for all your questions and we’ll speak to you again
in the next three months. Thank you. – [Latif] Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation. You may disconnect your
lines at this time. (lively music)

58 thoughts on “Tesla Earnings Call Q2 2019 (No Ads)

  1. Despite selling more cars, and laying off folks… still losing money. Over a billion this year, but hey they put more in their credit cards! This stock is not an investment, it’s a cult.

  2. This is last time TSLA will be available at sub $250. Before Q3 will be near $300n after Q3 will be above $300 and will never look back. Time to load up.

  3. I love the way this is set up, the best way to experience the earnings call by a long shot. Good job Teslanomics and Clean technica!

  4. Hope you guys all liked the livestream! If anyone has any feature suggestions for next time like info that would be useful on screen. Reply to this comment and we will look into it! Any other feedback is also always welcome! 🙂

  5. Tesla is caught in a virtuous circle of supply vs demand, as opposed to the damnable circle of the ICE car manufacturers who's sales volumes is spiraling down.

  6. Because I don't own shares, it's a case of TL;DR. I'll wait for analysts I trust to condense it all down for me. But I am very, very interested in the future of Tesla. Bye…

  7. They seriously need to stop cutting prices if they are that far off a profit even when setting record sales…sales are not a issue! Demand is not a issue! So don’t cut the damn performance $5k as if you can afford to cut prices. You can’t and the demand at the old price was not limiting sales at all.

  8. Asked Tesla Australia for over $5k of extra parts to be added to M3 order so we can add to invoice for finance…Was told that had to happen Separately??? That's not good service Elon

  9. what i love about tesla is that it's like a theme park with upcoming events to look forward to….next event….battery day!!!!

  10. Why TF would Tesla enable other automakers to keep building polluting vehicles through regulatory credits??

  11. it was an okay quarter, slightly disappointing. I was hoping for at least $7B in revenue and adjusted earning per share of more than -$0.20/share (actual was $6.35B and -1.12). I would guess that gross margin per car has been hit more by them lowering prices than from selling less S & X. It would be interesting to calculate gross profit margin % for each car

  12. BOOM!! There it is…another MASSIVE LOSS!! $408 MILLION…in…the…red!!! And did you hear the shakiness in Elon's voice?? HE'S WORRIED!!!

  13. I'm surprised he didn't promise he is working on a robot that will cook meals and margaritas in the trunk, ready in first quarter of 2020.
    No distractions this time?

  14. Tesla wants to slowly penetrate all the markets. That’s my guess to why they are cutting prices. It takes time.

  15. This is great.
    I am reassured Tesla is reinvesting in itself.
    Not cutting corners.
    And aiming for the future.
    I am sure a bunch of bean counters could have raised higher earnings for the NOW.
    Something Tim Cook might try.
    Cant wait for China’s Gigafactory.

  16. What's up with the intro music? Like the same track playing three times…at the same time!! Stop the madness!! Haha

  17. This quarter was bad for Tesla, seems like a bit of a cult stock. I like the company but fundamentally they need to start making better margins or they will need to access more capital in the next few quarters which will tank the stock price further.

  18. Time to send out stripped down model X’s with FSD to do parts distribution till Semi goes on line. That means updating some Ravens. Take out all seats and steering wheel. How many service centres? Full wrap for marketing and mobile advertising boards. Robotic Supercharger arm on these vehicles as opposed to rolling out snake so vehicle not limited time wise at chargers waiting for spot.

  19. Last week I was kicking myself for not buying more Tsla at the lower prices. All of the stocks that followed were at 52 week highs and I could not get the entry prices I needed.

    As luck would have it, Thursday gave me the opportunity to deploy my annual Roth IRA contribution into Tsla stock. If the stock takes another leg down, I am prepared to buy more. There simply aren't better investments with other stocks sitting at 52 week highs. Moreover, there is over $10 billion worth of Tsla shorted shares. When they cover, the price could jump 20% or more.

  20. With Neuralink, Musk is adding another potential billion dollar company. SpaceX is just awesome.
    I can't wait for the Tesla truck.

  21. How does this work? A company is loosing billions for years. Even with billions of government support to make the cars cheaper to public. Everyone keeps saying it's great. Economy is a strange thing. I also told everyone my product was great. I said it very loud many times. But after I lost 20.000$ the bank didn't want to give me more.. Strange…

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