Q3 2019 Earnings Call

One question and one follow up question.

You may do so by pressing Star then one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker Mr. Martin the ACA Senior director of Investor Relations. Please go ahead.

Thank you Shirley good afternoon, everyone and welcome to test loss third quarter 2019, Q1, a webcast I'm joined today by Elon Musk Zachary current corn and a number of other executives are Q3 results were announced at about two PM Pacific time in the update deck, we published at the same linked as this webcast.

During this call we will discuss our business I'll make forward looking statements. These comments are based on our predictions and expectations as of today actual events or results could differ materially into a number of risks and uncertainties, including those mentioned in our most recent filings with the FCC.

During the question and answer portion of today's call. Please limit yourself to one question on one follow up. Please press star one now if you would like to join the question Q.

Before we jump into Q1 <unk> you won't have some opening remarks you on.

Thank you.

First of all I'd like to think that total team for an incredible job. This quarter execution was outstanding and on just about every front so.

It's just that order books, which were so Tim.

Q4, Q3 was Oh, so very strong quarter, we had record deliveries were able to.

Great strides and controlling our costs.

We shifted back to GAAP profitability, while also generating strong free cash flow.

And again this would not be possible about each employee during a plot to reduce cost.

Operating cost is not the lowest levels since model three production started.

Regarding gigafactory Shanghai. This month, we started proud production at bigger Shanghai and have built a full vehicles from a body to page two general Assembly US. This is a more emphasizes or a real factory with a tremendous amount of equipment as.

Well, let people see the the outside show the factory, which is enormous and was essentially.

Underwater in January it was.

Global wouldn't it literally what what is I think much more significant is that we're able to install.

Cost of stamping machines.

Fully operational paint shop at the end as sophisticated Charles every line.

In the same period of time in parallel with booking building.

I'd like to pick out trying to put this extraordinary achievement.

Uh huh.

I'm not aware of any hey factory.

Of the snakes, you're in history being constructed and.

Such a short period of time of approximately 10 months as far as it was unprecedented.

And Gigafactory shambles, Shanghai will become a template for future growth claims will model wise in Shanghai as well of course, and both eight gigafactory in Europe , and we hope to announce to location that Gigafactory in fact, we will announce that.

Okay, just like Gigafactory before the end of this year.

Regarding model why.

Also ahead of schedule a model why preparations in Fremont.

And with the launch timeline from full 2022 summer 2020.

The maybe some room for improvement there, but we're confident about a summer 2020.

I've actually really driven the model like well leased kindred and think it's going to be an amazing product and be very well received I think it's quite likely to.

Mike This just my opinion, but I I think it will outsell X and three combined.

Regarding version 10 and spot seven last month, we were released our latest a software version 10, which includes video streaming games karaoke, Spotify and and a host of other new features and improvements.

Most importantly, it includes the first version of Smart seven which has now been used.

A million times.

Thats out over a million uses of smart seven.

And.

The next week or so we'll be releasing and approved version of smart seven taking into account all the data from those millions smart summing it sounds so its.

Because really illustrates the value of having.

A massive fleet because it allows us to quite a big piece corner cases.

And learn from them and use fleet loading and become a rapidly better just doesn't have to get on autopilot did on the freeway.

So we expect a.

A number of proven sunspots evident.

In the weeks to come in.

And as it relates to be getting as a quick more data and what about in pulls up traffic functionality gets better.

I I.

I do.

While it's going to be tight I still does appear that.

We will be at least in limited and early access release of a future complete pull self driving future. This year.

So it's not so for sure but it appears to be attract for at least early access release of a fully functional bill so accrediting body of this year.

And.

Yeah, Lastly were high folks lets systems that really make a material difference to the company such as opening.

Gigafactory then.

Got a confidence.

Yes, it's worth noting that these ultimately having.

Three gigafactory is affecting will triple R.R. outputs and then when you consider.

Increased output her gigafactory, it's going to actually more than tripled our effort overtime.

And then.

Their leverage think things happening with respect to advance batteries and workers from car trains.

That will subscribe and all that stuff, but.

That'll be something for future time.

And then what one last item is that a tomorrow afternoon will be.

Releasing version three of the tells us solar roof, that's the integrated so with it so.

The solar panels integrated with the roof.

So that's.

I think this is a great integrate grade product version, one to where we're still sort of figuring things out version three I think is finally ready for for them for the big time.

And so we're scaling scaling up production of the version three sold how rude.

At our Buffalo Gigafactory, and we think this product is gonna be incredible, but we'll talk more about that on the official product launch, which will be tomorrow afternoon.

Thank you very much and I think as Zach and Zachary has some remarks as well.

Yes. Thank you everyone. Thank you Martin.

Q3 was a great quarter for Tesla I know many employees are listening right now and I want to thank you for your passion and your hard work, we've made terrific progress and yet again, we realized margin improvement in nearly every aspect of the business.

