Q2 2020 Tesla Inc Earnings Call
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Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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At this time all participants are in listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone. Please be advised to 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 vehicle senior director of Investor Relations. Please go ahead Sir.
Thank you Shirley and good afternoon, everyone and welcome to fiscal second quarter 2020, Q any webcast.
I'm joined today by Elon Musk Zachary Kerkorian and a number of other executives are Q3 results were announced that about 115 PM Pacific time in the update that 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 well.
Today.
Actual events and results could differ materially due to a number of risks and uncertainties, including those mentioned in her most recent filings with the FCC.
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 we'd like to join the question Q, but before we jump into Kenny you will have some opening remarks.
Thank you.
Well I'd like to thank the testing for exceptional execution in the second quarter. Despite.
Tremendous difficulties.
They've done incredible job in its I think thats in order to work with such a great team.
I mean, there with so many so many charges.
You too numerous to name.
But they got to Don.
And just what a great group to to work with.
Access to it.
Hard work such great team.
So and as a result, we were able to achieve a fourth consecutive profitable quarter.
And although the automotive industry was down about 30% year over year in the first half a year, we managed to grow deliveries in the first half year. So despite.
That mess administered industry decline, we actually went up.
Well, so very excited to announce that we're going to be building our next the gigafactory.
In Texas.
It's going to be right.
Near Austin's or not.
To be about I'll, just go to a bit of detailing this.
And then actually we want to questions.
Look the location is five minutes from.
Fortunately National Airport, and 15 minutes from downtown Austin.
About 2000 acres and we're going to makes it to make it.
Factory that it's going to be stunning it's right on the Colorado River.
So we're actually going to have could have a boardwalk.
Adobe hiking biking trail can basically be and ecological paradise birds in the trees butterflies submission the stream.
Andrew we open to the public as well so not not closing.
Tesla so if anyone's interested in working at.
It's a gig in Texas.
With the engineering production whatever the case maybe.
Please let us know this is we're going to be.
Doing out a major.
Major factory there.
And it's also where we'll be doing.
Yes, what we're doing cyber truck there that has a semi.
And we'll be doing model three and why for the.
Eastern half of North America.
Now at same time I want to say, we will continue to grow in California.
So would we expect California to do model S and X four worldwide consumption.
Three and why for the Westin happens North America.
I think probably also the Tesla roadster.
Future program, we're also makes sense in California.
So I think this is a.
Nice split between.
Texas and California.
And.
Yes stem cells will take on California.
Rule will be creating a massive factory and several truck incentive programs in Texas.
So and I also wanted just to finish out to Tulsa.
And just say thank you very much for two to the that's also team.
You can our development team the governor.
Really.
Super impressed the hotels team as receive our pressed and.
For sure strongly consider a tulsa for future expansions has a down the road.
Let's see if anything we want to say about.
There's a lot of information so.
Thanks, guys.
All right well I should have lots of questions.
We've already started work on the facility so.
Some initial.
Construction work, so it's already underway.
This weekend.
Let's see moving out to other subjects.
Solar we recently adjusted the pricing by retrofit solar.
So tells a solar is the lowest cost over in the United States.
And we added a lowest most cost guarantee added money that guarantees are very confident that people will have arcelor product, whether it's this whole retrofit or solar roof.
Our solar is now updates and cheaper than us average.
For the federal Federal tax credit Tesla, so not costs $1.49 per what.
And this is very simple highly automated single click experience so.
Definitely.
Think about Tesla, where they want to new rueful for Tesla solar roof or you want.
Solar on your existing were either way.
Really really grow the company to go too.
And.
And then you'll get a powerful and have energy independence and be around utility.
So I think that that part is really coming together.
And it's only going to get better later this year.
So it's just very excited about that that's a business potential.
On the.
Additional technology stuff, we introduced the first.
Yes.
Production car with more than 400 miles range. So the current hasn't model S. Now has an EPA certified range of 402 miles.
I mean, basically you can drive from elevated San Francisco nonstop.
So we'll have some.
Miley wells at over one year right and this was a highway speed. So you talked at your anything.
Absolutely everything is driving just drive normally and.
Grow very very long distances.
And it for full self driving relaunch traffic lights and stop signs.
We're continuing to prove that make more robust.
And we're currently testing also driving software for.
Intersections and city streets in our streets. So I personally tested the latest alphaville of wholesale driving software when it went to drive my car.
And it is.
Really I think profoundly better than people realize.
[music].
Yes, really profoundly it's like amazing so.
Hey, almost getting to the point, where I can go from my house to work with no interventions.
Despite going through construction and widely Barry.
Car.
And it is.
Really I think profoundly better than people realize.
Yes, really profoundly better it's like amazing so.
Almost getting to a point, where I can go from my house to work with no interventions.
Despite going through construction and widely varying situations.
So this is why.
Okay very confident about.
Also driving functionality.
When complete by the end of this year.
