Tesla Q1 2020 earnings call (2020)
Questions on ElonsFAQ asked in this interview (9)
Transcript
0:01OperatorLadies and gentlemen, thank you for standing by and welcome to Tesla's Q1 2020 financial results and Q and A Webcast. At this time, all participants are in a listen only mode.
0:12OperatorAfter the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press Star one on your telephone. Please be advised that today's conference is being recorded.
0:23OperatorIf you require any further assistance, please press Star zero. I would now like to hand the conference over to your speaker, Mr. Martin Vie, senior Director for Investor Relations.
0:34OperatorPlease go ahead, sir.
0:37Martin Viecha (IR)Thank you Sherry and good afternoon everyone. Welcome to Tesla's first quarter 2020 Q&A Webcast. I'm joined today by Elon Musk, Zachary Kirkhorn and a number of other executives. Our Q1 results were announced at about 1pm Pacific Time in the Update deck we published at the same link as this webcast.
0:55Martin Viecha (IR)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.
1:13Martin Viecha (IR)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.
1:24Martin Viecha (IR)Before we jump into Q and A, Elon has some opening remarks.
1:28Elon MuskThank 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 GAAP net income in a seasonally weak first quarter.
1:41Elon MuskEven with all the challenges, we achieved a 20% automotive gross margin excluding regulatory credits, while ramping two major products. What we've learned from this is that we've obviously learned a lot here.
1:56Elon MuskAfter the Model 3 ramp from three years ago, our new products get ramped faster and become profitable sooner. In Q1, we produced more Model Ys in the first quarter than Model 3s in Fremont in the first two quarters.
2:09Elon MuskThus far, Model Y ramp has been even faster than the Giga Shanghai ramp in Q1. More surprisingly, in other words, we are ahead of the schedule that we were ahead of already.
2:20Elon MuskMost surprisingly, Model Y was profitable already in its first quarter of production, something we haven't achieved with any product in the past. Regarding Autopilot, we released a new software update for traffic lights and stop signs to early Access users in March and to all US Customers with the full stop driving package just last week.
2:44Elon MuskOur cars will now automatically stop at each stop sign or traffic lights until the driver gets a confirmation to proceed. I should say that the car is actually capable of much more than this.
2:53Elon MuskBut we are only exposing functionality that we feel quite good about and where we feel that it is probably a safety improvement. We are collecting data from over a million intersections every month at this point.
3:12Elon MuskThis number will grow exponentially as more people get the update and as more people start driving again sooner we will be collecting data from over a billion intersections per month.
3:25Elon MuskAll of those confirmations are training our neural net, essentially the driver when driving and taking action is effectively labeling reality as they drive and making neural net better and better.
3:39Elon MuskThis is an advantage that no one else has. We're quite literally orders of magnitude more than everyone else combined. I think this is difficult to fully appreciate. It's the reason that it's very difficult to have a search engine that competes with Google because everyone is training Google all the time with their searches.
4:02Elon MuskSo when you search on something and you click on a link, you're training Google every time you do that. It's very difficult for any new search engine to compete on that basis.
4:13Elon MuskSo all those confirmations are training on neural net. Soon clouds will be able to drive through an intersection without a confirmation as well as to make turns. And we're really feeling where 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.
4:42Elon MuskSo we can almost do this already with the leading edge alpha bills that are driving the car.
4:57Elon MuskSo let's see, on other technology fronts, we increased the range of Model S and X yet again, this time to 391 miles for Model S and 351 miles for Model X.
5:11Elon MuskIt should be said that actually the real Model s 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.
5:25Elon MuskSo the car and edited 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 test.
5:39Elon MuskAs soon as the EPA reopens for testing, we'll review the test and we're extremely confident that we will achieve a 400 mile or greater range with the Model S.
5:47Elon MuskBut to be clear, the Model S that for the past two months, the true range of the Model S for the past two months has been 400 miles.
6:01Elon MuskAnd of course we're not stopping there. We're always continually pushing for improved range over time and Improving handling, acceleration and all little details that make a Tesla special. For Model Y we introduced a revolutionary two piece rear underwater casting that we're going to be making a single piece casting later this year.
6:28Elon MuskMeaning that essentially the rear third of the body is cast as a single piece, which is no casting of this size or 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.
6:44Elon MuskSo we're really pushing the envelope on vehicle structural engineering and manufacturing. I'm very excited about this approach as it allows us to reduce the weight, the cost and improve nvh.
7:01Elon MuskIt's better in every way essentially. For Model Y we also introduced a revolutionary new heat pump which allows the car to have a higher range. So the Model Y has remarkable range on par with in fact slightly better than I guess the Model 3.
7:24Elon MuskAnd 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.