Three key points I'd like to highlight.

First we returned to profitability in Q3 aided by improved gross profit reduced operating expenses in the absence of negative onetime items that weighed on our financials in the first half of the I guess.

GAAP automotive gross margin improved sequentially to 22.8% and over 20% excluding regulatory credits.

We achieved these improvements through higher production volumes on FX and model three enabling better fixed cost absorption.

We realized improvements in labor hours per vehicle as well as other costs, such as warehousing logistics delivery and important related item.

We're also making continued progress reducing material costs, including commercial negotiations with suppliers.

Model S and X asps increased even accounting for revenue deferrals related to free unlimited supercharging.

And model three Asps declined slightly driven by mix in Asia pricing action in EMEA.

North American Nancy's held flat as mix improved offsetting pricing action you talked at the started for corridor, which is great to see.

Note that with the release of smart some in the U.S., we were able to recognized $30 million of deferred revenue.

As we expand smart some into additional markets and released new features will continue to recognize additional deferred revenue.

Our services and other loss reduce yet again, reflecting our focus to improve the efficiency of this area at the business.

And we further reduced operating expenses, despite increased orders deliveries and new programs in development.

And finally on net income in other income we saw benefits from foreign exchange, which as I mentioned last quarter, we don't hedge.

The second key point I want to highlight is that we demonstrated another quarter of strong free cash flow. Despite a significant increase in our captive leasing mix and a sequential increase in cabinets and this has enabled year to date positive free cash flows for the company.

Our cash balance increased by approximately the same amount as a free cash flows and we exited the quarter, whether highest quarter ending cash balance ever I've just over $5.3 billion.

Specifically on captive leases, we've received a number of questions on how these are funded.

We use our leasing warehouse and maybe ourselves to allow for captive leases without material use of cash.

What's important to note here is that our warehouse and maybe a slow to financing cash flow and as a result leases negatively impact free cash flow.

Impact was material in Q3 at the lease rate increase substantially by 50%.

In addition, capex spend increased driven primarily by Gigafactory, Shanghai and model I spending.

We've received a number of questions on wire capital spending appears low compared to prior levels, even though there are multiple new projects launching and in development.

As we noted in the shareholder letter this quarter and last quarter and this is because we've made great progress on improving our capital efficiency.

My third and final point is around demand and rose I.

Our global order rate remained strong and continues to increase despite increases to production levels or order backlog has been growing and quarter to date orders are significantly higher than at this point in a in last quarter.

In the immediate term are focused on increasing production of model three N S and X as quickly as we can.

The bulk of this work involves continued optimization of existing equipment. We've also made targeted adjustments to pricing to better balance supply and demand.

Our pace of execution on new factories and capacity expansion has increased significantly as you. All mentioned the first phase of Gigafactory Shanghai is already production ready and we've been able to pull in the timeline for other major projects.

Overall, we're quickly turning the corner for next phase of growth and our financial health continues to strengthen.

We remain focused on reducing cost, which enables rapid investment in future programs and growth.

Thank you very much and I think also our senior director of energy operations, who now Giro trial when it to ones.

Hi, everyone. My name is couldn't andro throwing I've been with Tesla for about four years working on different aspects of deployment energy products.

And now run tests Energy's deployment in from Goldman teams.

Over the last three months the energy teams have made great progress in both our solar energy storage business.

As you can see not quarterly Dag, our solar deployments rose by almost 50% or last quarter and our energy storage deployments, which include our walls and Powerpacks grew by 15% to an all time high of 477 megawatt hours.

And the last three months, we relaunched test the solar in North America by simplifying us we're offering into three sizes of small medium and large would translate in pricing on the website.

Thanks.

Sure.

But the one who don't realize is and like in California and number other states if you.

If you bought by our sort of solar subscription or solar rental.

There's no money down and you instantly save on your utility Bill and there's no long term contract right. So it's kind of a no brainer, it's really do you want.

We've got Prince money.

If it doesn't print money will fix it will take it back.

It's kind of a no brainer and it.

So it plays into testers overarching strategy here, which is effectively to become like a drain distributed global utility.

Yes on the energy fourth yeah, absolutely.

The subscriptions or often that he mentioned is launched in six states and like you said, it's six monthly payments and no long term contracts and the response from customers have been pretty awesome.

Most people do actually buy it as opposed to rent, which is actually it actually is the the particularly the better out while you make money is immediately if your your rental it's actually a better investment if you if you buy it.

Because the cost capital at the consumer is better than our cost capital.

And.

And then there was like interesting study by Zillow and number of other organizations that show that adding so to your home increase of the prices increase was valued at home and it took a look zillow study showed a 4% increase the value at home with solar.

And then if you add sort of the Powerwall, which gives you a blackout protection. So you will have.

Energy security and event.

A rolling blackouts or if it cargoes out for any reason, which appears to be a long term systemic issue and in California, particularly that that I think is definitely can be viewed as is a significant asset for anyhow.

