特斯拉 (TSLA) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tesla Motors Corporation second-quarter financial results question-and-answer conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the call over to Jeff Evanson, Head of Investor Relations. Sir, you may begin.

Thank you Jamie, and good afternoon, everyone. Welcome to the Tesla Motors second-quarter 2012 financial results Q&A conference call. I'm joined today by Elon Musk, Tesla's Chairman, CEO and Chief Product Architect, and Deepak Ahuja, Tesla's Chief Financial Officer. We announced our financial results for the second quarter shortly after 1.00 p.m. Pacific Time today. The shareholder letter, financial results, and webcast of this Q&A are all available at the Company's investor relations website at ir.teslamotors.com.

Today's call is for your questions. We will conduct the Q&A session live, so please press star one now if you would like to ask a question. During the course of this call we may discuss our business outlook and make forward-looking statements. Such statements are predictions based on management's current expectations. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent 10-Q filed with the SEC. Such forward-looking statements represent our views as of today and should not be relied upon after today. We also disclaim any obligation to update these forward-looking statements.

Now, Jamie, can we please have our first question?

Jesse Patel, Jefferies.

Jesse, are you there? Jesse?

Jesse, your line is open. Please check your mute button.

All right, Jamie we will come back to Jesse. Why don't we take the next question please?

John Lovallo, Merrill Lynch.

Hey, guys, thanks for taking the call. A few questions for you here. Starting with developmental services revenue, was that $5 million in the quarter all Daimler revenue?

Hi, this is Deepak. John, yes, it is all Daimler revenue, you're right about that.

Would you say that, that $5 million, maybe a little bit higher million dollar, would be a good run rate over the next six quarters?

It is going to vary by quarter because our overall program with Daimler is based on delivery of certain milestones and there are different revenues associated with it. We have indicated that it is going to be total close to $30 million and it'll be spread over the next six quarters roughly.

Okay, great. In terms of Model S deliveries in the quarter, did you guys disclose how many were actually delivered?

Yes, we delivered in the quarter 10 Model S. We produced a few more and our focus was primarily in providing those for our marketing activity so that we could have more ride and drive events, the Get Amped Tour, that we kicked off, so we really wanted to make sure we had a lot going on for our test tracks.

Yes, and if I can probably preempt a question that you weren't going to ask it, somebody probably would, we made a total 40 of production vehicles so far.

Okay.

And the production is ramping quite well actually, so it's stepping up, assuming that -- totally aware of how the production steps of. It actually steps up in a sort of geometric or exponential fashion. It is not linear. So we will see quite a dramatic increase in the production rate in the coming months.

That's helpful. Thank you. If I could just sneak a couple quick ones in here. In terms of the powertrain units for Toyota, how many units were actually produced this quarter?

We produced roughly 100 units in this quarter and it is a combination of battery packs and drive units, but it was in that ballpark. It is again, a start of the ramp in terms of our production as we've indicated and we will continue to see some growth there.

Great. Last question if I may. How many Roadster vehicles actually remain to be sold throughout the remainder of the year?

We have about 140, 130 to 140 vehicles left to sell and we expect to have those sold out by the end of the year.

Great, thanks very much guys.

Thanks, John.

Dan Galves, Deutsche Bank.

Good afternoon guys, thanks for taking my questions.

Hi, Dan.

How are you? In terms of the ramp and congratulations on launching the vehicle on time and the great reviews it has been getting. Just wondering if you can talk about what are the key challenges that you've seen or what are the key challenges to come in terms of making this exponential jump in production rate at some point in the quarter? Whether you're making last-minute tweaks in the vehicle or supplier issues or the process at Fremont, if you can take us through with the challenges are ahead in that?

Sure, absolutely. First of all it is worth noting it is actually normal in the auto industry for there to be an exponential growth in production. So it is not unusual. Ours is maybe going over a slightly longer period of time than is normally the case for gasoline cars because in our case we've got something like 97% or 98% of the components of the Model S are new, they are not in any other vehicle. And you can only make cars as fast as your slowest component and we want to make very sure that every car that comes off the line is as close to perfect as possible. In fact, I'm personally inspecting the cars whenever I can. I think it makes sense to take that approach and ensure that when customers receive a car it is as close to flawless as possible. And only grow the production ramp to the degree we are able to maintain an exceptional quality standard rather than to rush into things and then have a great deal of customer unhappiness.

