特斯拉 (TSLA) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tesla Motors second-quarter 2010 earnings conference.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder this program is being recorded.

I would now like to introduce your host for today's program, Mr. Ricardo Reyes, Vice President of Communications. Please go ahead, sir.

Thank you very much and thank you for joining us this afternoon. Welcome to Tesla Motors earnings call for the second quarter of 2010. With me on the call today are Elon Musk, Chairman, Product Architect, and CEO of Tesla Motors, and Deepak Ahuja, our Chief Financial Officer.

Before we begin the call please allow me to read the following statement to inform you of certain safe harbor provisions under the Private Securities Litigation Reform Act of 1995. During the course of this conference call we will discuss our business outlook and make other forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are only predictions based on management's current expectations.

Actual events or results could differ materially from those predictions due to a number of risks and uncertainties, including those discussed in the Risk Factors section of our financial prospectus relating to our initial public offering filed with the Securities and Exchange Commission and as amended on June 29, 2010.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

With that I will turn it over to Elon Musk.

All right. Thanks, Ricardo.

I think financially there is not much news in that obviously we just completed our IPO in late June so and it's only like six weeks later. So there is not a lot new there. But I will go over the progress made in second quarter as well as some recent progress and touch on the whole aspects of the business, Roadster Model S powertrain expansion of our business with Daimler, the strategic partnership with Toyota, and the new NUMMI Fremont factory that we have acquired.

So as far as Roadster is concerned, I think a very solid performance there. We delivered 141 Roadsters; the best quarter for new orders since Q3 2008, essentially before the start of the recession. This is, I think, just overall a good sign for us to be having such a good quarter for Roadster.

The first sales occurred in Japan, Hong Kong, and Canada. We are now in 28 countries and we are going to start increasing our activity in Asia through the balance of this year, which is essentially laying the groundwork for the Model S to come. So with each of these countries it can often take six months, sometimes a year as you work through the regulatory requirements, get established, get a location, hire the key personnel. And so I think we are really laying the groundwork very well for future sales for Model S.

We obviously announced the Roadster 2.5, which is our fourth iteration in two years on the Roadster. It was upgraded interior, new styling, improved nav system, and a number of other features. We have the Taug Heuer Odyssey of Pioneers, which is showcasing the Roadster in the first around-the-world trip of a production electric car. And that is charging from existing locations all around the world. So it's just charging off the grid everywhere from Switzerland to Siberia with no additional infrastructure required.

Just a little more on the retail expansion. Obviously we hired George Blankenship, who spent a couple of [years] at Gap and then was the key guy for the first six years at the Apple Store activity. We opened new stores in Copenhagen, Newport Beach, and Zurich. We signed leases for stores in Tokyo, Paris, and Milan which are expected to open later this year.

As far as Model S, we are on plan for a mid-2012 launch and that is starting with a slow ramp of production in mid-2012 and then getting to our 20,000 unit annualized rate in 2013 as described in the IPO roadshow. We are growing our resources in R&D and manufacturing considerably. We added about 90 people to the growth of 25% from the prior quarter.

Our recruiting teams are also building -- our ability to recruit is also building very well. That is headed by Arnnon Geshuri, Head of Human Resources and Talent Acquisition. He was the guy who ran -- built up the talent acquisition and ran it at Google when they went from 2,000 to about 20,000 people.

And I don't think really any company has added as many good people in as short a time as Google did under Arnnon. So I think we have a great guy leading that effort.

Of course we announced the purchase of Fremont manufacturing facility, otherwise known as NUMMI, formally known as NUMMI. Our manufacturing team is actually on site at NUMMI right now so they are planning the layout and installation of equipment. I think -- although officially the NUMMI facility transferred to Tesla on October 1, it is -- on a defacto basis it is ours today.

We are also looking at buying some additional equipment from the NUMMI facility, some of the equipment that was used to produce the Corolla and Tacoma vehicles, at exceptionally good prices. There is really, I think, never been a better time to buy automotive manufacturing equipment.

Our main hydraulic press, which will be used to stamp the body panels for the Model S, is being disassembled. It's currently in Michigan and it's being disassembled for shipment to Fremont. So we expect to start installing that later this year and have our stamping line up and running next year.

That is one of the key manufacturing milestones for next year along with activation of the paint facility. We have made a huge amount of progress in design and engineering of the Model S. We have finalized the 3-D CAD package so that the body and chassis has been developed and refined to within a few millimeters, and all of that data has been released.