Yeah, Yeah yeah.

Yeah, I think to your point of buying test the solar is easy because we had one of those spreads.

Now in the country and.

Just a little bit of story that we were able to lower prices because our cost of acquisition is now less than a quarter up and typical solar company.

Yes, Yes, you are online building owners or advertising.

Marketing right I know Salesforce yeah.

But what would you rather pay for for power for marketing Yeah, Yeah, I'd tell you rather pay for the product.

Totally.

Yeah.

That's great on solar we want to simplified the fulfillment process with the goal of really fast order to install timeline. So we've done we've done many a residential installs a single visit to a customer's home because a center sizes that reduce complexity.

We want to be working with cities and counties to submit generic permits that follow a template rather than customizing for every situation because I actually causes a really big deal that's.

Foreseeable what appreciate.

Great grow by you and the energy team to get this time, because one of the fundamental inhibitors. Both from a cost antitrust endpoints is getting permit approval from the various original authorities.

And.

And were part aired a novel approach, it's renovation applied to a two bureaucracy frankly.

<unk> infection airplane vision tracking.

And.

Every button.

A massive number.

Housing for both parties here.

To to take a generic template as opposed to custom type, but which makes it.

And.

Okay. So I think electronic as well yeah. So that just makes a simple and low cost and fast to get approval for solar which is atrophy total yeah on 350 cities and counties have accepted it is still.

More coming them, what many more coming I think ultimately be almost everyone. Yeah. Yeah. We have a lot more small cities and counties that have to come online, but that will be that'll be our focus in the coming days, yes, and it's more important as we scale solar roof to yes, exactly for all our deploying and as you products need innovation in that throughout the city space. If you said as well I mean, yeah.

[laughter].

Yes. So all these improvements have led us to speed up our customer order to installation timeline from month to in many cases days.

As as Ilan, you already said Weve added.

And to add Powerwalls to secure from people from future power outages and.

The home with southern power will actually shown in the recent California outages. Many homes ran successfully yes, you can tell which arms have but.

So powerful.

So that's where we'll delight, that's where the lights Ron.

Yes, well it looks enabling us like up because of.

For all but a few lights are often is usually the ones what they tell the powerful yet.

I think ownership can eventually grow select a single truck roll.

I can just like yes, visiting single visit stores is a big deal right.

We are taking it from where this whole industry would often be three but its before the solar was installed Edward often take quite quite long time translation or streamlined all of that to the point where.

In many cases, so single, it's a single visit.

To do everything.

And.

And it's fast.

Yes, Thats correct.

In the lights disruptions to the handler, yes, and ordering solar, especially one quick you can order. So if your house in less than one minute.

Yeah, and then we've done the same thing in the commercial solar space.

Nobody thought of putting a simple left side.

Good prices of commercial solar we do that now and.

We've seen a good response from small businesses wanting to go solar and by moving the complexity of long term contracts and simplifying the terms and conditions. The commercial solar sales process would typically take six months is now taking a couple of weeks. So the same thing that we've done in residential we want to expand more and more and commercialization.

So all in all the roadmap for energy products from solar and solar roof firewall to Mega pack is super exciting and I expect tests energy to become a larger part of our overall ecosystem as we leveraged integrate the same competencies from a legal business them the future is pretty exciting for to.

Great. Thanks.

Thank you very much so first we're going to take some questions from say dot com.

We will decide on take questions from both institutional investors as well as retail investors.

So the first question from institutional investors is what's already opportunities for just want to create demand is worth of miles steel sufficient or should we expect to see plus luck immersed in advertising in the near future.

Yeah, what we're seeing is that a word of mouth is.

Good.

Fair enough to drive our demand in excess of production, we have no plans to advertise at this time.

Of course at some point future. We were made to your advertising up a traditional sense, but more to just inform people and make sure that they are aware of the product, but not engage and the typical trickery that as common place and advertising.

Okay.

Next question from institutional Investor is some elong other than rubble taxis and that's what I'm most vehicle capabilities. When you look over the next three years. What are you. Most excited about this law that you believe investors don't understand or have missed.

I think there's generally a.

Lack of.

Understanding or appreciation for the growth of Tesla energy ethanol was talking about.

In the long term I expect Tesla energy to be same.

Roughly the same size as it has those automotive.

Sector business.

This is.

This is the most.

Let me shift.

I think.

It could be bigger, but it's certainly of other similar.

Magnitude.

Tesla solar meaning so it fits has us all of US battery stuff is due to the energy is I think for at least I appreciate it element.

And.

Harry quite part of it is like for four or for about 18.

It's almost almost two years, we have to divert a tremendous amount of resources, but basically take resource from every else rural so the company and apply them to them all three production victim fixing the model three production ramp and simplifying resigned mall three.

So for about a year and a half we unfortunately stripped.