When we looked at our cash flow forecast whether we did -- we did a bunch more deliveries in the third quarter or basically if you move several hundred deliveries from third to fourth quarter one way or the other, it doesn't change our cash flow point. And we really need to optimize for our cash flow point. For a cash flow standpoint, and then on the other side making sure that our customers are ecstatic when they get their products. So I actually changed the production ramp to slow it down at the beginning and then ramp at a faster towards the end. I think it is the right decision. Time will tell but I think it is the sensible decision, something that I would wish that somebody did if I was a shareholder in the Company and I am.

That makes sense. Just to follow up on your comments on the cash flow. It looks like liquidity went down by $120 million or approximately in the quarter, you have 265 of liquidity available. It seems like the cash flow point I guess I don't understand what you're talking -- what you mean by the cash flow point doesn't change, it would seem like the longer it takes until you get to the higher production rate, the lower your cash balances would go. So if there's any way to kind of gauge whether the cash burn will slow in the third quarter and if you have a targeted year end level you could provide to us, that would be helpful.

Dan, I think if this is a managed slowdown then you can manage cash and that's what we have done. We've deliberately upfront plant to do 500 units. The worst thing you can do is plan for 1,000 and then deliver 500, that's when you have the excess cash flow. This is a planned approach which helps us manage our cash. And as we've indicated in the shareholder letter that our expectation based on our plans is that we will achieve pretty close to free cash flow breakeven in Q4. And in Q3, we will see I would say roughly along the same lines as Q2, maybe slightly higher, but considering all of that and given our cash resources we feel pretty comfortable that we have sufficient liquidity to get to profitability next year.

Yes, if you move several hundred cars from one quarter to the next, it actually does not change out our cash flow point. That's driven more by working capital requirements at the end of the year. When we are producing thousands of cars, almost a couple thousand cars a month. So it seemed like why optimize for, why try to push product on customers that maybe are not as perfect as possible. If it does not actually yield anything tangible.

Got you. I guess one more on the subject. It seems like different than most automaker' s, you I think recognize revenue when the vehicles deliver to the customer not when it is shipped off the factory to a dealer. So I guess what I'm getting at is you probably, if you're going to deliver 500 in the third quarter you're probably going to produce quite a bit more than that? I guess is that true? And then where do you expect inventory to be once you get to close to your targeted run rate of 5,000 quarter?

I think it is probable that we will produce more than 500, but it is always a little tricky -- essentially if you imagine the production ramp is this quite sharp S-curve and you sort of, as you pick a point, an arbitrary point on that S-curve, on the steep course portion of the S-curve you can actually see a quite significant movement of units. It is hard to predict exactly where things will be on that steep portion of the S-curve, but I'm not sure it's relevant, because you get to the flat portion, the high portion of the S-curve, that point is much more predictable. And that is sort of the point we feel really confident about getting to in the fourth quarter. And I think it is the more relevant thing, like if you were to at present value of the cash flows and move the stuff around, it doesn't change the effective cap of the Company if one is doing the analysis correctly. So I think it is probable we will do that, but it is not certain, but even if, one way or the other, it is not going to make much of a difference.

Okay.

Elon, and Dan to your specific question, although we recognize revenue when the customer gets the car, the gap is not much, at least in the beginning. A lot of our customers are in California. Deliveries happen immediately and even if it is long distance, it's just a matter of a couple more days, a few days. It is not that dramatically different.

Okay, great. Thanks for all the helpful color on that. Appreciate it.

One thing I wanted to reemphasize, if people recall that one of the things I've been really emphatic about and those things in 2013 we will produce at least 20,000 units and that our gross margin will exceed 25%. I also said that we would start delivery at -- no later than July and those are the three things that I said we would -- that I was highly confident we would do. There are other things that are sort of nice to have and we'd like to do and maybe this will happen, but those are the important ones and we start deliveries in June so we're ahead of July. And I think we're going to exceed 20,000 units next year and exceed 25% gross margin. And both, those are the things that I think you should really hold me and Tesla to.

That's the flat portion of the --

That's the thing that really matters, yes. Absolutely.

I agree, thanks a lot.

All right.

Ben Schuman from Pacific Crest Securities.

Hi, thanks, guys. Elon you talked about changing the ramp a little bit, can you specifically address what is driving that in terms of the quality control factors that you are focusing on with that revised timeline?