So that actually took place late Saturday night. The team finalized and released all the stamping, all the panel dimensions for stamping. So in general, supply outsourcing remains on track to our internal plan for the Model S.

I think it's probably fair to say that, certainly in my opinion, there are no -- there are elements to the Model S that place our mid-2012 production date in jeopardy. We have sourced most of our major components already, so of course we know both what the unit cost is and what the tooling, engineering, development, and so forth is related to those. We pushed out bracket, both our R&D and tooling expense as well as our unit cost per vehicle and we are at about the roughly 80% level there.

So it's also sort of a key, major component that were the most questionable such as the 17-inch touchscreen, the instrument panel, seating, mechanical restraints and airbags, lighting systems, suspension, brakes, battery cells, HVAC, wheels, tires, brakes, etc.

So in terms of OEM relationships for the Daimler or relationship is going well, it's expanding in its scope. It's worth noting that Daimler did not sell any of their stake in the IPO and they had somewhere in the order of three extra turns. So they could have recouped all of their additional cash and still had two extra turns sitting in the Tesla stock and they have obviously chosen to sell nothing.

We delivered the required amount of battery packs and chargers for the Smart in Q2, and we also signed the agreement to develop a battery pack and charger for the Mercedes A-class. That development is on track for completion later this year and we expect to be in delivery of battery packs and chargers in 2011 for the A-class.

On the Toyota front, Toyota invested $50 million at the IPO price, which has given them about a 3% ownership, and we signed the agreement to do the electric RAV4. That development will take place this year and next with -- prototypes have already been delivered to Toyota and we expect to start delivering those to customers probably in the 2012 timeframe.

And that is going, I think, very well. We are pretty excited about that vehicle. Essentially, it's sort of like the resurrection of the RAV4, except that this is going to be way better than the electric RAV4 that was temporarily out several years ago.

So in terms of just looking ahead, I mean, what Tesla is doing is we are just head-down focused on execution of the business plan. Obviously, given our level of growth, quarterly profitability is not as meaningful.

We are essentially going from 500 or 600 vehicles a year to 20,000 vehicles a year with the Model S, and spending roughly $0.5 million in development and tooling and what not over the course of 10 or 12 quarters. That is an average expenditure of roughly $40 million or $50 million, so obviously it's not profitable to -- it's not really possible to stay profitable with that level of growth.

But it is worth noting, and Deepak will talk a little bit more about this, that if we were to stay at approximately our current level of -- if we were just to create a business which was the Roadster and selling powertrain components, we would have a profitable enterprise. But we are giving up that possibility in order to achieve what is pretty astronomical growth.

So for the remainder of 2010 I think the biggest milestone is really completion of the alpha version of the vehicle. The alpha version of the vehicle is roughly 80% to 90% production intent, so it's very close to a production vehicle. We expect to have that completed towards the end of this year and to be essentially complete, perhaps 98% to 99% complete, in terms of sourcing the components of the vehicle.

So if we were roughly at the 80% completion level right now for sourcing of components for [the models], we expect to be at the 98%, 99% level by the end of the year and have an operating alpha prototype. So that is really the key focus. And with that I will turn it over to Deepak.

Thank you, Elon. I want to just welcome the new investors to the Company, of course, and then since this is our first earnings call I want to start by providing a brief overview of the financial profile of Tesla. We will then go over the quarterly results and finish up with a discussion of our DOE funding mechanism and some parts in our full-year financial guidance.

We believe that our activities over the past few years have laid a solid foundation for us to successfully launch the Model S in 2012. We have now delivered over 1,200 roadsters in 28 countries, built a worldwide network of 13 stores, and established relationships with two major OEMs to provide electric powertrain development solutions and components.

During the last 12 months we have also increased our gross margin on the Roadster by improving our top line as well as controlling our variable costs. To achieve all of this we have put in place key operational, recruiting, and IT infrastructure around the globe and grown our engineering and manufacturing talent.

You will see that we have continued this growth in the current quarter by hiring over 100 people, a 21% increase overall from the last quarter, primarily again, as Elon touched upon, in the areas of engineering and manufacturing. We now have about 680 employees around the globe. We have also completed the consolidation of our powertrain engineering teams and our manufacturing facilities at a single location at the Tesla headquarters in Palo Alto, California.

We continue to stay focused on developing the Model S in a capital efficient manner. As a Silicon Valley company, we have demonstrated with each model release of the Roadster that we can work faster and be more efficient in our spending. The full spending required to bring the Model S to market is currently expected to be about $400 million. This is primarily funded by $364 million of the total $465 million loan facility from the Department of Energy, which allows us to borrow at Treasury rates.