The energy of entering other resources and even.

It took the cell production lines that were mindful power will empower pack and redirect them too.

Car because it can.

You didn't have enough cells.

Now that we feel that wealth reductions and at a good place an editor of great place.

We have.

Right.

Restored resources to Tesla solar and storage.

And.

And so.

That's gonna be.

I think we really crazy growth for.

Pardon futures I can imagine.

And but we had we had to do it because of the fruit insult model three tells it wouldn't survive so.

Fortunately that that's short it pretty much the other costs the company.

But it would be difficult for me to.

Overstate the degree to which I think tough energy is going to be a major part of tells us activity in the future.

And.

Tell his mission, probably getting has been to accelerate the advent of sustainable energy that it's sustainable energy generation and sustainable energy consumption in the former vehicles electric electric vehicles.

No I think one of those stats will publish.

In the future along with our.

Vehicle production is that how much.

Sustainable energy Tesla produced or tens of customers produced with our products.

And I think you'll see that well producing.

Okay.

About the same will comparable amounts of sustainable energy as a as our consumed in the car.

In our cars because.

For for alongside the Provital against their cars like or don't they used dirty power from coal well well know we're.

Solar power and that's the only this whole Parker.

Companies like not just Tesla, but.

You have to sort of salt to sample generation as sustainable consumption and and Thats what were doing Kindle tomorrow.

Okay. Thank you the next question.

From Investor is related to full still driving attach rates given that self driving regulations will evolve on evenly in different markets would you consider selling modules individually for example, navigating autobahn whether someone.

Versus comes strategy of cylinder packages, a hole in order to encourage adoption and getting more data.

I think will continue so it in a bundled fashion.

Any cause of it you buy already has basic autopilot included.

So I think thats.

<unk>.

That really is a.

Pretty major advantage relative to other cars.

But then and then the next step we full self driving.

So with smart so I'm wondering kind of the beginning of that.

And.

And then obviously, we kind of have a two sides of it.

Hi way or pilot and we've got some interest sort of low speed and talking less I kind of thing now we need to work I was hoping that the intermediate portion, which is traffic lights and stop signs.

And navigating through.

Windy Road.

Roads and.

Why do you narrow it's in suburban neighborhood.

That does folks right now.

You got to wonderful it's.

Yes, it's coming out of what's going on for sure.

Okay.

So reflect what quarter, which we're able to.

Upload suffer enabling which has it become.

Moreover, taxi.

Okay.

<unk>.

Yes.

Expect to have that thing from.

For a functionality standpoint bike bite into next year.

Yeah, we're going to answer this.

But functionality.

Based crush value as price aspirationally analysts here, but reliable enough that you do not need to pay attention in our opinion by the end of next year.

I mean.

The acceptance by regulatory authorities will vary by jurisdiction.

That that transition.

But that's sort of flipping the switch from a car that.

It is.

Front from not Robertex, you'd rather taxi I think we'll probably be to.

The biggest step change increase in asset value in history.

By far.

Okay. Thank you. The next question is with respect to model why or what are you Sir ladies expectations for launch timing do you anticipate any model three production downtime at three months during the launch and how should model why gross margin in the percent look compared to model three gross margin.

What we've talked about the the launch tied to what what really matters is the timing too.

Volume production, where volume production at some number in excess of 1000 units per week and.

And we're confident of reaching that point.

No later than the middle of 2020.

The yes so.

Let's start from an interest have point, we do not expect you had if there are the.

Yes, but the body line to separate the.

Paint line is.

So basically we do not affect expected just there with model three without do not expect any downtime.

For margin standpoint, SAGD anyway.

Yeah from a margin perspective, we're expecting Sps from out of line to be slightly higher than they are from all three and this is common in the industry and each incidence and see these.

On the part that we've worked very hard on is controlling the cost of model line.

And our steady state forecast for that program and puts the costs at roughly equivalent to model three although there will be ramp inefficiencies at first of course as the launch the program.

But as it stabilizes at steady state production, we do expect that it'll be a higher margin problem problem.

Something that we're very excited about company.

Okay.

Thank you.

Last question from these additional investors is can you provide an update on FSB SSD package attach rates.

As the attach rates improve will you, let the financial benefits manifest in high gross margins for companies shareholders for winning forward to price to drop delivery volume.

I don't think we're going to need slow the price of FSP.

But I expect the price of FSD to.

Increased slowly as the Cape functionality and capability improve.

That's a but that is unchanged.

The.

Moving on to.

I I mean.

Our our cash gross margin to obviously is higher than our GAAP gross margin because of unrecognized revenue associated with FSD attach rates. So.

That's why those.

I think it's meant order 600 million or <unk> or number of half a billion 500 half a billion of Ah unrecognized revenue.

So if you if you already.

Include that.

Which was losses recognized as we.

Really see apples are driving functionality, but actual gross margin that we're operating on a cash basis today is higher than the GAAP gross margin.

