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  • Good day, ladies and gentlemen, and welcome to

  • the Tesla Second Quarter 2017 Financial Results Q&A Conference Call.

  • At this time, all participants are in a listen-only mode.

  • Later, we will conduct a question-and-answer session, and instructions will follow at that time.

  • As a reminder, this conference is being recorded.

  • I would now like to introduce your host for today's conference, Mr. Jeff Evanson.

  • Mr. Evanson, you may now begin.

  • Thank you, Shree, and good afternoon, everyone.

  • Welcome to Tesla's Second Quarter 2017 Q&A Webcast.

  • I'm joined today by Elon Musk; JB Straubel; Deepak Ahuja; and Jon McNeill.

  • Our Q2 results were announced 80 minutes ago 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 yourselves to one

  • question and one follow-up.

  • But before we jump into the Q&A, Elon has some opening remarks. Elon?

  • [AV issues, skip to 11:15.]

  • All right. Thank you. All right, we apologize, everyone.

  • Elon, over to you.

  • All right, thank you. My apologies, we actually tried a new audio system

  • with a bunch of individual mics that seems to have malfunctioned,

  • so we went back to our standard conference call object.

  • Anyway, I just want to confirm people can hear what I'm saying? Okay, great.

  • So first of all, I want to say that Friday night was an amazing time for Tesla.

  • It was one of the most important days in the history of the company.

  • It's something we've been striving for, for 14 years.

  • Having with us steady production of Model 3s was just an incredible milestone in the company's history.

  • We wanted to make a great, affordable electric car which is a fundamental thing that is missing.

  • We wanted to make that from day one, and if we could only have done it sooner, we would have.

  • And I'm glad that this day has come.

  • What we have ahead of us, of course, is an incredibly difficult production ramp.

  • Nonetheless, I think we've got a great team, and I'm very confident that we will be able

  • to reach a production rate of 10,000 vehicles per week towards the end of next year.

  • And we remainwe believe on track to achieve a 5,000 unit week by the end of this year.

  • So, I would simply urge people to not get too caught up in what exactly falls within

  • the exact calendar boundaries of a quarter, one quarter or the next, because when you

  • have an exponentially growing production ramp, slight changes of a few weeks here or there

  • can appear to have dramatic changes, but that is simply because of the arbitrary nature

  • of when a quarter ends.

  • But what people should absolutely have zero concern about is that Tesla will achieve a

  • 10,000 unit production week by the end of next year.

  • So, if you can sort of see where we came from, the Roadsterwe were making only 600 units

  • a week where the non-powertrain portion of the car was made by Lotus.

  • And we did the powertrain and final assembly of the car, and then we went from that to

  • 20,000 units a year of the Model S, a far more complex car, where we did the whole thing.

  • And then with Model 3, we are more vertically integrated.

  • I think people should really not have any concerns that we will reach that outcome from

  • a production rate.

  • We're also very confident about costs.

  • We feel we gained a lot of experience.

  • We certainly aspire to learn from the mistakes of the past, and I think we largely have.

  • Deepak will go into some of our margin expectations there.

  • And unlike, say, for example, the Model X, where the mistake that we made, and I obviously

  • take the prime responsibility here, was having far too much advanced technology in version

  • one of our product.

  • Model X is an incredible car, but it was overreaching for the first-generation of the product.

  • In the case of Model 3, we're strived hard to simplify and make sure that it has everything

  • essentially to be a fantastic car.

  • If you see the reviews, the reviews areone could not ask for better reviews.

  • And I just thought I'd give you one little anecdote, which waswhich I found quite

  • surprising is that when we were giving test drives toor the journalists were driving

  • the car and doing test drives.

  • About 80% of the journalists said that they would buy the car themselves.

  • Most of the remaining 20% said probably.

  • This is crazy.

  • I've never seen anything like it.

  • So this is a very good sign.

  • It should also be noted that one of our big concerns was that Model S, particularly, and

  • Model X demand would suffer with the introduction of the Model 3.