With this loan and the $234 million raised from the successful completion of the IPO and the investment by Toyota, we believe we have sufficient capital on hand to bring the Model S to market, expand our global operations to support this revenue growth, and start parallel development of additional models. It is the combination of the Model S opportunity, our capital efficiency, and the leverage of the DOE loan that we believe creates long-term value for our shareholders.

With that overview I will now turn to our financial results.

Two quick comments. First, even though our stock started trading on June 29, the IPO didn't officially close until July 2. As a result, you will note that the IPO proceeds and Toyota investment do not appear on our Q2 financial statements.

This ripples through the financials in several areas including our share count. We have footnoted the financial statements in the press release in all of these areas for your convenience.

Second, I will be providing additional commentary on our financials on a non-GAAP basis, as this is how management measures Tesla's results internally. Our non-GAAP results exclude non-cash charges related to stock-based compensation and a change in fair value of our outstanding preferred stock warrants.

However, as you know, non-GAAP information is not prepared under a comprehensive set of accounting rules and therefore should only be read in conjunction with our GAAP results to valuate our performance. Reconciliation of the non-GAAP information for all quarters mentioned on this call is also included in our earnings release posted on our website.

Turning to the P&L, our revenue for Q2 was $28.4 million, a 36% increase sequentially and a 5% increase year over year. I want to remind you that in 2009 we were shipping aggressively against a two-year order book. So sequential comparison is more meaningful and it clearly shows the growth achieved in all areas of our business.

We report revenue in two categories -- Automotive Sales and Development Services. Automotive Sales increased 16% sequentially to $24 million in Q2. Automotive Sales consists primarily of Roadster sales including options and zero-emission vehicle credits.

As Elon noted, Roadster orders in this quarter were at their highest levels since Q3 2008. Consequently we shipped 12% more Roadster compared to the last quarter. Roadster ASP in Q2 was 24% better than the prior year and held almost steady as compared to the last quarter.

Automotive Sales also include the shipment of powertrain components to OEMs, which in this quarter were battery packs and chargers delivered to Daimler. These sales almost doubled to $4.8 million in this quarter driven by record shipments to Daimler, a great result from our powertrain operations team.

Development Services revenue consistents of services we provide to other OEMs to develop electric powertrain components and systems. We began recognizing revenue from the A-class agreement with Daimler in Q2 which amounted to $4.4 million. This compares to $200,000 recognized in the prior quarter related to the prototype packs developed for Freightliner.

We will start to see revenue from the development of the electric RAV4 prototypes for Toyota to show up here in the second half of 2010.

Total gross margin for the quarter was $6.3 million at 22%. This compares to 19% last quarter and 8% in Q2 of 2009. The 22% gross margin is a record for us and we are very pleased with the result. The gross margin from our automotive sales was just under 16%, slightly lower than the prior quarter, partially due to one-time expenses related to the launch of Roadster 2.5 towards the end of the quarter and weakness in the euro during Q2.

As compared to a year ago, the substantial increase in gross margin was achieved by improving the top-line revenue of the Roadster as well as controlling our variable costs. We have achieved significant material cost reductions through redesign or resourcing of our powertrain components, HVAC system, and wheels as examples.

Finally, it's also important to note that the gross margin of 58% for our development services is not an indicator of gross margin for these activities in future quarters. We incurred costs related to our Daimler A-class agreement in advance of finalizing the contract and had to book them as R&D expenses rather than costs in Q1.

However, some of the deferred revenue on this program from Q1 was booked in this quarter when the agreement was signed. Hence, revenue and costs were not fully matched in Q2 as accounting standards around revenue and expense recognition have led to timing differences. Going forward, such factors will continue to complicate the gross margin of this program, and for that matter, other such programs in any given quarter.

Looking at our operating expenses, they reflect our continued emphasis on the development of the Model S and its infrastructure. R&D expenses were $15.4 million for the quarter on a GAAP basis and $14.9 million on a non-GAAP basis.

Non-GAAP R&D expenses increased 14% sequentially. We will continue to ramp up the spending on Model S development with increased internal R&D resources and further engagements with suppliers. The timing of payments to suppliers depends on many factors, so we anticipate that R&D expenses will continue to increase significantly but may not have a predictable trend.