Relentlessly driving it.
In conclusion.
Correct Gainsay, thanks for hardware to test the team.
Achieving our first full year profitability in a company history was incredibly difficult.
And just as a result the hardware.
Lot of people from tells a worldwide.
And next thing about the next the next 12 to 18 months, we'll have three new factories in place.
Yes, thanks, looking great with that gigabyte Len.
And.
What will have cyber truck semi roadster.
Full self driving the so much to be excited about.
It's really.
Hard to kind of fit into this.
Call, but.
The sheer amount of hardcore.
Engineering, especially on the.
Right.
Autonomy and the.
Manufacturing sharing front is mindblowing.
And then of course is back today, which is coming up.
Pretty soon.
And I think that's that's really going to.
The surprise people that I just how.
How much there is to see.
So.
With that.
Thanks again for your support in a long term mission.
And we're looking forward to.
Having a great journey with year.
To create amazing products and continued scaling it and.
Yes.
This is.
I think I've never been more optimistic we're excited about future Tesla.
And then historically like.
Thank you very much.
Our CFO second record corn has some remarks as well.
Yes, Thanks Martin.
I want to start by thanking our employees customers and suppliers for your support over the last quarter.
In particular to the Tesla team I couldn't be more impressed with the hardware and the resiliency that you all have shown.
Net income overall as I mentioned, we achieved our fourth sequential quarter of profitability.
This is despite a significant impact to our financials as a result, a suspended operations of our U.S. factories and field operations around the world.
To ensure the business remains healthy we took temporary action to reduce costs, including expenses related to personnel and non critical path projects.
Direct cost savings at the draft cost impact of the temporary shutdown was largely offset by these cost savings action, although the costs were concentrated in Cogs and the cost reductions brand, both Cogs and operating expenses.
On automotive gross margin, excluding regulatory credits this reduced sequentially from 20% to 18.7%.
The sequential reduction is fully attributed to idle capacity charges and lower operational efficiencies due to the various shutdowns.
Despite these charges.
We continue to make progress, reducing our costs, particularly on model Lion Fremont and model three in Shanghai.
Given the global macroeconomic context, we made the decision in Q2 to pass through savings to customers around the world on some of our products.
With the release of stop late and stops and recognition and response.
Recognized 48 million of deferred revenue in the period.
A full profit impact on our piano is less than half of this due to cost associated with FSD computer retrofits in the field.
Regulatory credit revenue increase sequentially to 428 million.
While difficult to forecast precisely our best estimate of 2020 credit revenue is roughly double that of 2019.
Services and other margin improved yet again, marking the fifth sequential quarter of improvement.
In the energy business, our Mega type product achieved its first quarterly profit.
We remain for production constrained in this business and are continuing to work towards building additional capacity.
And our solar installation business was impacted by permit office closures limiting installation volume.
Stock based comp increased from Q1 to Q2.
This is driven almost entirely by an expense related to the next tranche of the CEO grant as well as early as lessening of the first tranche, which is reflected in SGN a within operating expenses.
On cash flows our cash balance increase to our highest level yet of 8.6 billion, which included free cash flows of over 400 million.
This is a strong result on its own despite an increase in capital expenses associated with Shanghai in Berlin, as well as movements in working capital.
A few things turn it on working capital, particularly accounts receivables.
While our and our balance is usually about 20% of revenue it can fluctuate depending upon a number of factors.
First overall less than 30% of our receivables is associated with new car sales.
Second due to payment terms associated with financing and enterprise customers settlement timelines for certain methods of cash payments and geographic mix of our deliveries our cash balance and associated receivables are impacted significantly by how many kinds of delivered in the final weeks and days of the corridor.
Third roughly 40% of the balance is attributed to payment terms on regulatory credit sales and statutory easy incentive programs, both of which have been increasing.
Customer deposits reduced slightly as well not that as we transition to lower order fees across the world. The average deposit per order will continue to reduce driving down this balance.
As we look forward Tesla is able to navigate through Q2 due to our agile and dynamic culture. We will continue to appropriately manage our cash flows through cost optimization and close working capital management. This is key as we remain focused on expanding production scaling our operations and preparing for the launch of three new factories over the next year and Uh Huh.
Thank you very much let's go to questions from institutional investors first.
The question number one is this dislike continues its journey towards the long term goal of selling 20 million units per year. What are the most important vehicle programs that will drive volume growth over the next three to five years beyond model three by and the cyber truck.
For smaller versions of three in Y or region specific vehicles or anything else.
Well I think we can.
Moving on our detailed part roadmap beyond what's announced cuts and grid warner's or that full product launches.
But it would reasonable to assume that we would make.
Coming back vehicle of some kind.
And probably a higher capacity.
Trickle of some kind of these are.
Right.
Likely things at some point.
But I do think there's a long way to go with three and why.
And with cyber truck.
In summary, so long way to go with those.
I will do.
The obvious things.