7:42Elon MuskAnd the feedback we're getting from customers who have received the Model Y thus far has been universally positive. We're confident this product will be our best selling product ever.
7:55Elon MuskSo in conclusion, just to this is a forward looking statement. We are absolutely continuing our Model Y capacity expansion at full speed at both Giga Berlin and Giga Shanghai and Amsterdam Fremont when they will let us continue localized production in China and in Europe will bring the cost down, making our products even more competitive over time.
8:31Elon MuskWhile 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 fully global manufacturer with major factories in North America, China and Europe and a capacity of well over a million units a year.
8:58Elon MuskSo there's a tremendous amount to look forward to and we can't wait to tell you what's going to happen. Thank you, thank you.
9:06Martin Viecha (IR)And now to Zach's opening remarks.
9:09Zachary Kirkhorn (CFO)Yeah, thanks Martin. And thanks Elon. I'm very proud of the accomplishments of the Tesla team this past quarter. A few things to highlight and add to what Elon just mentioned.
9:20Zachary Kirkhorn (CFO)We successfully launched, ramped and demonstrated profitability of the Model Y, as Elon mentioned, significantly ahead of schedule. This is our second large scale product launch since model three in 2017 and it's evidence to the progress we've made on cost control and ramp efficiency.
9:37Zachary Kirkhorn (CFO)It's hard to understate the significance of demonstrating profitability of this program in its full quarter of production. Our Shanghai Model 3 margins improved dramatically since Q4 of last year, nearing equivalence of Model 3's built in Fremont.
9:52Zachary Kirkhorn (CFO)This is despite not yet running at full capacity while also managing through the production shutdown in early February. We also announced a long range and performance variant of the Model 3 per our roadmap which will positively impact ASPs in China on order rates.
10:08Zachary Kirkhorn (CFO)We did not experience much of an impact related to the expiration of government incentives at the end of Q4. In fact, we exited the quarter with our highest ever backlog yet again.
10:19Zachary Kirkhorn (CFO)Aided by these accomplishments, we were able to achieve our first ever Q1 profit. Automotive gross margin, excluding the impact of regulatory credits, remained strong for all products despite charges taken in Q1 associated with production downtime.
10:33Zachary Kirkhorn (CFO)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.
10:44Zachary Kirkhorn (CFO)We also experienced expected launch inefficiencies associated with our third version of the Solar Roof which impacted overall profitability. As I've noted before, we expect regulatory credit sales, which are credits we sell to other carmakers, to generally increase with time.
11:02Zachary Kirkhorn (CFO)This can be seen by the increase from Q1 relative to Q4. And note that most of the credit revenue did not contribute to cash in Q1 and it's reflected in the accounts receivable on the balance sheet.
11:15Zachary Kirkhorn (CFO)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 are pacing towards a record quarter of deliveries and strong free cash flows.
11:33Zachary Kirkhorn (CFO)As Elon mentioned, it is extremely important that we remain on track to achieve our long term plans and technology roadmap. We are taking the near term actions required to continue those investments.
11:45Zachary Kirkhorn (CFO)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.
11:55Zachary Kirkhorn (CFO)Our Shanghai factory remains operational, contributing an increasing level of cash flows and profitability to the company in Fremont. We're working towards restarting production as soon as that's possible. We are also continuing to deliver cars that we were unable to deliver at the end of the first quarter.
12:12Zachary Kirkhorn (CFO)Our vehicle inventory balance increased by 14,000 units at the end of Q1 which was a headwind to free cash flows in Q1, but it's helpful in Q2. Note that one of the most important aspects of Model Y in Fremont and Model 3 in Shanghai is the dramatically improved cash conversion cycle by locally producing and delivering vehicles.
12:31Zachary Kirkhorn (CFO)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.
12:42Zachary Kirkhorn (CFO)However, unavoidably, the extended shutdown in Fremont will have an impact on our near term financial performance and we will need to work through how quickly we'll be able to ramp production to prior levels.
12:52Zachary Kirkhorn (CFO)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.
13:04Zachary Kirkhorn (CFO)The Tesla team has done a great job here. We've also taken actions to eliminate or reduce non critical expenses and optional investments while continuing to drive efficiencies throughout throughout the business.
13:15Zachary Kirkhorn (CFO)Overall, we've modeled many scenarios into 2021 and remain comfortable that we have sufficient liquidity to proceed fully with our most important long term investments. It's important to note that Tesla remains an extremely agile and dynamic company and this is aided by the substantial work we've done over the last year to improve our cost efficiency and productivity and we have the ability to quickly adjust our spending and point planning as required.
13:41Zachary Kirkhorn (CFO)So thank you again to the Tesla team for success in Q1 and we will turn to questions.