Okay, Let's now go to questions from retail investors. The first question from Craig is can you provide more detail on the beach scale acquisition, its importance and whether Thats my still on track to recognize and respond to traffic license stop signs with automatic driving on cities responding to putting on <unk>.

Sure the discounts very tiny company.

Yeah I was it's basically.

Brought about 12 people and its a.

They have some expertise and increasing the.

The efficiency of neural nets for a given amount of compute where should that is helpful.

So right to be seen but being intensified what was.

A very tight acquisition.

Was too.

Like it.

Slightly accelerates FSD.

That that the intent on hopefully they'll turn out to be true.

Yeah.

Okay. The second question.

We've already answered regarding modal why delivery. So we'll jump to the third question from Craig good.

News reports suggest the Gigafactory three already.

May already be producing model fees for Chinese market could you. Please update us on the production expectations for Q3 income from purpose over the second building now being built is that for battery production as suggested by some personal floods.

Yeah, we're in trial production of well three.

Basically.

Selling cars through the through the system and.

The ramping rapidly.

Right.

Expecting to hit volume production on in a few months essentially.

The second building is indeed fall battery and module production.

And.

That's probably going to you'll just positive a bunch more construction beyond what what's already because obviously, we need to build out upsell. These four model life production that Shanghai as well.

Okay.

The next question from retail investors is can you update us on the initial results of Tesla car insurance is their timeline to expanded nationally and internationally.

Yeah, I can take that.

So far we've lost launch Tesla insurance in California.

I have to say that I'm quite pleased by the result, so far.

Take rates as measured by close to purchase conversion are quite high by industry standards and we expect that this will only increase.

As folks.

I understand the products better and.

Receive some of the known price increases coming from some of the standard carriers that'll come to us and look for in alternatives.

There's a bunch of work happening behind the scenes on improving the product, particularly the purchase from.

To make sure it's the best product experience for customers and we're also working very hard to get other states lined up in the states and then also to launch in some countries internationally. So when we're not able to provide specific timelines on those changes right definitely working as quickly as we can given how long.

Steve Tesla Insurances, then in California.

I think it's it also has a secondary effective ensuring that.

Third party providers of insurance.

Our provide reasonable rates to our customers.

Completely agree the goal here is not to have and outsized market share of insurance, it's just to make sure that.

That customers have an alternate other companies as well.

Does it meets our high I mean, ultimately what makes the most sense for total cost of ownership perspective is for folks to have okay pricing I'm sure yes exactly.

Okay and last question from retail investors there skepticism regarding your comment that the full so dropping will be featured complete by yearend like resulting.

From confusion about feature complete what feature complete means.

Could you. Please talk to these perhaps give us the list of features that they establish the FSD baseline.

Yeah, like Michigan feature complete I mean, it's able the cars that will drive from.

Yeah from once house to to work most likely without interventions.

So it will still be supervised but it will it will be able to drive.

Irritable filling the gap from.

Low speed autonomy.

You got to less Peter talked or Simon you got high speed of probably got a highway and when it gets me to speed autonomy, which create really speeds truck flights and stuff sites.

So.

If needed to complete means to say, it's most likely able to that without intervention.

Without without without human intervention, but it would still be supervised and I've been through this timeline before I think several times, but it is often.

Misconstrued.

That does because like this system three major levels to autonomy does.

The core being able to be autonomous, but requiring supervision that intervention at times. That's feature complete then as.

And it doesn't mean like every scenario everywhere, including every corner cases means most the time.

And then as another level, which is that we think its but that from a catalyst standpoint, we think the car safe enough to be driven without supervision than the third level would be that regulators are also convinced that the cart can be driven autonomously without to provision those are three differ.

Levels.

Okay. Thank you very much sciarrino, we can now go to the questions from analysts. Thank you as a reminder to ask a question. Please press Star then one and we request that you limit yourself to one question and one follow up our first question comes from Dan Galves with Wolfe Research.

Hey, guys. Thanks for taking my question.

See I was hoping that you could give us.

A little bit more color on sizing up the key factors in the auto gross margin improvement from Q3 to Q2.

Particularly you mentioned some nonrecurring items in the ER and the latter and also you know should investors be prepared for any meaningful headwinds as the China plant nom comes up but isn't at full production yet.

Yeah, I can provide a couple of comments on that on your final on your last question about China headroom, there are always ramping inefficiencies only launching in factory.

Well, we don't expect China to be any different than that.

So there will be some that we experienced in Q4 the amount is that it's hard to forecast.

Given that it's a different type of factory design and we can we just can't freemont.

We're working very hard to limit the rent inefficiencies that sand fixed cost absorption.

And having all of the labor ready as we ramp will have an impact on Q4.

And Ah on the margin improvement.

A couple of things there for auto gross margin.

As I mentioned in my opening remarks.