Okay second question from institutional is what is your vision for softer at Tesla what opportunities do you see for monetizing the installed base other done by FSD.
All right out by pod by pod FSD because of just overwhelmingly the most important thing.
I think the upgrading of the fleet to fulfill driving.
Especially with an over their software update.
I mean may go down as the biggest asset value increase in history as a step change.
Maybe there's something bigger, but it certainly would be one of the biggest accounted for anything bigger.
So sort of so overnight.
A million.
Exactly when it happens when its loud and various.
Regulatory.
Jurisdictions.
You'd have like.
A few million cars.
Suddenly becoming.
I was more valuable or something like that.
So we five times higher utility.
The go from like 12 hours.
The week of utility something like that or.
The three hours are used to.
60.
Like that.
So.
We also pretty small by comparison.
Now when things do become full self driving.
So what if we were going to during the car.
Well, I guess, you're probably going to do productivity and entertainment as some guide.
Whatever you play games and do work.
Well, that's the best in the future.
Yes.
Already putting some games is definitely car just for fun.
Yeah, we have been experimenting on that.
So.
FSD remains by far and away that make us opportunity in the near term.
We're putting the plumbing in place to be ready to scale other areas. When the time is right.
So premium connectivity subscription is something that we put in place.
And the ability to upgrade your vehicle through the App.
Sample on acceleration days or upgrading a standard range model three to a standard plus anywhere heated seats. So these are things that we have and we're continuing to get feedback from the field and other things that we can launch in will trickle doesn't with time.
Yeah.
They're all very tiny compared with like the trial.
The step change to full self driving its kind of on.
Hi, calculated is probably working or.
At least $100000 per car, so as less operator, so yes.
In the App store or whatever.
Yes.
Thank you. The third question. It's also about auto pilot where are the most important upcoming self driving milestones and how do you think about timing.
Yes.
Well.
Thanks.
[music].
The actual major milestone that's.
Happening right now, it's really a transition.
Of the autonomy system of the.
Cars like AI, if you go from thinking about things in.
I code like two and a half D.
Like Big Fabless space based take like isolated pictures.
And during image recognition on the on pictures.
That are partially correlated in time, but not not very well.
And transitioning to.
For de where you.
It's like.
You are which is video essentially you got.
Thinking about the wasn't three dimensions and.
For the fourth dimension being time so.
That that architectural change, which has been underway for some time, but it's not really been rolled out to anyone in the production for fulfilled driving.
Okay.
So.
Well, what we've been doing thus far is really just feeling like.
Two D.
Mostly Judy and.
Like so no well call it in time so.
Just just it's just hard to convey just how much better.
I fully for de system.
Good work.
Does work.
It's capable things got it.
That if you could you just <unk>.
Looking at things as individual pictures as opposed to video likes to basically like you could go for like individual pictures.
Too.
It's a round.
Do you.
So is that fundamental so.
The the Nicole.
Seem to have just like a giant improvement.
Yes I.
Hi, Rolling out later this year.
But it will be able to your traffic lights.
So I'll.
Turns trust everything.
Pretty much.
And then it will be.
A long March of.
Nines, essentially how many lines of reliability.
Okay.
So definitely way better than humans, but how much better than humans as maybe.
So.
But that's actually going to be the real work is just a massive amount of work with each kind of order of magnitude of reliability.
Yes.
So you'll see you'll see it happened and if you part the points on a curve it will be kind of office, where it's headed.
Hi in general I think if something yes.
In saying those bankers.
I'd run for a decade, where should be concerned about where I is growing.
The people actually being the most strongly about AI are the ones who are very smart.
Because I can't imagine better computer could be way smarter than.
But that's the floor in the logic.
They are just where dumber than I think there.
Thank you and the next question from institutional investors.
Please maybe update us on alien dreadnought, how has your thinking involved and what is needed in order to gets closer to fundamentally physical limits.
Well bring a massive amount of effort into manufacturing engineering.
The machine that makes machine.
That's probably.
1%, maybe 10000 sent more.
Engineering required.
For the factory then for the product itself.
So.
We're certainly making making progress I mean.
You know.
Patrick Powertrain factory Gigafactory, Nevada is.
On an alien dreadnought version 0.5.
[music].
So starting to approach version one.
Well, we're getting way better making cars.
You can see that in Giga Shanghai.
You'll see that even more with the first Berlin.
And were really.
Changing the design of the car in order to make it.
More manufacturable.
The fundamental architecture about why will be.
Fred in Berlin. It May look the same but the internal speaker.
Quite different and fundamentally more efficient.
Okay, actually then and what we've done today.
Thanks, George like that.
Yeah, I was going to expand on that thought I think.
Part of the alien dreadnought concept is not just automation, but minimizing the number of process steps and complexity involved in the manufacturing system.
Which involves really integrating design manufacturing.
Cross from like when the raw materials entered the factory to the finished goods.