13:48Martin Viecha (IR)Thank you very much. So we'll take the first questions from institutional investors compiled by SAIC Technologies. The first question from Institutional Investor is Most Tesla owners have yet to purchase or experience FSD despite most vehicles having all the necessary hardware.
14:06Martin Viecha (IR)What levers could you pull to accelerate adoption and deepen your data advantage? For example, could you consider offering FSV as a premium subscription?
14:18Elon MuskI think we will offer Pulsar Driving as a subscription service, but it will be probably towards the end of this year I should say it will still make sense as to buy FSD as an option as in our view, buying FSD is an investment in the future and we are confident that it is an investment that will pay off to the consumer, to the benefit of the consumer.
14:49Elon MuskAnd in my opinion buying the FSD option is something people will not regret doing.
14:56Zachary Kirkhorn (CFO)I agree and financially we rolling the upfront purchase of the FSD option into a loan in the vehicle or a lease will be the least expensive way on a monthly basis to own plus you preserve the option value of increased value of time.
15:10Zachary Kirkhorn (CFO)But we do understand that some customers who have ownership or have leased their vehicles did not purchase that option up front and so this will enable those customers to spread out the cost of ownership of SSD or subscription over time.
15:25Elon MuskAbsolutely. 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 and we think that that's the kind of thing that all companies should try to do and it's what results in long term value creation and loyalty to guest loyalty.
15:45Elon MuskSo our goal is always really to do the best thing for the customers. And, and we're confident that if we behave like that, customers in turn,
16:00Zachary Kirkhorn (CFO)they
16:00Elon Muskhave the same way to us.
16:04Martin Viecha (IR)Thank you. The second question from investors is China recently announced changes to its NEV subsidy program that disqualifies Tesla vehicles from benefiting from the subsidies. To what extent is there room for Tesla to lower manufacturing cost in China and pass those savings to buyer so they can qualify for the subsidy?
16:25Elon MuskYeah, so we are making rapid progress on lowering the production cost in China and we're actually excited to announce on this call that we will be reducing the price of the standard range model
16:39Zachary Kirkhorn (CFO)3
16:41Elon Muskbasically tomorrow, China time. So the day after tomorrow, California time, but tomorrow China time and that price below the subsea limit, we feel confident that that will still be a vehicle that delivers a good gross margin.
17:00Zachary Kirkhorn (CFO)Yes. And on the manufacturing cost portion of the question, the cost of vehicles produced in Shanghai in Q1 is already lower than the cost to produce the Model 3 in Fremont.
17:13Zachary Kirkhorn (CFO)And there's still significant opportunity left to take cost out. So fixed cost absorption from higher production volumes, which are occurring in Q2 and will occur through the rest of the year, we're not fully localized on the supply chain yet.
17:26Zachary Kirkhorn (CFO)And so while a lot of the supply chain is localized, it's not complete and there's additional opportunities there. And so we'll continue to bring the price down and expand margin, cost down and expand margin even with this reduction in price that Elon mentioned on the standard range version of the vehicle.
17:44Martin Viecha (IR)Thank you. The next question is Andy Gro 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?
17:58Elon MuskWell, it has caused us to look closely at our cost structure and, and to be more efficient as a company. One always has to do that in a crisis.
18:11Elon MuskAnd just think about our core beliefs and what do we want to do? And we came to the conclusion that the right move is actually to continue to expand rapidly, continue to invest in the future in new technologies, even though it is risky.
18:31Elon MuskAnd we've talked to some investors and they support that approach as well. So I think that there's clearly an uncertain future ahead. It's a bit of A bumpy road, but I think the long term prospects are extremely good.
18:51Elon MuskAnything you guys want to add?
18:53Zachary Kirkhorn (CFO)Yeah, I agree with that. Elon Musk. 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.
19:14Elon MuskTouchless delivery.
19:15Zachary Kirkhorn (CFO)So touchless delivery, mobile service, touchless sales has been something that we've been very focused on on and made a lot of progress on. Yeah.
19:23Elon MuskThe Tesla is the only car that you can literally order it in less than five minutes on your phone. You can order a car and have it delivered to your doorstep with all the paperwork and everything done.
19:36Elon MuskThat's it. Effortless.
19:37Zachary Kirkhorn (CFO)And many customers do that and they're doing it.
19:39Elon MuskYes. In fact, a big part of it is just trying to communicate to people if this is something you can do. Because normally buying a car is a quite a pain for most people.
19:50Elon MuskThey would rather go to the dentist than buy a new car. Actually, my dentist is great. It's really like quite an arduous thing when the typical retail experience of buying a new car is more painful to people than having a root canal, than having you have to say, whoa.
20:16Elon MuskAnd for Tesla, it is completely as easy as ordering something from Apple App Store, ordering something on Amazon and just a car.