  • In fact, this has turned out to be the opposite situation.

  • Model S and Model X demand increased with the release of Model 3.

  • Jon, would you like to just elaborate on that?

  • We did express this as a concern.

  • Yes.

  • And it was a big concern, but it has turned out to be a pleasant surprise.

  • Yes.

  • I think that's right.

  • Not only as Elon said, we expressed it is a concern.

  • We had positive comps, both year-over-year and quarter-over-quarter in orders in the

  • second quarter.

  • But since then, orders have accelerated in July as we noted in our shareholder letter.

  • And they've accelerated further since the hand-over event on Friday for the Model 3.

  • So, it clearly shows that S and X as our flagship products have a strong position in the market

  • and strong demand.

  • And that's super encouraging that we've got a strong product lineup with three cars that

  • are proving to be very popular in their individual segments.

  • Yes.

  • In fact, I don't know – I think we mentioned some of this in the earnings letter, but just

  • some of the key stats on, say, July orders for S and X were...

  • Yes.

  • July orders were 15% higher than our Q2 average weekly order rate, so we accelerated off of

  • Q2 into July.

  • Yes.

  • And as we noted in the shareholder letter, deliveries grew by 53% compared to the Q2

  • 2016 in a flat luxury vehicle market, so we're gaining share...

  • Yes.

  • In a flat-to-down market, and the order has accelerated.

  • So July was one of our best months ever.

  • Yes.

  • Again, contrary to our expectations, I want to emphasize.

  • Of course, who knows if this will continue, but all indications are that it will.

  • So that's very exciting.

  • Yes.

  • A side note, we're making great progress on our internal Autopilot software.

  • It's getting better and better.

  • I'm really, really excited.

  • I test drive the latest development release as soon as it comes out, and I'm like this

  • is really getting to be something special.

  • Yes, it's really, and I think it's going to accelerate from here.

  • And the talent that we're seeing join on the technical side for Autopilot is really world-class.

  • I don't think there's – it's unmatched anywhere, I would say.

  • So, let's see, Model 3 net orders arethere's not that many cancellationsabout 1,800

  • a day.

  • I want to emphasize you can't see the car, unless you want to look at pictures online.

  • You can't test drive a car.

  • You have to put down a $1,000 deposit.

  • We're not promoting the car.

  • We're not promoting the car.

  • If you go to our stores, we don't even want to talk about it, really, because we want

  • to talk about the thing that we can supply.

  • If somebody orders a Model 3 now, it's probably late next-year before they get it.

  • We want to give people a car where it's, in fact, maybe a one- or two-month wait for an

  • S or an X.

  • I think the point that we're trying to make is that the S is still a superior sedan.

  • It seems to have come through, and that's true.

  • Things got a little confusing because of the nomenclature of being Model 3 versus Model

  • S and X, which was, I guess, sort of my fault, being too clever for my own good there, because

  • especially the Model E, as you can tell, I have a wonderful sense of humor.

  • But then people mistook that for generation three, but in fact, if you look at, say, what

  • we're really on right now?

  • I would say is approximately generation four.

  • We're on generation four of S, X and 3.

  • At the risk of really confusing matters.

  • Model 3 is generation four, but so are S and X.

  • We evolve the technology all at the same time.

  • So overall, looking really good.

  • And then Solar Roofwe have installed and working the Solar Roof tiles.

  • I have it on my house.

  • JB has it on his house.

  • I think we included some of the pictures in the earnings letter.

  • I want to emphasize that there's no Photoshopping on the roof.

  • That is actually how it looks, and it wasn't taken by someit was take some pics with

  • your phone and send them over.

  • That's what we're talking about here, not some special lighting conditions, pro-photographer

  • situation.

  • And this is version one, and I think this roof's going look really knockout as we just

  • keep iterating.

  • Now it is a very challenging technical task to get this right, get the costs good, streamline

  • the installation process, ramp up the production.

  • Again, this is sort of follows a similar S-curve to vehicles where it starts up very slow,

  • but then it grows exponentially.