And we're learning so much they're doing that.
Vertical integration is extremely important for this.
Okay.
But the supply chain. If you if you if you put like a GPS tracker on automotive fuel from when it got mind to when it was in the usable product it would look insane.
Okay.
Well it went around the world like six times.
So with vertical integration, maybe you can only go around the world Once you know.
To prevent or not even like effort I think they have.
Vertical integration like probably getting an order of magnitude improvement.
So.
Yeah.
Hey drove anyway.
I think a focus for us as a.
We're seeing them Capex efficiency. This is something that Oh, we've been working very hard.
Well that by three years.
And you can see that we can build new factories for less amount of money and much faster yeah lifting the together.
It's a better it's a better factory for less money in less time and as many me.
Yeah. So that's a great advantage and I'm also reducing and still is a lot.
Amount of inefficiencies, we want every operation to I invite you to the vehicle.
Value, meaning moving items closer to their final states you know so we did one any robot that just looks thing, yes, well or apartment.
In fact, it's like we were going to be Super respectful of People's Labor and we're asking somebody to do something always shirts useful Oh, we ask you actually have to spend their time in a way that as respectful of their time, but but it's like Wow. The potential for driven is there's tremendous and like I swear to be clear here to look we love manufacturing.
Awesome.
And I really think more smart people must be working to manufacturing.
One more people yeah, we would be roughly.
Yes, we do people are interested in designing new lines and a train the thing do you frac.
I've got a job for you and now we've got job everywhere, it's not already in California, I got jobs in China, and barely in Austin, Texas, Yeah and in California.
Oh, Thank you very exciting places and all these places will do original work and challenging that meaningful work yet.
Absolutely.
It's actually extremely exciting and 4.2 design you production systems.
And I think that.
You know for somebody's I kind of got a bad wrap, especially in the U.S. for long time, and if it wasn't that bad manufacturer that sort of been sort of manufacturers like ours is poor some boring just making a copy or whatever but actually this far more opportunity for innovation and manufacturing been in the product itself.
Order magnitude.
So.
Yes.
Like if there's one thing that comes out of school, it's like Hey, if you want to help us.
And that amazing.
Your manufacturing techniques and add having put into the product itself. It's not like you just get toss the product and say hey makers.
Product and it's kind of love you design.
If you hear me actually you get to change the product design and say Hey, It was part you asked me manufacturers so.
[laughter] like great, let's fix it you know so.
Is it.
However, if you were going to manufacturing engineering, so you're just get forced editor sandwich, you get to change the product design. So.
Yeah, It's it's super exciting and we evolved the lines even after they're both third this rapid evolution of the production system.
So.
And there is nothing more rewarding and going from zero cars in our tier 5000 cars, a weaker thousand cars a day yeah.
So.
The long term sustainable advantage of Tesla I think we'll be up manufacturing.
So.
Thank you very much and the last question from institutional Investor is how many vehicles this will produce in Texas.
Right now zero.
But.
Long term a lot [laughter].
Our biggest property, yes based property true.
Okay, and now we can shift to retail investor questions on sale.
The first one is definitely energy seems widely ignored by Wall Street despised.
The long comments about the growth rate exceeding automotive good that's my share more detail on calendar planned projects to help investors better understand the business outlook. How disruptive is this loss auto bidder technology.
Yes, I kind of says I think long term Tesla energy will be.
Roughly the same size as it has automotive so.
I mean energy business collectively is bigger than the automotive business. So we feel like you know.
How big is the energy sector begun automotive.
So.
In order to achieve a sustained why did your future we have to have sustainable energy generation.
Which I think every primarily solar.
You know <unk>.
Footfall by wind.
And those Intermittency you need to have a lot of batteries to store. The so the energy because when doesn't always blue and the some distortion right. So.
So it was like three elements of the or sustainable energy future.
Wind and solar samples regeneration.
Battery storage and electric transport those three things and.
The National Tesla.
Accelerate sustainable energy so.
I can't emphasize enough of that.
Yeah the.
That battery and solar will both be ethanol Miss.
And that kind of have to be in order to express to have a sustainable future.
Everybody great product road map on that front as well.
So we're can chip in the Mega pack is very well received.
[music].
Yeah, well talk about that.
Yeah, I think the the Mega pack is has represented itself and as an integrated rapidly deployable.
Great tied storage battery of Mega megawatt hours scale.
We're working with utilities large and small you know not just utilities that also just like Microgrid and project developers of all types and building around projects, where it makes sense.
And others, there's a lot of demand for the product and we're growing that production rates as fast as we can for that product and then on all of it or out of it or is it basically autopilot for grid tied batteries, it's an autonomous energy market participation system that you know does high frequency trading and.
That's a bad word sorry, sorry, hi, Jefferson Treasury called front running.
Not doing anything.
It's ensuring that the battery is doing everything you can say manage the clintons guarantee of renewals renewables and just grid intermittency of all kinds. I mean, you know people turn their lights on a power plants or turn on and off yeah.