20:30Zachary Kirkhorn (CFO)Yeah,
20:32Elon Muskif you really went fast, I think you could order a car probably in 90 seconds.
20:40Martin Viecha (IR)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?
20:54Elon MuskYeah, we're just, we don't want to preempt a battery day. You don't want to leave the exciting news for that day. But there won't be a lot of exciting news news to tell and I think it'll be one of the most exciting days in Tesla's history.
21:12Elon MuskAnd we're just trying to figure out the right timing for that. We think probably the right timing will be probably the third week of May not give you a firm date, but we think that probably that's the right timing.
21:28Elon MuskAnd depending upon what we're allowed to do, it will either be in California or Texas.
21:36Zachary Kirkhorn (CFO)Okay.
21:37Martin Viecha (IR)And the last question from institutional investors. Could you please update on progress towards development and commercialization of full self driving? How much revenue have you recognized so far?
21:55Zachary Kirkhorn (CFO)So just a couple things on the financials for full self driving. So currently in North America it's sold for $7,000 as an option. You 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.
22:17Zachary Kirkhorn (CFO)Our deferred revenue balance is continuing to grow. It's a little bit over $600 million. 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.
22:35Zachary Kirkhorn (CFO)And then cars going forward, once a feature is released, we can recognize that revenue, so we reduce the amount of deferral and we can recognize that revenue within period.
22:43Zachary Kirkhorn (CFO)So I mean, this is one of what we think will be one of the most powerful gross margin levers of time as the feature suite is rolled out.
22:51Elon MuskAbsolutely. There's also a tremendous amount of untapped potential in the fleet out there that could upgrade to turn on autopilot, basic autopilot or full self driving. And that's something we will enable just as a simple in app purchase or as we were talking about earlier, just towards the end of the year as a subscription.
23:14Elon MuskSo that's just a lot of untapped potential there that's not in the deferred revenue line obviously, but is certainly a great deal of deferred potential that we think is a large portion of which is likely to reach fruition.
23:33Martin Viecha (IR)Thank you. And now let's go to questions from retail investors. Question number one. Elon has mentioned a 50% compound annual growth target for Tesla in the past. Is this still in line with Tesla's ambitions for the next five to 10 years?
23:48Martin Viecha (IR)This would be 4 million vehicles in 2025 and more than 20 million vehicles in 2030. Is 40% a more realistic target?
23:57Elon MuskWell, it's always difficult to predict what the macro situation is going to be. I think very few people would have predicted the unexpected roundhouse that Vet Covid came up with.
24:15Elon MuskIt sort of came out of nowhere. So I think in the absence of something, some massive force majeure event, but quite massive. I think 40% is the likely number.
24:37Elon MuskIt's possible that is 40%. I would be very shocked if it's less than 40% even with force majeure short of World War 3.
24:51Martin Viecha (IR)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?
25:05Elon MuskI think we will announce the next Giga possibly as soon as a month. We may announce as soon as next month. This is not a prediction, it's just
25:20Zachary Kirkhorn (CFO)saying
25:22Elon Muskthat could happen. It will certainly be within three months and possibly one month. And that would be in the U.S. so as for how many will be in five years, I don't know right now what that number would be.
25:45Elon MuskI 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.
25:56Zachary Kirkhorn (CFO)I'll also add that our gigas have gotten bigger.
25:59Elon MuskYes. Arguably they start being called tera.
26:04Zachary Kirkhorn (CFO)Yes. With multiple products as well. And so the absolute number of gigafactories we may ultimately build might be less, but each one is larger. And that's under a belief that just significant efficiencies by having as much as possible and similar product lines under the same roof and as much vertical integration as possible all in one facility.
26:29AnalystThank you.
26:30Martin Viecha (IR)The next question is, can you give us an update on solar roof ramp? How many are you currently able to install per week? What is your installations per week's target for the end of 2021?
26:45Elon MuskWe were actually gaining tremendous 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.
26:57Elon MuskPermit offices were closed and shelter in place all over the place. So we obviously cannot install. If you can't get permits and you can't physically do it, it's physically impossible.
27:12Elon MuskBut I think the long term trend for solar roof is extremely good and I'm confident that let's say within the next, I don't know, year, maybe even by end of year, we should be installing at a rate of 1,000 a week.
27:33Elon MuskPerhaps not in the middle of winter or something.
27:40Elon MuskFor seasonality where it's hard to install on roofs that are covered in snow and ice. But in a say spring, I think it's installing which is the hard part.
27:51Elon MuskWe actually have demonstrated the ability to hit 1000 a week, worst flood 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, roofing industry installers.
28:14Elon MuskAnd internally we want to have at least 1,000 solar roof install teams and taking a week or perhaps a little less than a week to do an install which gets you 1000 a week roof installations.