SG&A expenses for the quarter were $22.2 million on a GAAP basis and $16.7 million on a non-GAAP basis. The increase in our SG&A expenses on a non-GAAP basis from the prior quarter occurred as we have continued to expand our presence globally, as well as establish our network of company-owned stores.

We also incurred higher expense related to the recruitment of key talent from all over the world, new filings for our patents and trademark protection globally, as well as facilities expenses related to the consolidation of our engineering and manufacturing center at our headquarters in Palo Alto.

A quick comment on the charges in other income and expense line. This reflects the change in fair value of our outstanding convertible preferred stock warrants and the DOE warrant at the end of the quarter. Since our stock price closed at $23.83 on June 30 this non-cash accounting charge was $6.3 million.

Net loss for the second quarter was $38.5 million on a GAAP basis and $26.1 million on a non-GAAP basis. This compares to a non-GAAP net loss of $23.8 million during the prior quarter. As Elon mentioned, we are incurring a net loss and will continue to do so for the next several quarters as we are making significant investments to prepare for the launch of the Model S which will grow deliveries by almost 40 times those of the Roadster in the next few years.

We were not in this aggressive growth mode we believe that our business could be right-sized to deliver a net profit based on gross margins in the range of 20%.

By looking at our losses on a per-share basis, please note that weighted average shares were only $7.6 million since the IPO did not float until after quarter end. This resulted in a net loss of $3.41 per share for this quarter versus $3.26 in the last quarter, again on a non-GAAP basis.

Our pro forma basic common shares outstanding would be approximately 93 million shares considering the IPO and the investment by Toyota, as well as the automatic conversion of our preferred stock and warrants. On a pro forma basis, therefore, our Q2 non-GAAP net loss would have been $0.28 per share assuming that the share count was outstanding for the entire quarter.

Turning now to the balance sheet, cash was $47.3 million versus $61.5 million at the end of the prior quarter. As I noted earlier, this doesn't include the $235 million raised on July 2.

Looking at cash flows, cash used in operating activities during the quarter was just under $18 million. This is less than the $27 million used in the prior quarter. Capital expenditures were $9.2 million this quarter driven mainly by increased investments in the Model S program. Offsetting our cash usage in the quarter was a drawdown of $15.5 million from our DOE loan facility.

At this point I want to make a couple of points regarding the DOE launch. First, to reiterate my prior comment, we expect that the launch will pay for most of the costs related to the engineering, development, and facility expenses for the Model S until its launch and for all such expenses of our powertrain activities on a reimbursement basis. So almost all of our cash burn from R&D and CapEx spending for the Model S business is eligible for reimbursement.

Currently there is about a six- to eight-week lag in reimbursement between when these costs show up on our financial statements and when we receive funding. We estimate that about $12 million of our expenditures incurred through June 30 are eligible for reimbursement by the DOE.

Also, as of June 30, we have drawn down $45 million of the loan facility and the remaining $420 million can be drawn over the next 2.5 years. Think of this as a $420 million credit line. These loans extend until 2022 and allow us to borrow at Treasury rates with quarterly principal repayments that start at the end of 2012.

Second, I want to explain what will happen to a portion of the IPO proceeds in connection with the launch. As some of you may recall, we agreed to set aside $100 million of the cash raised into a dedicated account. As a result, our Q3 balance sheet will show this as restricted cash.

This dedicated account can be used for us to fund any cost overruns for our powertrain and Model S projects and will also be used as a mechanism to defer advances under the DOE loan facility. This will not affect our ability to draw down the full $465 million loan, but will require us to use the dedicated account to fund 50% of the project costs upfront.

These upfront payments will be fully reimbursed by the DOE once the dedicated account is depleted. Therefore, consider the dedicated account as essentially a mechanism to defer, but not replace, the loan amounts.

To make this easy to follow and to accurately portray the true use of cash in our operations, we will report the total amount of expenditures eligible for reimbursement from the DOE at the end of the quarter. This is a combination of the lagging reimbursement, as I discussed earlier, and the default draws related to the dedicated account. As I mentioned earlier this amount is $12 million at the end of Q2.

Next, I would like to offer some thoughts on guidance. Since we remain focused on the long-term objective of delivering the Model S, we will provide limited guidance on our short-term financial results. Specifically, we will provide annual financial guidance on revenues only.

Accordingly, for this year we project total revenues of $110 million to $115 million. We expect Roadster sales to show some growth, but small fluctuations are likely due to seasonality during the winter months. Just to set expectations for next quarter, in Q3 of last year we experienced the peak of Roadster deliveries to clear the order backlog that we had acquired for the prior two years so we do not believe next quarter's year-over-year revenue comparison would be meaningful either.