He's ramp up and down and batteries are great discipline to solve those problems.
Yes, it just it this grid stabilization.
The most second level.
So if this ensures that things are servers or.
It's like it you know your P.S. on Uninterruptible power supply of an order size.
[laughter] no, but just get it just it shows that this could have smooth sailing.
And then the the batteries.
The computers like old interact with each other and make sure that they're working together to make the grid.
Right.
And this can be done with the power tools and the Megapacks and the Powerpacks all working together and interacting with third party systems as well, yes, essentially are distributed it does but yeah.
Yeah, I mean weve yeah. It was if necessary in order to solve the sustainable energy problem. So yeah, you can't plan power plants on the hourly scale in a renewable world you need to plant you need to optimize them on a minute by minute scale and that's what we're doing.
Yeah, but the real limitation on Tesla growth is is cell production at affordable price.
That's a.
That's real limit.
So.
Yeah, that's why we're.
We're going to talk about a lot more about those on battery day.
Because that this was a fundamental scale scaling constraint.
And in any part of that at that supply chain or pricing.
At that sell level.
Well, we'll be limiting factor so.
Hi.
You know what whatever maybe.
And your from mining to refining and as many steps will therefore refining too.
Catherine anode formation sell formation.
Or whatever the choke point is that will set the worth the growth rate.
And so.
Rick.
We expect to expand our business with Panasonic with CTO with LG, possibly with others and.
Yeah.
There was lot more to say on that front on battery.
Thank you and the second question is not at this time to bring the Tesla semi into volume production can you share more detail on production plans what weekly production rate.
It's considered volume production when does this like spec to reach that rate.
Yeah, So one stop production nexgen, realizing you're not looking for.
I'm personally very careful on the project I complaints, we did have a few trust that keep driving around and I can take anywhere on card.
But we're going to accelerate that I want to be Karen that the first few unit.
We will use ourselves that's not to carry our on freight.
Probably must be between Fremont and Reno, which is a fantastic test route.
I'm going to prove that we have very good reliability and so far the early you need do have it but we'll we'll do that them larger scale and we have also promised at some early unit to some.
Long term very patient and supported customers and well do that and now we have a marcellus coming up in the next year.
Just pointed out so we can increase and.
<unk> do you have the portfolio you didn't make sense up to now to do it yes, but.
We'll be ready and.
That's.
Maybe I'll buy it very excited about this and Oh, we have a lot of very unique technology that will always dreaming about that we will be putting into that semi and will be just awesome yeah.
And just they'd like to general class live.
Sell those like iron phosphate and then the nickel based Nick Nick nickel based cells have.
Harry energy density so longer range.
So those are needed for something like a semi.
Where you're every.
Every unit of mass that you add and battery pack you have to subtract in cargo. So it's very important to have a mass sufficient and long range.
Pack for for batteries.
How about what we're seeing with.
Our.
Passenger vehicles is that our powertrain efficiency and so tire efficiency.
Drag coefficient like basically all of the things that.
HVAC.
Going to heat pump.
Hey, Scott our total vehicle efficiency has gotten good enough with.
Model three for example that we actually are comfortable having an iron phosphate battery pack in model three in China and that'll be in volume production later this year.
So we think that.
Getting a range.
That is in the high two hundreds.
Basically we think you probably get it a range of almost 300 miles.
With an eye in phosphate pack taking into account a whole bunch of.
Of powertrain and other vehicle efficiencies.
And that that frees up a lot of capacity or things like that has a semi and and.
Other projects, so far higher energy density.
So.
Yeah. So.
I'd like to to supply chains that you can tap into aren't phosphate or or nickel.
We use very little cobalt in our system already and that's.
That may trend.
You know to zero along.
So it's really about nickel.
Thank you and then they especially as the slot recently decided not to produce standard range version of model why no longer have is offers the standards range model S or X and has announced ramping of the semi.
Does this shift from smaller pack vehicle suggest that this is not battery constrained as in the past what are the biggest constraints now.
Well I'd, just like to reemphasize inside any mining companies out there please mine more nickel.
Okay [laughter] wherever you are the world peace of mind more nickel and start wait for nickel to go back to some long some high point that you experienced some five years ago or whatever.
Go for efficient you know as the environmentally friendly mechel mining at high volume.
[music].
Tesla will give you a card giant contract for a long period of time.
If you.
Mine nickel efficiently and an interview permanently sounds sort of way.
So.
Hopefully this message go that's all mining companies.
These get nickel [laughter].
With regard to passenger vehicles.
I think the new normal for range is gonna be.
Just in U.S. EPA Rick terms.
You know approximately 300 miles so.
I think people really come to expect that as.
You know some number close to 200 miles as.
As normal.
That's a standard expectation.
Because you do need to take into account like is it very hot outside or very cold or.
Are you.
Driving up a toll mountain.