I can talk a little bit about it although it is easy to get lost in the weeds because it is not as though there's any one big thing. It is a bunch, it's like a couple hundred little knick-knacky things. One example is there's the chrome plating of the door handle. We just couldn't meet our quality standards. There were little tiny pits in the plating that were unacceptable for us so we had to switch that to a different plating supplier. Right.

Things like the banana leaf interior trim, when I was shown a sample of that it looked good, but when I saw it in the car it did not look good, so I canned it. We are not going to deliver an option that doesn't look good and unfortunately, that was not clear until we saw it in a car which was late in the game. So there's some sort of things like that where we have to do last-minute maneuvering. The decisions are made absolutely with respect to ensuring that the product is the best possible product. That's what we are aiming at. Great companies are just build around great products, or services and so we have to super focused on ensuring that we have a product that's not slightly better but substantially better. I think we have that actually. If you look at the reviews, that's the response we are getting.

Okay, great. Can you address how cancellations are trending now that more and more of those finalize your order emails are going out?

I think overall, Ben, we are fighting that cancellations as a percentage of our reservations is falling fairly steady the last few months. Clearly, customers have to make that decision, but we're not seeing anything which raises any red flags in our minds.

Quite frankly, the thing that I get bugged about is not cancellations, it is people who want their car sooner and who want -- a day does not go by when we get several requests from quite senior people or celebrities or whatever saying isn't there some way they can move up on the list. That's not the cancellations that are concerned. We do not have a demand problem. Hopefully people can see that this is -- we obviously do not have a demand problem. One of the biggest reasons people don't put down a reservation payment for a Model S is because you have to wait a year almost, 10, 11 months. If you need a car, you need a car. So we actually need to focus our energies heavily on the production ramp and maintaining quality and achieving gross margin. Those are really our issues, it is demand generation. George is doing such an awesome job, I don't have to worry about that.

Okay, great. Just one more, we've seen some concept cars from other manufacturers, high-performance EVs, things like that but nothing really close to production that compares to the Model S in terms of performance characteristics, things like that. Who do think from a competitive standpoint is closest to Tesla, especially on the powertrain side of things and how far behind are they?

Well, the next best powertrain's are the ones that we provide our partners. Then after that, you fall a long way. Then you're at the Leaf, I suppose, which obviously has some range issues and it's not a fun car to drive. So it sounds like -- I actually do think that Nissan should double down on their electric vehicle investment and just need to improve the product, it's not where it needs to be. But the way to think about the Model S is really not from the standpoint of how does it compare to other electric cars, that's not really how -- why people are buying our car, they're buying a car because they're looking at this and saying it's the best car. Would you look at the characteristics of the vehicle, whether it is aesthetics, safety, handling, performance, the user interface and the functionality and the technology in the car, fit and finish.

A whole dimension against which you would evaluate the car as a product, including taking all those characteristics and integrating them and saying, does this as an integrated system work because sometimes you can have a mixture of ingredients that don't come together into a good product. So really, people are buying our car because they think it is better than buying any other car. In that price range. They're selecting against cars in that price range, not electric cars.

Great, thanks.

Adam Jonas, Morgan Stanley.

Hey, guys. Going to go back to the point about the Model S, S-curve ramp from 3Q to 4Q. So you are at 10 cars a week now, I guess you will be averaging just over 40 a week in 3Q and then to ramp to an average of 375 a week in 4Q to kind of make the 5,000 full-year number. So I totally take on board your point about the shape of the S-curve, and it is more of like a switch than a ramp if I'm not mistaken. But in order to make sense of this I think at the vertical portion of the S-curve what would have to happen pretty, not only pretty quickly, but very early in the fourth quarter, so or else you will be implying an exit rate that would be way, way over 375 a week. Which would be implying I guess, maybe this is what you're implying, that you'd be doing way over a full-year clip of 20,000 a year. So is there any other way you can give us an idea, and if you can't I understand it, but what your exit rate might be in the third quarter or your entry rate in the fourth, or am I right to be thinking that, that, in order to do your 5,000, that switch, that geometric switch has to be pretty early in 4Q?

Yes, I think you're essentially right about counts. We will be at a higher production rate than 20,000 a year at the end of the year. And --

Would that then level off though or is that kind to fill, is that something that would be then sustained in like a horizontal portion of that curve?