28:29Elon MuskWe see demand is good, production is good. So it's really all about the install and 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 1,000 a week.
28:56Elon MuskWe're also seeing a lot of interest outside of North America. So do you expect this to be a product that is international and actually seeing a tremendous amount of interest from China along the solar roof?
29:09Elon MuskSo we're confident this will be a very significant part for the company over time.
29:16Martin Viecha (IR)Thank you. The next question is, can you elaborate on Tesla's plan to enter the residential and or commercial H Vac market? Can you provide some basics of how your system will work?
29:27Martin Viecha (IR)Will you consider the heat pump water heater market as well?
29:33Elon MuskWell, as I said on Twitter, I'm personally extremely excited to build a kickass H Vac system that also has,
29:45Martin Viecha (IR)you
29:45Elon Muskknow, sort of hospital grade particle filtration. Basically HEPA filtration that filters out viruses, bacteria, pollen, fungi and also neutralizes acidic alkaline gases that is quiet and efficient.
30:11Elon MuskAnd these are all things we've achieved in our cars, by the way. In fact, I don't know if a lot of people realize, but the Model S next are the only cars in the world that have a hospital operating room grade like HEPA filters built in.
30:23Elon MuskThey're very big, but you get to a particle count that is insanely low with our cars.
30:32Zachary Kirkhorn (CFO)And 3 and Y have like MERV 16 or 15 capable filter.
30:37Elon MuskHm.
30:37Zachary Kirkhorn (CFO)Which is.
30:38Elon MuskYeah, it's not like model 3 and yeah, no slouches. Model 3 and Y are also way better than any other car. To the best of my knowledge. They're not quite as good as possible operating room but they're extremely good.
30:49Elon MuskWay better than any other normal car. And we're continuing to improve the culture zone 3 NOI. These actually have a big effect on health even in normal, just day to day living.
31:01Elon MuskIt's reducing particle count and it has an effect on allergies and all sorts of things. So it's really. Air quality is incredibly important. Even in a non Covid situation, it's important.
31:18Elon MuskSo taking all those things that we've learned and applying to home H Vac would be. And commercial H Vac would be just very exciting. And if you're condensing water, why not also have it be a water source?
31:34Elon MuskIf you have water, you possibly could then heat the water and have a water heater as well.
31:40Zachary Kirkhorn (CFO)Yeah, use it as a heat source if you need it instead of the outdoors when the outdoors is really cold or the other way around. So lots of options.
31:47Elon MuskIt could be a hell of a product. So we just have to, you know, it tells us we have a tendency to Buy a form that we can chew on the product front.
31:56Elon MuskSo we gotta make sure we get a lot of irons in the fire here for new products. With the cybertrucks, MIA Roadster and the gigafactories in various parts of the world.
32:14Elon MuskIt's brilliant. Model Y and Autopilot and the solar roof and new technology. Yeah, exactly. Powerwall, power pack, megapack. We are seeing tremendous demand for stationary storage, more than we can supply, at least for 2020.
32:38Martin Viecha (IR)Thank you. And the last question from 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?
32:53Elon MuskWell, we haven't really thought about that yet. It's not out of the question. But our brain is full. Excuse me, sir?
33:05Zachary Kirkhorn (CFO)Our brain is full.
33:08Elon MuskThat's not out of the question. Our overarching goal is to help accelerate the advent of sustainable energy. And the three elements of that are sustainable power generation, then we've got to store the power.
33:24Elon MuskStationary storage, and then you've got to have electric transportation.
33:32Elon MuskWe don't have 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.
33:43Elon MuskBut it's not like you said, market share, growth, it's going in and of itself. It's just the faster this happens, the better off the world is.
33:53Martin Viecha (IR)Thank you very much. And I think now we can move to analyst questions.
34:00OperatorThank you. Our first question will come from Adam Jonas with Morgan Stanley. Please go ahead.
34:08AnalystThanks, everybody. I hope everyone's safe and healthy. I got one question, one follow up, and I point out I've had a root canal before and I would agree, Elon Musk.
34:17AnalystIt was less painful than buying a car.
34:20Martin Viecha (IR)Exactly.
34:20Elon MuskI mean, really, it's. Yeah, exactly.
34:27AnalystIt's a big problem, actually.
34:28Elon MuskIt's a big problem, yes.
34:31AnalystDifferent conversation. 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.
34:44AnalystJust wanted to give you a shot at that. I got a follow up.
34:48Zachary Kirkhorn (CFO)Yeah, it's a fair question. I don't have any additional color to provide, so $8.1 billion in cash and cash equivalents at the end of Q1. We're managing it very closely.
35:00Zachary Kirkhorn (CFO)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.
35:12Zachary Kirkhorn (CFO)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.
35:28Zachary Kirkhorn (CFO)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.