Snacks average selling prices increased from Q2 Q3 I.

I mean, that's important as as I mentioned in the last earnings call.

The prior powertrain person to that's an x. provided significant headwind on average selling price for that product in the corner.

We've also.

On a bunch of work as a company.

To become.

I'm more targeted and how we adjust pricing on our products and how we optimize that based on local supply and demand insight I think there's a bunch of could work from the team.

On that in Q3, which flow to on our financial.

In cost reduction has just from India huge focus for us it's hard to underestimate how much is that has been ingrained in the culture as the company and around the his team has done absolutely tremendous work.

Oh on every line item of our costs, whether it's the manufacturing labor warehousing logistics.

There's just a tremendous amount of good good work that happen there.

Specifically on nonrecurring items.

To that I'll note, one being the smart some imagine you asking question.

To date of on whether that's considered.

Recurring or not given that we continue to expect to at least my features and lease revenue associated with that in the future, but we did want to called out specifically in the dollar value around that as you know that's been speculation around the intact for the corner.

And foreign exchange, it's just something that since we don't hedge it has an impact when it comes in Gaza every quarter, so well have to see as the quarter plays out.

After that time.

Thank you. Our next question comes from Adam Jonas with Morgan Stanley .

Hi, everyone. This is George daily on for Adam. So first question is it fair assumption to say that once the Shanghai Giga factory is ramped model. The model three sold in China for China could be the the most profitable car you sell you do more profitable than the average car made it from on right now.

Matt.

Now, let's also difficult to forecast it's a good question.

At least based on the plans that we have now.

We're expecting it to be roughly in line with where model three is coming out of our cannot factory.

There's a there's still a bunch of work around cost optimization and the factory. After we launch with ramping efficiencies when we need to work those costs down.

And then there will be work.

Lands on what's the right next is within the country.

And where we ultimately land on the product offering.

So I think just for now it seems to the same minutes roughly in line with the margins that you see coming out as a few months facility.

Great and if I could just sneak in one more so it's been over seven years. Since you launched the model S and many Oems seem that they don't have the same commitment to battery electric vehicles state that you do in many don't even offer one right now.

As your as your business model proved to be more sustainable could we potentially see Tesla maybe supplying other OEM attitude batteries are software complete.

Electric vehicle architectures, maybe in an effort to accelerate mass adoption of sustainable transport.

[noise].

Yeah I think this.

It would be consistent with the mission hotels look to help or other car companies.

With electric vehicles on the battery and powertrain fronts post spin other fronts.

So it's something we're open to.

So let people know we open source out patents.

So that's a.

Those were not so as an obstacle to the adoption of electric vehicles or.

So a power socially storage.

And.

We are definitely open to supplying.

Batteries in Catarina Topcell things to other car companies.

Okay. Thank you let's go to the next question. Please.

Thank you. Our next question comes from Maynard with Macquarie.

Hi, Thank you.

Two questions. The first is software version 10 add a lot of functionality, that's never really been available in a car before through an over the or update.

In in your shareholder letter you say that this plays an important foundation for things to come can you just talked about the longer term plan or your vision for the direction of the software platform and if you have plans to monetize an opportunity.

Well, the Gulf, where the infotainment infotainment system is.

So say, what's the most about a fund you can have a car.

So I think as it.

[laughter] Olympic other car companies, you're thinking about that way, but it's really what is the most fun equity maximize in Germany card it such that as an awesome.

So you know just some some sort of transport utility.

Device with no soldner character.

Who.

Once we find an entertaining reference.

Alright, you love.

And so the study which is what we can do because people are generally spending.

Yeah couple of ours day on average in the car.

So that's pretty high percentage of their.

Waking time.

Your outside of like.

Showering and going back from that kind of thing you know just it's so lot of time and.

I I guess, maybe there's some way to monetize it really thought about it that way.

But regardless just to make try to say what is the most fight it could possibly have why your car.

And obviously as autonomy gets better and better that is going to become much more of an entertainment.

Opportunity.

So.

We'll see we'll see where that leads but that's the best will raptor cargo.

Great and then can you help us help from the opportunity for machine credits as the standards in that you start to tighten next year and I'm not looking for an exact number but maybe more to understand whether this is an opportunity in in the tens of millions hundreds of millions billion anything to help us frame the opportunity and also whether you have any ongoing.

Hi, logs with Oems. Thanks.

We certainly have ongoing dialogues with Oems, but.

Did you see for profit actuals, though.

Tax credits or emissions credits or.

Forming up.

Very big percentage of our revenue there.

I mean.

So what what was the last quarter was pretty quick.

$100 million, but I don't like several billion. So it's like one of the half the said it's not a.

So it's not exactly.

Dr. percentage.

And obviously the does.

Quick credits in the U.S. are really.

Not credit situation.

Not particularly strong for obvious reasons.

Which we think is not great for the future, but anyway, that's where it is.