We expect powertrain activities to grow over the next few quarters, and this will come from both powertrain component sales as well as development services to Daimler and Toyota. And as we have mentioned, we expect both R&D and capital expenditures to increase over time but with some lumpiness related to the development of the Model S.

Finally, since we are not actively focusing on getting Model S reservations at this time, we do not regard the number of Model S reservations we receive in any given quarter to be an indicator of our performance, at least for the next year or so. We are therefore not planning to provide guidance on the number of reservations we receive in any given quarter.

I would like to conclude by letting you know how excited we are about our long-term opportunities. We are confident in our long-term operating model and look forward to continuing to build on our strong market position.

This ends our prepared remarks. Operator, can you please open the call for questions?

(Operator Instructions) Rod Lache, Deutsche Bank.

A couple questions. First of all, just on the CapEx and R&D can you give us a feel for how that is going to flow over the next few quarters? And I am assuming that the funds for Fremont, those actually get released on October 1. Is that correct?

That is correct. When we complete the acquisition of the Fremont site we will pay the balance of the $42 million acquisition price as well as some additional equipment that we are purchasing from NUMMI, as Elon indicated, at very good prices.

Basically, I think we put $3 million down on the NUMMI facility, correct?

That is correct.

It was like $39 million to be paid to NUMMI to acquire the facility. It's looking probable that a significant portion of that will actually be covered by the DOE loan because NUMMI is a car -- or was more recently a car factory so we are able to offset a significant portion of the purchase price by the fact that we will not need to make facility upgrades that would have been required at a different location that was not a car factory. So that is helpful I think on the NUMMI purchase price.

On the CapEx question, we are trying to avoid giving precise numbers for CapEx expenditures because at this -- given the rate of change of things at Tesla, it's difficult to predict expenditures to within a month or two, which is kind of what you need in order to have quarterly precision. And so we could ultimately exceed or be above or below a projection by some meaningful number simply because an expenditure got pushed from one month to the next.

But it's fair to say that we have got roughly about $400 million to spend going forward over the next 10 quarters out of a $500 million program. So you figure it is going to be an average at least of $40 million a quarter.

This is a combination of expenses and CapEx.

Yes, but it's going to be a little lumpy. So it's not -- it's hard one quarter from the next. It could be one quarter is a $20 million a quarter and the next is a $60 million quarter and that is just a function of when payments become due.

Okay. And can you give us -- just another question on the sales of Roadsters. How has the trajectory of the international sales been looking and how successful has the lease program been at this point?

The European sales have been sort of moderate. They have continued at a steady pace. We haven't seen really much movement there. We have seen some improvement on the US side, and of course we have just begun delivering a few units in Asia and we think there could be a fair bit of demand in Asia.

But we are not really trying to push too hard on Roadster activity. But if we end up selling 500 Roadsters a year or 600 Roadsters a year or 650 Roadsters a year, it's not a huge impact on our numbers. The real value of the Roadster is serving as that advanced scouting troop and that vanguard to lay the groundwork for the Model S to follow.

But I think it's a -- certainly I feel very confident in being able to achieve 500 to 600 units a year of Roadster sales without really trying too hard on that front.

And the leasing program?

Sorry, good question. The leasing -- we are at about a 20% mix on the leasing.

Okay.

So we actually thought we might be higher in leasing, but it's sort of 20%. We might, that might increase. Part of it also is we only have leasing in the US, this is perhaps a -- so we don't have leasing in Canada, we don't have leasing in Europe or Asia so the 20%, Deepak -- it's 20% of our total mix.

No, it's 20% of our US.

Oh, 20% of our US mix. Okay, so it is [kind of low].

Okay. My last question is just can you elaborate a little bit on the relationship with Toyota? What exactly does this mean financially, just the development contract, and what kind of volume would you be anticipating in the out-years for this vehicle?

We are not making any predictions on that front. So far things have gone very well and we have consistently exceeded Daimler's expectations. But it's always difficult to predict where these things will go in the future. It's a function of a lot of things that aren't necessarily in our control.

But certainly it's fair to say that discussions are underway and we are cautiously optimistic that there will be continuing business there.

Okay. So you are not prepared to disclose anything on just the development project or what kind of revenue from Toyota we should be expecting at this point?

I think it would be premature for either Daimler or Toyota to start making predictions. If things bode well for the future -- but I don't think we have enough certainty to be making predictions.