With a full load.
Hi.
And its a.
A few people don't want to have.
Okay gets the destination with Mike.
10 miles range there there was some regional reasonable margin so.
I think three hundreds going to be really close to 300 is gonna be a new normal their code 500 kilometers basically.
Roughly.
Thank you next question on insurance.
What is the hold up for this line trusts outside of California with the release numbers from that part of the business will test lunch runs be required to participate in the Tesla ride hailing network as a driver.
Sure.
Yes.
Joking before the call that when we get to quarterly insurance question that tough on say dot com here.
We are working Super Hot uninsured bonds.
I'll go onto a little bit more detail here than I have on the past.
Currently we have a product in California as I've described before.
And quite well received and.
I would largely describe it as a fairly standard insurance product with the elements of it that are unique to archives that you can think of it is.
Version, one at Tesla insurance.
Yeah versions or per night, they're getting at least zero.
Right well, we're working on now is you can comment version two or we can call. It. The first version of our telematics product yeah. It's a really ultimately where we want to with Tesla insurance is to be able to use the data that is captured in the car.
In the driving profile of the person in the car to be able to assess correlations and probabilities of crash and and be able then to assess a premium on a monthly basis for that customer.
And what makes it very exciting for us is <unk>.
The amount of data that is available with the customers permission to use.
It is not available in any other product or any other people in the world. So this gives us a unique advantage in terms of information.
And we had a decision point here, where we could take the California product and replicate that into other states or we could delayed delayed going into additional states and instead of more effort into the telematics sinuses and and we chose to ladder.
And where we are now is.
Nearly complete with the risk in cost analysis associated with the first version of the telematics product, we hope to be filing that in a handful of states with bank. Your line is very shortly.
And assuming that regulatory approvals.
Oh, absolutely, we hope to have them.
In a handful of states that ended the year.
And and then we'll continue to file for approval on additional states with regulatory approval that we'll continue to roll this out nationwide as quickly as we can and then that product as we continue to collect more data and we innovate on it will be version two version three et cetera, as we continue to refine that yeah, I mean at the heart of being competitive with him.
Insurance is what does the accuracy of your information like are you doing with.
You are forced to assess people statistically you looking in the rear view mirror or can you.
Assessed people individually.
Looking ahead with.
What's what projections.
And inform the driver, but that's how they may reduce their what actions they can take to reduce their insurance.
As Aquas, we're going to like it okay, you're driving to faster.
And this that of the other thing it's like if you if you want to pay more for insurance you again, but if you won't pay less.
Then.
Please don't drive.
So quickly [laughter].
Then.
Hi.
Thank you can make choices like okay. They want to drive aggressively in the case will be higher higher insurance or your word.
You're more capital is are there driving it will be.
Pls.
It was actually very helpful for us to have a feedback we have to see what is driving insurance expense a lot of it is just it's like you.
Like little Fender Bender, and the met Fender Bender because of the way that what are your collision repair is being done.
Cost like $15000 Mccravy Im like <unk> and.
We can actually adjust the design of the car and just how the repairs done to actually have the fundamental cost of solving that problem be less.
So this has helped us on a whole bunch of still the things that we're doing basically without realizing it.
This is a problem in general with insurance like so if insurances like or you can eat then it the feedback weve for improvements we.
So there's this gives us a great feedback weve for improvement gives especially a fundamentally better insurance product.
I'd also like say.
Spurt of recruiting because if there's one thing I'd like to come out of this call, it's but a lot of great people want to join Tesla. That's no one thing I'd like on this call.
And on the insurance front I wanted to clear we're building a great like major insurance company.
If you're interested in.
Revolutionary insurance please.
Join Tesla.
I would love to have some.
Hi, energy actuaries, especially I have great respect reactor real profession.
Your guys are greater math.
He is joined Tesla.
Especially if you want to change thanks.
Our north by Hausler. The industry is those are the place to be.
What we want revolutionary Actuaries [laughter].
Okay. Thank you very much answer sorry that so it was the second part of this question will Tesla insurance be required to participate in the tunnel ride hailing network.
So I think has the incident so far in prior calls, but at the time the ride hailing that work is available we will test lunch and coverage will be provided.
Sure in this network.
It's a different type of insurance because of the use of the car.
It's not decided whether third party insurance, Mrs tougher insurance and being required there might be some things need to think through there.
Tussle insurance at least we'll be working.
Yeah, working for them I can't tell network.
Thank you very much and Ginger sometime list goes into Q and they have analyst on line.
Thank you our first question will come from Dan Levy with Credit Suisse. Please go ahead.
Hi.
Good afternoon. Thank you.
I'll ask a question on the quarter and then just question more broadly on strategy.
Just on the quarter, if you could give us an update on gross margin was China accretive to gross margin in the second quarter and yes ideal hop off model why gross margin.