In Europe is a much more business to reach the environment.

But we're not counting on some big windfall.

Maybe the maybe it'll be good maybe you know, we don't know, but we're not counting on it.

Yeah, I think that's a sound way to characterize it I mean, our expectation to that.

Revenues will generally increase was.

Not necessarily increasing every corner, we did increase from Q2 to Q3.

There's a certain amount of 10 minute baseline based on the number of cars that we thought and deliver and it's another deal specific and that's deals can happen an inkling that we're constantly in conversations with automakers about this but within the company.

We managed the business without counting on any profit or cash flows from regulatory credits.

It's purely incremental.

In my recommendation is that every when she feels that way, it's just an extra constant.

It's obviously a good thing to do that would help accelerate Gavin sustainable energy.

For sure.

But its a.

And like sorry outside the U.S. that seems to be a strong pushing that direction, which is great.

And then probably that it within the U.S. that.

Over time will become a strong push.

Thank you must give them next question. Please. Thank you. Our next question comes from Emmanuel Rosner, We can meet your bank.

Hi, it's Dennis it out for a manual thanks for taking my question first.

There's been a lot of activity in the industry about electric pickups lately I'm. Just curious if you have any updates anymore insight you can share on the one day, you're about to put out later.

And then secondly, there was a comment I think earlier about the order book quarter to date.

And just clarify what was the baseline and any insights about the geographic mix of that thanks.

Yeah.

Look I think were said enough about the.

The <unk> tells us out of truck, we're not going to there's not the right form for rest of new product launches.

But I think it'd be well, but will be.

I mean, my my opinion and this could be totally wrong, there could be totally after lunch here, but.

I think the tells US I would track is our best product ever.

That's my opinion.

Yeah [noise].

Yeah diplomat as its not not seems to be strong as well should be production constraints this quarter.

Yeah, that's right not the baseline for my comment earlier than I need like.

Looking at this point in the quarter in Q2.

And Oh order rates are strong.

In all markets.

I think we're very encouraged as a team.

At the reception of our products.

As a more and more people become aware of electric vehicles.

I think a competitive products help rates that Arnold.

And overall interest is just increasing so our focus internally.

It is to increase production that's assets you can both with existing equipment and accelerating our timeline on capacity.

We believe that everybody should be driving an electric car need to move as quickly as we can.

Yes, absolutely.

The.

<unk>, we Wanna get booked has a volume to where it is.

Perhaps have somewhere on the order of 1%, replacing 1% or the global fleet overtime.

That's correct.

Go fees pretty big over that that's yeah. We think that's it that's a good one to aim for.

Yeah. It was which is about 20 million vehicles here just by the way, but I do think that put them out for new cars will rise as the.

The will transition away from.

Combustion engine vehicles.

Just just as when when you.

We're very well had CRT TV so there's no.

Cabot richer TV the.

The sales rate was just basically replacement right you wouldn't buy it wouldnt really buying you and your.

Sure TV.

Yes, yours broke but when when flat screens came out there was there's a big step change in Nevada, because now getting a big.

Screen TV was much much better than having.

A small see our TV.

I think we'll see what's happening with electric vehicles, which is that the instead of just pure was buying a car just because.

The last call we're out there they'll they'll buy electric car, because a fundamentally better car.

Especially as Scott so private.

Thank you let's go to the next question. Please. Thank you. Our next question comes from P.S. Air to win New Street Research.

Okay. Thank you called <unk>.

Well see how hard here. So we can't hear you yeah, it's very quiet we kept too.

Oh I'm the one.

It's muscles, but well try.

Okay, sorry for that.

So I was wondering how you're thinking has evolved our model S and X.

Slightly.

Thank you very sad state to deliver is also because this quarter.

Hi, good realizes that do not know these costs a great deal. So how are you thinking about these two markets doing whole lot what sorry, what's it's probably just how did you have in mind.

We put up some of them otherwise.

The model S and X R.

I really need there really niche products I mean, there the very expensive made in low volume.

Your told me Frank.

We're keeping where there were continuing to make them more four cents medical reasons, but anything else.

There are really.

Minor importance to the future.

Okay.

And then my question, but Theres no great color.

I think it's like if you want to.

I mean, it wireless literally one motor trends best car ever in history.

By the way I think.

If some if you're out there and you're buying and your standby and your job by model S.

Yeah, I think you just made a mistake.

To be totally Frank it's incredible, especially the new one with the.

Your variable damping suspension.

Hostile operating room Hep, a full to for air purification.

The Raven powertrain, which it puts the fastest cornwell.

And it's just it's so easy to drive makes you feel it's super on driving that car that's incredibly safe.

Yeah, It's just a.

But amazing vehicle and then model S. I think it's like the faberge egg of cars.

Let me talk model X model X is like you stuff faberge egg of cars.

Yeah, it's and that's why somebody our artists and musicians.

By the carts.