Okay, thank you.

Himanshu Patel, JPMorgan.

Good afternoon, guys. I know you don't want to give quarterly figures for Model S reservations, but could you at least comment did the IPO process itself just raise sufficient awareness of Tesla and the Model S? Was there any sort of noticeable uptick from the IPO itself?

Yes, I guess the reason that we aren't giving Model S numbers, although I think they can be inferred from numbers on our balance sheet, it's just that we aren't really actively selling the Model S right now so it would be difficult to take the growth in reservations at some proxy for demand.

The sales team is only right now selling the Roadster. We are right now at over 2,600 reservations for the Model S. Actually, sorry, it was 2,600 as of end of Q2, so I think we are at maybe over 2,800 now for the Model S.

But again, I really caution people against trying to infer too much there when we are not actually actively selling the Model S and it's two years away from production. We will start to push advance orders in the Model S probably in the second half of next year, at which time we will be able to have demo units in the stores. So that is sort of the timing when Model S reservations will start to have some meaning.

Okay. And then, Elon, you mentioned the alpha version would be done by the end of this year and sort of 85% of the car would be done by then. Can you just kind of give us a sense of what are the major items on the Model S that need to be accomplished in calendar 2011?

Yes, so just to be -- I will add another layer of precision there. We expect, in terms of sourcing decisions, to be probably 98% to 99% -- essentially except for a few little stragglers to be done with sourcing decisions by the end of this year. But in terms of what gets then incorporated into the alpha build, there is always going to be a bit of lag.

So we will have -- alpha (inaudible) that is why it's sort of roughly 85% production intent by the end of this year. And then the beta build, which would come out next year would be at the 99% production intent level. And that is -- sort of the difference between 85% and 98%, 99% is a whole series of small tweaks and small items. It's not really anything major.

Okay. And then do you have a guess or a view right now on whether at the Model S will come out as a model year 2012 vehicle or a model year 2013?

Well, the approach we are taking is a little different from the standard model year approach. We are going with version number, so Model S version 1 essentially is the mid-2012 -- is what we will be released in mid-2012. Just as with the Roadster; we have got Roadster 2.5.

Internally the nomenclature for development is more that of a high-tech Silicon Valley company than a typical automotive that is why we call it sort of the alpha build, beta build, release candidate, and production.

Yes, you answered my question. I was just trying to get a sense for when within 2012 you were looking to launch. It sounds like mid-2012 is kind of the target right now.

Yes, yes.

Okay. And then one last question. I don't know if you could or would care to comment on this, but Nissan has made these comments that may be disputable about their cost per kilowatt hour and the lease being sort of in the mid-300 range.

I know there is many ways to measure it and slice and dice that data, but I am curious are you seeing or hearing anything about how fast the competition's cost is falling on battery pack cost such that perhaps the gap with Tesla is starting to narrow perhaps faster than what you would have envisioned earlier?

Well, I think that is why it's important to note that the Leaf battery packet is at a much more primitive level of technology than the Tesla battery pack in a couple of different ways. The energy density is lower. They aren't really trying to achieve the kind of range that we are trying to achieve. I think the Leaf is something like 80 to 100 miles of range or something like that.

Also, the specification at the pack level, if you distinguish between the cells, battery cells and the battery pack, the sophistication at the pack level to the best of my knowledge is really more primitive than even the first prototype that Tesla came out with. It does not have, for example, active liquid thermal control which is an important thing for a hot and cold [regime].

So if you don't have active liquid thermal control your battery pack temperature is going to be all over the place. In cold environments you will see a huge degradation in range and in hot environments it will just shut off. So it's certainly possible to lower your cost per kilowatt hour by going for lower energy density by removing systems like active liquid thermal control. But -- so those are important, I think, sort of mitigating factors.

That said, I think we will probably still be -- well, I would be more cautious about making detailed cost predictions, but I think suffice it to say we do not think that Nissan will be honest on a cost per kilowatt hour.

Great, thank you.

Even though they don't have those other things that I mentioned.

Joshua Paradise, Morgan Stanley.

Thanks. Good afternoon. You mention in the release that there has been some specific improvements in manufacturability of the Model S. Are there any that you can talk about or give any color or details on?

Well, we have a much better understanding now that we have identified our site as to how the manufacturing processes would be laid out for each of the shops. We are also working with our suppliers in the purchase of manufacturing equipment and some of the tooling associated for the Model S. So in that regard we have made significant process on the manufacturability of the car as well.