  • Also, our conventional solar is doing quite well and generating significant positive cash

  • flowjust standard flat panel stuff, which, I think, is still the right solution for any

  • kind of flat roof situation, which is most commercial installations in a lot of houses,

  • or some part of the roof where it's really not visible and therefore, doesn't really

  • matter from an aesthetic standpoint.

  • And then, batteriesalso making great progress on the battery front.

  • I'm hoping to do something around the International Astronautical Congress, which is in Adelaide

  • this year.

  • Not promising anything, but we're aspirationally going to have a very substantial portion of

  • the battery pack, already done in about eight weeks, which is hard because we have all the

  • shipping and logistics challenges of getting things across the Pacific.

  • Not promising anything.

  • It's an aspirational goal.

  • Team's working super hard to make it happen.

  • But I'm excited about the prospect, and I feel, of course, optimistic that that will

  • take place.

  • So, yes, I think and we're really proud of the Tesla team for getting to this point.

  • And I really want to thank the whole Tesla team, and we already have 33,000 people at

  • this point, for working hard to achieve some very difficult things.

  • And I can be prouder to work with such a great team.

  • So, let me go toanything else you want to add, guys?

  • All right.

  • Let's go to questions.

  • All right.

  • Shree, let's open it up to Q&A.

  • And everybody in Q&A, we have a lot of people in queue, so Shree's going to be real hard

  • core on the one question, one follow-up.

  • Yes.

  • Not the, one question with eight nested questions.

  • Correct.

  • No nesting.

  • Yes.

  • But as one question part A through H.

  • Thank you.

  • Our first question comes from James Albertine with Consumer Edge Research.

  • Very good.

  • Thank you for taking my question.

  • Good afternoon, and congratulations on the first 30 deliveries last week.

  • It was a great event.

  • Thank you.

  • I wanted to ask if I may, my one question on capital expenditures.

  • Wanted to get an idea, what comes next with respect to some of your spending on the Model

  • 3?

  • And I guess, if I can nest one in, related to (25:23).

  • Oh, God.

  • You know what?

  • Fine.

  • Do it.

  • You know.

  • Fine.

  • It's one question on CapEx.

  • But really want to understand what the big next steps are in 3Q and 4Q as we start to

  • kind of build-out our models and figure out from there?

  • Thanks.

  • Certainly.

  • I mean, I do want to emphasize like but a lot of us is actually very hard for us to

  • know.

  • When we make mistakes is because we're stupid, not because we're trying to mislead anyone.

  • I just want to emphasize – I – we aspire to be less dumb over time.

  • So if I knew it, I would tell you.

  • It's sort of like I've got this, like secret hand of cards that I'm holding close to my

  • vest and I'm not telling you.

  • It's just fundamentally impossible to predict the exponential part of the manufacturing

  • S-curve.

  • It's crazy hard.

  • And S-curve is a simplification because it's really running through a series of constraints

  • that, if youit's like a really jagged sort of upward growth and it'll plateau and

  • then it'll grow rapidly, and it'll plateau again.

  • And then sometimes it'll go backwards because something broke.

  • Yes.

  • When I said manufacturing hell and supply-chain hell on Friday.

  • I meant it.

  • I mean, we know this.

  • Signed up for it.

  • Not blaming hell because when we bought the ticket.

  • So but I think at a high level, I don't think we should expect any significant negative

  • surprises.

  • There will beas usual be the case, there tends to be some cost growth in CapEx for

  • unexpected things.

  • So we've got to expedite this, you've got to fix that, or this supplier doesn't work

  • out, or this machine we bought doesn't work out.

  • And you've got to be all hands on deck 24/7 to fix it or replace it.

  • But I don't expect any significant – I think that is relatively contained.

  • Deepak, do you want to...

  • Yes, I think maybe the other way, James, to answer your question is.

  • You need to talk to close with this.

  • Yes.

  • I think you're asking where we are spending the money.

  • I think it's in the completion of the Model 3.

  • We are bidding-off on the equipment.