This at RPX basically.

Yeah, I stat, I mean, that's absolutely phenomenal cars.

And we are increasing production on kind of Athenax lines for this quarter in response to increasing demand.

So I think part of this story here.

And as we've launched Rampton stabilize model three that's consumed a lot of the attention around the company. The now that has that has stabilized weren't able to focus our attention and balance that between ethanol from all three.

So the delivery number is in choose to me I understand it's interesting the product for that quarter.

And we continue to see strength in the order rate, which we anticipate will be reflected and that's the next deliveries in Q4.

I mean <unk> model S.

But the best basing while I suppose point has a range of 370 miles actually technically is 373, but we actually.

Certified it incorrectly has 370, but it 373 and there are some.

Software improvements that we think we'll make that even better.

Recommence, we're also expecting that to those who is going to get over they are improved.

But that will improve the power of the model S. Exome three that's look by by the way just coming in a few weeks should be on the order of.

5% power improvements due to improved from where crude you want to thing.

Yeah, we just continue to learn how to optimize motor control and in our products and yes, the 5% improvement for all three customers and.

3% for snacks, Yeah. There's also the single pedal driving their pockets that will approve the range as well I'm very excited about that.

The improvement in comfort and feel yeah, I suspect, it's easier to drive and it appears the range.

And faster supercharger, Oh, passive charging or standard range and Sandridge bus customers, which is a big deal.

Yeah. It's.

This.

I don't think it's ever been a situation history, where you buy a car and it gets way better over time just your software.

I felt little bit better, but a lot.

Hi.

It's very exciting I think.

At the customer myself I enjoy these updates.

Hollywood.

Yeah.

Well I agree with the.

Well as strange to almost through 380 or through a high three seventies.

The update.

No we're not stopping to work there.

Yeah.

Yeah absolutely.

Appears it did you have a follow up question.

Yeah, Yeah, just a quick one on a on them otherwise.

I was wondering if you what you've left with a SNH make you think maybe when you launch.

Why you'd have some time utilization of demand over the other three and how did you started to thinking about that and and how to approach it.

No I don't think we're not expecting to see.

Conversation a model three once the sedan ones TV, yeah. The baskins handsomely has for that as somebody launch model X. I only had modeled last at the time, Yeah model as sales increased yeah and <unk> <unk>.

So we didn't see any cannibalization there the opposite.

Where do you watch model X model S sales increase.

Yeah. So that's the that's comparison that we have.

Great. Thank you very much let's go to the next question. Thank your next question comes from Dan Levy with Credit Suisse.

Hi, Hi, good evening, Thank you for taking the questions.

First just wanted to ask a question on how to get three you're targeting 3000 units. We feel we solid Fremont that had the ramp on model three plays lumpy and you sort of ramp and then sort of cut production to fix the bottlenecks.

Given this is a brand new capacity at how smoothly should we expect production to be on a week to week basis, meaning once you hit the 3000.

Is that 3000, you could go every single week in a quarter or is it still going to be lumpy, we didn't have corridor.

I mean, if you've got a crystal ball, we'd love to use it.

I'm looking for it yeah.

It should be smoother than model three because there's a lot of commonality of parts, but.

And I think if you look over a reasonable timeframe. The the production will actually be run fairly smooth, but.

From a week to week standpoint.

It obviously was lumpy.

To be about Smith as say the stock market the house, where the stock long before we to next.

Oh, it's it's a it's.

But if you just extend the time period to say you know.

Two or three quarters it will be a.

Very very rapid city route.

And I was it'll go way past 3000, a week.

Okay, great. Thank you and then just a follow up between the you mentioned how long you mentioned earlier in your comments that one of the things you're optimistic on in the future is Tesla energy and think we understand the part that you know there. That's one of the challenges in the past was sort of a reallocation of resources away from energy to the auto side could you.

Just talk to where do you see the greatest pockets of growth in energy is it solar or storage.

And now that you have to now that you can reallocate resources, what would that entail in terms of capacity growth or what does reallocation of resources look like.

Well I think a percentage basis solar will grow the fastest.

Storage will also grow high on a percentage basis I think both.

Overtime will grow faster than automotive.

<unk> starting from smaller base.

I think it's especially if you look at sort of you look at like year over year growth, albeit it absolutely incredible I think.

For one quarter to the next the there might be some fluctuations due to seasonality or.

You know some short term part shortage or you name it could be but over the course, so say a year.

Gigantic increase.

It's also worth with solar it's hard to install a lot of solar in.

In the winter, especially on the East coast.

<unk>.

Well, the snow and ice.

So you expect to see some seasonality there, but with dedicated wraps up quite a bit when the weather improves.

Uh huh.

Yeah.

Okay. Thank you very much and I think that's unfortunately, all the time, we have today I. Appreciate all your questions on we're looking forward to talking for you next quarter.

Thank you very much and good bye bye thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

[noise].