Yes, we have got, I think, a very detailed plan for the manufacturing of the Model S at the NUMMI facility with detailed schedules laid out for all aspects of the manufacturing. And as Deepak said, just having acquired the new facility gives us a big leg up on Model S production.

There is a lot of things that are already there and in place, both from a regulatory standpoint in terms of various permits and whatnot as well as the equipment itself, that we would otherwise have to purchase and install and debug and that kind of thing. So the NUMMI facility definitely gives us a great head start.

Okay, great. And then also thinking about manufacturing and the CAD model, the CAD package that you released I think you said has a tolerance of plus or minus 5 mm. Do you have a timetable -- when you get to, let's say, the end of 2010 and the whole design is really locked down, what would be tolerance be at that point?

Actually where we will really get locked down is going to the beta build. So the -- and plus or minus 5 mm is really, that is kind of a broad brushstroke reference point. There are some things that are accurate to within tenths of a millimeter, but it's kind of -- in terms of how body panels -- kind of the maximum movement that we, dimensional movement we -- it's not really, I should clarify, it's not really a tolerancing thing. It's really what we are referring to is in terms of the most we would expect to change a given part going from alpha to beta build.

But in terms of level precision, in terms of how big are, let's say, the gaps between the body panels and what is the level of precision, what is the fit and finish of the vehicle? All of those elements [can't] be on file with or better than what you expect from any other team after that.

Right, okay. And then just one last question. The R&D expenses they have development comp of $8.5 million, so that $8.5 million that is not a revenue that is some sort of an offset to the expense? Can you explain how that works?

Yes, you are referring here, I believe, to the 2009 financials which had an $8.5 million offset to our R&D expenses. Is that your question?

Okay, right. So that is just for 2009, there is nothing there in 2010?

That is correct.

Okay, great.

And that related to our treatment of the development services or the engineering services that we provided to Daimler for the Smart program.

Super, thanks.

Patrick Archambault, Goldman Sachs.

Good afternoon. So a couple of questions just really on the batteries. I believe that going from the current Roadster model battery, I guess the Roadster Sport, to the battery pack that you guys are going to use for the Model S, I think I may have the number wrong, but I think you guys have contemplated like a 31% cost decrease.

Can you give us a sense of sort of what improvements you are making in this Model S version to help bring that cost down? Secondly, kind of related to that, there has been some or there has been a couple of articles just talking about inflation and availability of rare earth elements. Is that something that could potentially affect your battery costs as well?

It sounds like you are probably referring to the factory cost reduction we are talking about in the IPO presentation where we show the Model S factory cost per kilowatt hour being about 44% of what Roadster version 1 was and Roadster 4 being 69% of what Roadster version 1 was. So essentially what we are saying is that we are able to drop the cost per kilowatt hour by roughly, to roughly half of what it was when we started with Roadster going into Model S.

So the improvements there come from both the battery pack level and at the cell level. So we have been able to increase the packing density of the cells considerably, so there is almost a 50% increase in energy density at the module level for the battery pack. So they are very densely packed and installed with enough room to fit the liquid cooling loop in there and maintain tack safety. So that even if one cells goes in thermal runaway it does not cause a cascading effect and cause other cells to go to the runaway.

This is actually a very hard call to make. But the more energy you pack into those -- the higher the energy into the pack the harder this problem gets. So if you want to do a lower energy density pack it's a much easier probably than a high energy density pack, which is (inaudible) reason and common sense.

We have also changed the cell chemistry to one which has a lower fundamental cost. In the Roadster the cathode was or is cobalt. In the Model S it's a nickel cobalt aluminum cathode, so we are using roughly a third as much cobalt as we do in the Roadster.

The cost isn't strictly speaking, I think, a rate earth element, but it is expensive. It's the most expensive ingredient in the battery pack so being able to reduce that to a third of its level in Roadster gives us a much lower material cost at the cell level than was previously the case.

And the energy density is actually higher so it's about a 15% increase in energy at the cell level going to the new chemistry. We have worked closely with Panasonic to develop a cell that, although it's in the 18-650 form factor, so it's 18 mm diameter by 65 mm in length, the internals of the cell are actually optimized for an automotive application rather than a laptop application.

So it's because the external form factor is still 18 650, we leverage the economies of scale that Panasonic has in the factories that are able to nonetheless have an automotive-optimized cell. The changes associated with that cell, that is intellectual property that Tesla owns and has a platform patent on. So that is something that in the future as we look to achieve attain a second source for our cell manufacturing we can transfer those changes to the second source as well.