35:38Zachary Kirkhorn (CFO)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.
35:46Elon MuskYeah, 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.
36:03Elon MuskAnd Bay Area produces the vast majority of our cars, all of S and X and most of the three and all of the Y. So the extension of the shelter in place, or frankly I would call it forcibly imprisoning people in their homes against all their constitutional rights.
36:25Elon MuskThat's my opinion. Raising 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? Outrage.
36:40Martin Viecha (IR)Outrage.
36:42Elon MuskSo. 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.
36:54Elon MuskAnd old peoples, 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.
37:07Elon MuskAnd it's causing a lot of strife to a lot of people.
37:15AnalystElon, on that point you mentioned people that gave their lives to build the country. My faults for you on this, there have been a lot of comparisons drawn to the state of the U.S.
37:27Analysteconomy to the early 1930s when Roosevelt began a series of new deals and infrastructure projects, or Post World War II, when Eisenhower launched the U.S. highway act and when JFK launched the Apollo program, which you could say was influenced by the Cold War, clearly.
37:42AnalystAnd you benefited from. And our space program benefited from. What would be your message to U.S. lawmakers on this call? As we in addition to your opinions on shelter in place but you know, thinking longer term, your message to US lawmakers coming out of the crisis Specifically around infrastructure and a chance to kind of, you know, work with taxpayers to support sustainable transport, renewable energy.
38:05AnalystI'm wondering if you see this, you know, as a chance to make the crisis and all the loss and lives lost not be in vain. Thanks.
38:16Elon MuskI 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.
38:31Elon MuskIt's great. Europe has better infrastructure. It's really quite sad. 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.
38:51Elon MuskAnd it's not just a question of money, it's a question of will. Sometimes we spend a lot of money on these things, but what are we getting for it?
39:02Elon MuskAnd yeah, we really need to be thinking about what is the transportation of the future, not the transportation of the past. If this was 1920, do you want to be investing in steam engines or into open motion engines?
39:16Elon MuskObviously 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?
39:36Elon MuskI think the people are going to be very angry about this and are very angry. Somebody should be. If somebody wants to stay in their house, that's great. They should be allowed to stay in the house and they should not be compelled to leave.
39:49Elon MuskBut 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 the goddamn freedom.
40:13Martin Viecha (IR)Okay, let's go to the next question, please.
40:16OperatorThank you. Our next question comes from Emmanuel Rosner with Deutsche Bank. Please go ahead.
40:22Zachary Kirkhorn (CFO)Hi, good evening.
40:24Elon MuskQuestion 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?
40:38Elon MuskWhat other factors should we think about and what does that mean for the outlook for the eventual gross margin on Model? Yes, sure.
40:52Zachary Kirkhorn (CFO)A couple of thoughts there for why. 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.
41:08Zachary Kirkhorn (CFO)So we started with deliveries of performance initially, and so that helps create some of the margins and that will come down with time as more variants are released and we have more of a steady state mix.
41:22Zachary Kirkhorn (CFO)But it's similar to the ASP trend that we had with Model 3 when we launched that product in Fremont two years ago. On the cost side, I think you hit on a couple of the buckets.
41:31Zachary Kirkhorn (CFO)The commonality is huge. It's very important. And in addition to that, manufacturing processes are very similar to Model 3 as well. So we have experience with that both with, with Model 3 in Fremont and then as well in Shanghai.
41:45Zachary Kirkhorn (CFO)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.
42:00Zachary Kirkhorn (CFO)The number of vehicles that we built in the first quarter is quite limited
42:03Elon Muskrelative to where we'll go, take cost out of the car and to make the product better so it's not make the product worse. Any fuel can take cost out of a car and make it worse.
42:15Elon MuskWe want to take cost out of the car, figure out how to make it lighter and simpler. And so we want the car to just incrementally improve as well as incrementally get lower in cost.
42:30Elon MuskBut for a five seater Model Y, we expect marginal cost of that car to be comparable to the Model 3. Once we have reached say PEP to 10 or 20,000 units or something like that.
43:34Martin Viecha (IR)Hello,
44:01OperatorLadies and gentlemen, please stand by. Your conference will resume momentarily. Thank you.
45:34OperatorSpeakers, you're back online.
45:38Martin Viecha (IR)Hi, sorry, we got disconnected for some reason. What was the question again?
45:50Martin Viecha (IR)Okay, let's go to the next question please.
45:53OperatorThe next question comes from Ben Callow with Baird. Please go ahead.
45:58Elon MuskHey, thank you very much. Just wondering about the sell strategy in Reno. You have obviously integrated there, but you're buying cells I think in Shanghai and what we think in Germany.
46:19Elon MuskAnd so how are you looking at that going forward? And then could you just talk about Mr. Mazzino and that board addition and kind of the process with adding them to the board.
