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 remain – we 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 Roadster – we 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 are – one could not ask for better reviews.

And I just thought I'd give you one little anecdote, which was – which I found quite

surprising is that when we were giving test drives to – or 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 are – there's not that many cancellations – about 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 Roof – we 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 some – it 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

flow – just 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, batteries – also 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 to – anything 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 you – it'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 be – as 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.