Was the person's Fremont model three and then just more broadly on strategy. It seems like your approach to insourcing is varied by region, you're in sourcing a lot one fremont, but you're relying a lot more on the supply chain in Shanghai, What do you expect your approach to be on his first thing when you eventually open up Berlin and.
What's your Texas factories going today. Thank you.
Yep.
Okay, and just to start with the gross margin questions. We didn't see progress on gross margins in China.
And that was despite pricing action that was taken.
The factory still not running at full capacity yet as it continues to ramp.
So we think theres continued opportunity to optimize the cost structure now.
Model why as we mentioned last quarter was profitable in its first quarter of production and despite the inefficiencies that we had to each and the shutdown we did see pretty substantial improvement in the model I margin and it's as we said before the model like cost structure and model three cost structure will converge.
They're not quite there model, while still slightly more expensive model three and it's not yet it for production.
And with model like carrying a slightly higher price point, you can kind of back into the math down relative gross margin.
Yeah, and the Shanghai factories pretty Big factory.
But.
And then it's continuing to do more and more internally.
It's also but the thing is really helping as like there were previously a ton of parts that were made in other parts of the world that were being shipped to Shanghai from or the world and.
Just locally sourcing.
Those components makes a massive difference to the cost vehicle.
And but I mean, the proportion of local sourcing.
Has literally been raising it like 5% to 10% a month.
Hey, good from 40 for like 40% gas here isn't like that.
Yes, it will be like 80%.
Yeah, Hi, this year.
Maybe more.
There's also a alok very strong their competitor and very eager supplier or on the factory in China.
Yeah, I feel like the suppliers in China have been extremely competitive, possibly the most competitive anwar.
And so far in nowhere negotiation.
Our marine animals I wanted a lot of isn't there also are not as a supplier.
In Germany are on the rest of Europe, there are eager to support on the factoring merriment, yeah, well journey has a great automotive industry supply chain, so actually a ton of us.
Our suppliers are in Germany have been like 200 kilometers the factory.
Thank you very much let's go to the next question. Please our next question will come from Toni Sacconaghi, Okay, Toni Sacconaghi with Bernstein. Please go ahead.
Yes. Thank you you mentioned in the slide deck. A couple of times are that you were pleased with gross margin with a P.T.I. margin progress and you expect it to achieved industry, leading operating margins over time.
Maybe you could shed a little light on that.
You know industry, leading for luxury vendors is 8% to 10% P.T.I. for Porsches smaller 17 for mass market vendors. Its five to eight what do we think about and how much ultimately to you believe that.
ER <unk> credits will contribute to that March and because I know your margins than 5% over the last 12 months, but it's actually less than 1% excluding easy credits so to a for four point contribution right now how do we think about ultimately what industry, leading margins are and how much of that you think is coming from.
He be credits regulatory credits and I've a follow up place.
Sure.
As mentioned this before in terms of regulatory Kinda you know we managed the business.
Said differently, we don't manage the business that the assumption that regulatory kinda tokens.
Significantly into the future.
Yes.
That's my friend, he talked credit revenues and double in 2020 relative to 2019.
And it will continue for some period of time, but essentially.
Well reduce yes, it's witness with hurting that.
We're seeing.
Buyers about card in the U.S. received.
There are a federal tax credit, whereas made about competitors, sorry that they get a $7500 type tax credit.
And you're not sales have continued to do well.
Yes.
Yeah, and so what we see.
Is he had continued decline in the cost to produce transition.
That caught costs as even from mature products like the S. And the act continues to come down and work on that model, three which is a second less mature product.
And then layer on top of that as long as discussed earlier the potential for software based revenue, particularly for self driving.
Okay. The revenue recognition portion of that we have today that will expand its need as we released more features and then you can layer on top of that in the future revenue from a right now.
Operating expenses continue to fall down.
And become more efficient as a percentage of revenue.
Well, they still incredible opportunity there that we weren't we're working on particularly on how customers interact with the company from sales and service.
And and what their flow is and how we get cars to them.
So we continue to see efficiencies there.
So.
In the medium term here, what I'm modeling shows.
In the alone.
No teens operating margin level.
And I think there continues to try the opportunity to trying to set up.
Oh hearing your point on the 5% than the 1% Ron is that of a journey here.
Okay.
Thank you and if I could just follow up Ilan you talked a lot about the mission of the company and.
And.
Alan and and really trying to drive.
Easy.
The option globally. So how do you think about that tradeoff.
Between driving towards industry, leading profitability, yet trying to make your cars more affordable and broader it it feels like.
Historically, you've always pick the path of I'd, rather drive more growth and more adoption because ultimately that's the mission another company and we even saw a little bit this quarter with with price reductions you could have.
Probably kept price where it is sold some units and had better profits, but but that's been an ongoing choice that Tesla as a company has made so how do we how do you personally think about that tradeoff between.
You know, even if he were to get to industry, leading margins wouldn't you be inclined to give more of that back to drive greater adoption more quickly.