46:32Elon MuskThank you.
46:40AnalystSure.
46:40Zachary Kirkhorn (CFO)From a sales perspective, you know, with all the partners we've had historically and in the future we're just looking for competitive technology and competitive pricing. I think we'll talk a little bit more about this battery investor day, like how we're approaching all of it.
47:02Zachary Kirkhorn (CFO)But yeah, I mean we don't have like one model we're
47:08Elon Muskrestricting ourselves to pursue.
47:10Zachary Kirkhorn (CFO)We're just trying to find what's best
47:11Elon Muskfor the products in the long run.
47:15Zachary Kirkhorn (CFO)And then another question about the board.
47:21AnalystSorry, I couldn't.
47:22Martin Viecha (IR)We couldn't hear the second part of the question.
47:24Elon MuskYeah, I was asking about Mr. Maduro entering the board and kind of the process behind that and what he brings to the board.
47:41Elon MuskOh, I think we all need a hero.
47:52Elon MuskAnd obviously he brings experience investing at the highest levels in the world and has done critical work at the Japan pension fund, which is the largest fund of any kind in the world.
48:10Elon MuskAnd generally the conversations over the years just show incredible insight into how the securities global security markets work and what he thinks is whether errors for reform. It seems like a strong philosophical understanding 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.
48:59Elon MuskI guess linking into the Panasonic relationship, maybe just how is that relationship going? Is there any read through on bringing him onto the board? Thank you. No, I think this is getting through with the Passmic relationship.
49:17Elon MuskI mean I have a great relationship with Passmic CEO. We meet regularly, one on one and talk all the time. So that relationship is strong.
49:34Elon MuskHe would bring more of a broader and a global strategic view to the board.
49:43Martin Viecha (IR)Thank you. Let's go to the next question, please.
49:45OperatorOur next question will come from Gene Munster with Loop Ventures. Please go ahead.
49:51AnalystCongratulations on the progress and you only talked about full autonomy by the end of the year. I would love for you to walk through the rollout strategy of the Tesla network app and how that's going to look prior to the robotaxi stage.
50:04AnalystAre you going to gradually take over human routes with autonomous capable routes over time or how do you see that playing out?
50:17Elon MuskWell, it's pretty much going to play out as it has played out, which is we'll release more and more functionality before we release any functionality. It goes through extensive testing.
50:31Elon MuskWe have a simulations team that has a very good simulation in the real world. So we run any code changes through battery tests and simulation. Then we have a level three A team which I'm on, actually I'm one of the on the global credit carry team.
50:54Elon MuskAnd we test the releases in the real world, spot real world differences between the real world and the simulation, which are very many because the world is very complex and weird.
51:08Elon MuskAnd 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.
51:29Elon MuskAnd so there are many stages that these things go through. So by the time something is going to wide release into the US it has gone through all of those stages and the software that's at the very early stage is much more advanced than what people are saying.
51:47Zachary Kirkhorn (CFO)So
51:49Elon Muskjust got to go through a very rigorous safety process. So essentially we need to figure out get very good at complex intersections, get very good at complex turns and intersections and things like busy malls in a parking lot or office park or special events and sporting events, that kind of thing.
52:22Elon MuskWhen those eventually come back, those are extra hard cases. But it's all tracking very well. I feel like the autopilot engineering team is. We just have an extremely talented group
52:44Zachary Kirkhorn (CFO)and
52:46Elon MuskI'm deeply involved with the team.
52:53Elon MuskSo we talk every week and meet every week when we can. Because now physical meeting is difficult. So I have quite a deep understanding of where we are, where we're headed
53:04Zachary Kirkhorn (CFO)and
53:06Elon MuskI feel like we have a tremendous amount of momentum and we'll have the functionality that's very cool, full self driving by the end of the year. Now after that functionality is released, there's still another step which is to.
53:23Elon MuskImprove the reliability of it once it's released. So we can have full stop driving with human 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.
53:41Elon MuskAnd we provide a vast body of data to regulators to show them that this is the case. And then presumably the regulators, depending on which jurisdiction it is, would give approval for fully autonomous Mars that can drive with no human on board.
53:59Elon MuskObviously 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 the day I feel very good about.
54:14AnalystSo to summarize, we want we're going to get owners full autonomy, some level of that by the end of the year and then a human in the loop Tesla Network app sometime is it first half of next year, Would that be the hope?
54:32Elon MuskDo you mean like working on the car drive with no person
54:37Analystwith a person initially a person to observe. Would that be with the Tesla Network app? Would that be early part of the year of 2021? That the hope?
54:50Elon MuskIf described as a hope, I would say that that's probably a fair description.
54:55AnalystOkay. And then, you know, kind of take it to its end stage, the Robotaxi 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 the.