And to add to what Elon said, which is primarily significant design improvements in both the battery pack and the cell, we will see some additional economies of scale as we manufacture these in-house at the higher volumes as compared to our present production.

Yes, absolutely; economy of scale. So obviously going from 500 cars a year to 20,000 there is economies of scale across the board including the battery pack.

Thanks. And just on the potential for some of the element inflation is there something that you can do? I mean is there a hedging plan that you guys can [undertake to protect] against that or how do you think about controlling the potential inflation cost because who knows how much, for instance, cobalt is going to cost three years from now?

We have considered some hedging activities given the limited nature on the size of the market for trading of some of these elements, but there is nothing that we have implemented at this point. Certainly as we get closer to the launch of Model S we will look at these again. We can also do it by a contract with our cell manufacturers so there are a couple of different ways of doing it. We will evaluate it as we get closer to the launch of Model S.

Yes, it's always tough with hedging strategies because you -- and our hedging strategy comes for free so we did consider that even for the Roadster but ultimately decided that it wasn't really a cost-effective way to do a hedging strategy. If we did make the cell supplier, Sanyo, in the case of the Roadster sort of guarantee us a price, then of course they have got to build in margins within what they sell it to us for. So it ends up not being a great way to go.

The best thing that we -- I think that the path that we are taking by going to a chemistry that is, only has a third as much cobalt, the nickel, cobalt, aluminum chemistry, that is really the thing that gives us the most comfort in that even if cobalt costs were to spike it only has, call it, 30% to 35% of the impact that it would have otherwise had. Aluminum and nickel are not -- we are not too worried about those.

So it could have some impact but probably not a huge impact.

Great, thank you very much.

We will get a little visibility into that and if we see that it -- if it appears it's going to be a sustained high cost, obviously then we can adjust the price of the Model S in subsequent years.

Great. Very helpful. Thank you.

Thank you. Ladies and gentlemen, due to time constraints this does conclude the question-and-answer session for today's program.

We can take a few more. Actually, sorry, we are okay on the time constraints. If there are a few more questions, we are happy to take them.

Jeff Evanson, Dougherty & Co.

Could you give us a sense of the mix of (technical difficulty) revenues to auto sales?

Sorry, unfortunately, you are extremely faint.

Can you give the mix of development sales, development services sales to auto sales anticipated in your guidance?

We are not providing that relative mix because there is just too much uncertainty associated with that.

There are many revenue recognition issues that we need to deal with, especially when it comes to development services revenue. So it's -- depending on how work progress is and how those issues get resolved it's difficult as a result to give very specific guidance on the mix of automotive sales versus development services.

Right. It's not as though we have this information and are sort of keeping it from you. It's just that the uncertainty, the [error box] around the prediction would be quite significant so it would be difficult to really give any level of precision there.

I mean certainly all indications are very positive for business from Daimler and from Toyota. And I think that there is also a good chance that -- we have additional partners that we are selling powertrains to, companies beyond Daimler and Toyota. And if you look at that and (technical difficulty) the trajectory of the Daimler relationship which started of with the Smart car and then expanded into the Mercedes A-class and the Freightliner truck group, that to me is a positive trajectory.

The fact that Toyota only seriously engaged with us about five months ago and we have already announced the RAV4 that will go into production in 2012. So indications are all very positive. We just don't have enough fidelity to give you predictions that we are comfortable with.

There are no further questions in the queue at this time. I would like to turn the program back to Elon Musk for any further in remarks.

All right. Well, thanks a lot everyone. And, yes, I think, as I said at the beginning, we are just head-down executing on Model S and powertrain, growing the Company, adding as many good people as we can find.

One of the things that I am really excited about is just the quality of personnel that are joining Tesla is just superlative. We are really attracting the world's best talent and ultimately the value of a company is a function of the level of talent contained within it and how well that team is working together.

We plan to keep you regularly updated on progress with the Model S so we are not going to be waiting for quarterly earnings calls to provide Model S progress updates. As there are developments we will be providing that information on our website on the Tesla blog and we are going to try to be as open and transparent as possible.

Like I said, if we had enough fidelity ourselves to make forward predictions with high levels of accuracy we would do so, but it's just -- we just don't have that. But we will certainly, as progress is made, as issues come up we will try to inform you as soon as we know about them. All right.

Thanks a lot and just like to welcome all new investors to Tesla and let you know that we intend to do a great job for you in growing the value of the stock over time. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.