Well I think we actually achieve both when you factor in autonomy.
I think we can go go way beyond industry margins and and have the carvey affordable to more where people and actually.
Almost everyone almost everyone when factoring in autonomy, but that was really a mega game changer.
Okay gigabit get bigger contingent.
Yeah.
Right, but I mean, it is important for people to the tourist industry two things there's value for money better price has and then as affordability and.
Even if you.
Rail value for money and have value for money like infrared if you will not have enough.
If you will not have enough money in the bank accounts to buy the car. They simply cannot. So then you just have looked like wasn't thing and nobody can buy so.
Hi.
It is important to make the car affordable and we will not exceed our mission if we do not make cars portable.
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Like the thing that Bugs me the most about where we all right now is that our cars are not affordable enough.
We need to.
It takes me to fix that.
So.
We are making progress in that regard I'm, just sort of steadily making progress.
So.
Yeah.
We need to.
Yeah not go bankrupt, obviously that's important.
Because that will go in our mission.
But we're not trying to be super profitable.
There are obviously, we're you know profitability is like.
1% or something here.
One of 2%, it's not it's not crazy.
Last quarter was only 0.1%.
So.
We want to be profitable.
Like I think just want to be like slightly profitable and maximize growth and make the cars is affordable as possible. That's what we're trying to achieve.
Thank you let's go to the next question. Please my next question will come from Emmanuel Rosner with Deutsche Bank. Please go ahead.
Hi, Good afternoon could you. Please characterize the occurrence near term demand environment for your vehicles. These obviously unusual times.
Going back in Q1, you had indicated record backlog.
I guess at the beginning of this past quarter I haven't seen any specific comments about new orders of backlog in the release today. So can you give us some color.
Demand is not our problem.
Definitely not.
We do have some production supply chain challenge those challenges, we're trying to slow right now.
For example model why we're body casting objects as new technology, it's been tricky to.
Maintain rage and keep growing to.
The rate for model wide casting, which as a two piece casting was launched I know there's about a half a dozen other parts that are added on.
That will transition to a one piece casting if I can pretty super excited about this we haven't tried the world's biggest casting press.
Is getting assembled right now actually in Fremont.
For the model why everybody Kathy.
It's enormous and looks awesome. So.
So.
I would like are the things that are calling us right now not demand that they are.
Just a bunch of firefighting on supply chain production.
Issues.
Okay got you put up.
Sorry.
Don't worry about demand as Lobbyism [laughter], okay. So when you're young achieving 500000 deliveries as has become more difficult was it's really just a function of the recent shutdowns and some of these oh, you know supply dynamics.
Yeah. It so it's not it's not Stewart demand, it's really just.
Production issue, it's pretty hard when you've got like.
You know global supply chain, and it's kind of whatever the most effective part of that global supply chain is that's such a rate.
No there.
I mean, the number of.
Rather through medical out of a hat for supply chain is insane teams aren't moving job.
So.
I think it also so I'd say, our some of our costs were related to hurry to.
Yeah.
You are a lot of airplanes to get parts around.
Because of parts shortages.
So hopefully you use your airplanes.
That will improve our costs.
But its a.
Domestic seed supply right now the flips, where we are now.
Thank you very much and the last question. Please.
Our last question today will come from the only thing hopefully with Jefferies. Please go ahead.
Yes. Good afternoon. Thank you you mentioned a few times, it's not the the constraint will see is battery capacity still and I was hoping you could salary tied to the scope of the drilling plans to building right now will there be battery capacity.
This is with the amount of assembly, but do you expect to come out of burden.
And and you know we should be able to source, you'll battery requirements out of Europe would you have to imports batteries from outside New York.
To ensure production in Berlin.
Okay, well, we can't say too much about this except that we're there will be local cell production.
And.
That will that will serve the needs of the grow in factory or is.
That.
I mean I know that's that's that's right far enough I think I, just adding to what you said earlier about.
Talented people, yes, <unk> like the same goes.
All areas itself, yes supply chain manufacturing materials design.
We are solving this problem and we.
We're we're treating it like any other problem that we have Sol we will solve this problem and yeah.
People to join us as we thought.
Yes, and I'd like.
Hi, My biggest concern for getting up talented people is probably but then because the labor labor <unk> mobility in Europe is.
Hello, I would recommend changing is [laughter].
Electric is somebody when suit, leaving during another company, sometimes have to spend six months on garden leave fiscal gardens, Dana I got in the garden basically.
Mike. This doesn't this is not a good use people's time yeah.
I am if they want us to hang on the garden, that's fine, but they shouldn't have to.
<unk>.
Thank you.
I mean, those in our Europe, although what I'm talking about.
Fill up as we have a follow up question.
No that's fine thank you very much.
Okay. Thank you very much for everyone for joining this call and thank you for older. Good questions and we'll speak to again in about three months.
Yeah, maybe sooner with battery.
Hi, Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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