55:12AnalystWhen will we start seeing Robotaxis? Well,
55:24Elon MuskI think it's quite likely in
55:27Zachary Kirkhorn (CFO)my view
55:30Elon Muskcould be wrong.
55:37Elon MuskAs you seem we're ahead in some areas and we're behind in others. Because when I give a guess, I give the guess that I think is the likely midpoint, not the point with lots of margin.
55:52Elon MuskIf this is normal distribution, I give you the 50th percentile, not the three sigma optimistic or pessimistic. So then that necessarily means at least half my predictions will be wrong and half will be right.
56:06Elon MuskI think it might be bright but offset by a few weeks to a few months, in some cases a few years. But I believe as everything I've ever said would come true, did come true.
56:23Elon MuskIt may have come true late, but it did come true. So functionality is not my strong suit, but I always come through in the end. So I think we could see Robotaxis in operation with Network fleet next year.
56:48Elon MuskNot in all markets, but in some.
56:52Martin Viecha (IR)Thank you and let's go to the last question please.
56:55OperatorThe last question will come from Pierre Ferrou with Nustreet. Please go ahead.
57:01AnalystHey, thanks for taking my question one on gross margin first and your impressive performance in Q1. So there are three moving parts, the tailwind from credits, of course, the model Y ramping.
57:16AnalystEven if it broke even, it probably took average gross margin down and of course you had like Fremont being closed shut down the last week of the quarter. It probably was the sort of an extra cost.
57:27AnalystAnd so when I looked at how gross margin evolved sequentially excluding these three moving parts, I felt like your auto gross margin could have been up like a couple of points sequentially.
57:40AnalystSo I wanted to check with you if that estimate would make sense and then I would have a follow up on energy storage. Thank you.
57:51Elon MuskThe question mark is improved margin improvement.
57:59Zachary Kirkhorn (CFO)The three things that you mentioned had a little bit of a hard time hearing the poll question here because I'm having a bit of network difficulty in the room.
58:06Zachary Kirkhorn (CFO)I'll do my best here. When we look at margin we do exclude credit as you have. So I agree with that. Model Y ramping bringing down overall gross margin.
58:15Zachary Kirkhorn (CFO)I agree with that as well. So it was lower than the overall average and that will increase with time and shutdown in efficiencies in both Shanghai and Fremont also weighed on margin and the Shanghai margin was below the average as well.
58:34Zachary Kirkhorn (CFO)Even though it's increasing quickly and approaching Model 3, it still is below the average. I think the sentiment of your question was if you were to remove this factors, was there a sequential increase in gross margin?
58:50Zachary Kirkhorn (CFO)I haven't specifically calculated that, but I think your intuition is right. We saw strength in gross margin across the board as I mentioned and in particular FNX gross margins continue to improve despite slightly lower volumes there and higher fixed cost amortization.
59:08Zachary Kirkhorn (CFO)So there's good progress happening both on the ASP side and the cost reduction side for our products in production. And I think this also lends itself to the power of the gross profit contribution to the company.
59:21Zachary Kirkhorn (CFO)Once we get through these ramp inefficiencies, 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.
59:33Zachary Kirkhorn (CFO)We feel very optimistic about that task going forward.
59:39Martin Viecha (IR)Thanks.
59:39AnalystAnd I had a quick follow up on Energy Storage, if you can hear me. Well, I think, like, I can't remember, I think from the very first days I heard you on the call, you've always mentioned that demand for energy storage is always outstripping supply and you have more orders than you can meet.
1:00:00AnalystAnd so I'm kind of thinking there should be an inflection point in that business at some point, and it's going to be driven by your ability to add much more manufacturing capacity, like battery manufacturing capacity, and at a high level.
1:00:16AnalystHow are you thinking about that inflection point in terms of timeline?
1:00:32Zachary Kirkhorn (CFO)In terms of timeline, I think what
1:00:35Elon Muskwe've been doing with both our partners
1:00:37Zachary Kirkhorn (CFO)and internally is looking at how to reduce fundamentally the cost of investments in new cell capacity. Because when you look at a car vehicle product, you know there's a lot of things in the vehicle besides the cells.
1:00:54Zachary Kirkhorn (CFO)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.
1:01:04Zachary Kirkhorn (CFO)And I think, not to give too
1:01:08Martin Viecha (IR)much away, but that'll be one of
1:01:09Zachary Kirkhorn (CFO)the things we address in Battery Investor Day is how we're focused on that.
1:01:14Elon MuskAnd when we have that in the
1:01:16Zachary Kirkhorn (CFO)place we want, it'll be a lot easier to scale that business.
1:01:21Martin Viecha (IR)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 time. Thank you very much and have a good day.
1:01:33OperatorLadies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.