It depends on how demand is looking.

Okay.

Right now, demand is looking good.

Okay.

If demand is looking good, why level off?

I agree 100%. So that is part of the implication is that it makes the 20,000 next year really like that, at least really you're emphasizing that with what you are implying?

Yes, when I say at least I mean --

You don't mean 20,001. Understood. Then my last question is given the enormous interest in the Model S, and also the very strong interest in the Model X and the chance, what looks like the opportunity to launch the Gen 3, at least according to some comments Franz made, maybe as early as 2015, earlier than many expected. This might accelerate some of your capital needs to give these products the full resources. So you throw in some uncertain economic conditions and can you see the rationale for potentially raising a bit more equity capital as sort of an insurance policy to make sure all this hard work, and great work, and momentum isn't unnecessarily put at too much risk due to events outside of the Company's control?

Yes. I actually I think that there is arguably some merit to raising incremental funding just to protect against an unforeseen event. I do want to emphasize that our cash flow projections require no funding raise at all.

Right.

So if we do not raise any funding we can reach cash flow positive with decent margin. That's not to say that there isn't some merit in raising a little bit of funding maybe just to increase the cushion, that something we are debating internally and it is something we may do, but I do want to emphasize it is not something we have to do.

Right. It is more -- it is a cushion, it would be for risk management and more opportunistic to kind of create, to kind of fuel even greater growth opportunity, is that how you'd pitch it?

Yes. Exactly. In order for us to -- let's say in order for us to not raise any funding we would probably spend at a sub optimal rate on future programs.

Right.

So arguably you'd want to spend at the optimal rate and, yes.

Would you say that it would be more of the early feedback on opportunity on the Model X that would potentially drive that opportunity, or is it the timing and opportunity on the Gen 3 or is it a bit of both or all the above?

Well, if we were to raise a small amount of money I emphasize that, the only two things we are considering are raising zero money or a small amount. It is not, there's not some third option. Then a very small amount of money, then it would be probably half of if for cushion value, and then half of it for future projects which would be the Model X and the Gen 3.

Okay. Thanks.

We have to come up with a better name than Gen 3 though.

I'm sure you will. Get George on the case. (laughter). Thanks very much.

Suggestions welcome.

Carter Driscoll, CapStone Investments.

Good afternoon gentlemen. I was just kind of following up on the previous questions. Do you imagine you will disclose the ramp maybe say throughout the third quarter so we can get comfortable that you're going to be at that 375 pace above in the fourth quarter? Or how do you expect to communicate with the street that you're progressing along the lines that you are hoping for?

I think we continue to have Investor visits here. Clearly, as deliveries progress you will get a sense of it.

There will be cars on the road. That will be a huge clue.

Right. (laughter). We'll definitely make sure over time we are communicating how things are progressing.

Right. I think actually people could track it by just figuring out -- has cars that have just been delivered, and there you go.

Fair enough. Can you talk about your fast charging initiatives and any developments there?

We're just finishing up some construction activity on that. It is looking like probably a September event but that's contingent on finishing some construction and getting all the permits and whatnot for the superchargers. But I'm really excited about that announcement. I think it is way cooler than anyone realizes. It is -- I think it is going to have a profound effect on people, on how the public sees electric vehicles.

Okay. Can you talk --

There's going to be a few surprises there. Almost no one knows the full story, there'll be some cool things there.

Okay. Good enough. We will wait for that announcement. Can you talk with us about the warranty. There's been a lot of discussion, myself, I've had discussions with some of your sales people, and I don't think people fully understand the warranty side for battery versus the vehicle itself. Can you just remind everyone what the battery and the vehicle warranty contains right now?

Sure. For the battery warranty we essentially mirrored language that Nissan was using and I think maybe the Volt is also using some of the language, so which is to say that the battery is warrantied for 8 years. Any amount of miles you can really put on it, actually, I think, depending on which version. It's unlimited for the 300-mile range version, you just won't -- unless you torture yourself, you won't be able to put enough miles on that to matter. And I think it's 100,000, 150,000 something like that. For the 160-mile version, you really have to be doing a lot of traveling within city to do 100,000 miles in 8 years.

Where the pack energy level will be at that point, it is going to vary depending upon what sort of environment the pack has experienced and what sort of driver the person has been. In much of the same way as that of an engine after eight years is going to depend on whether someone was driving it hard or not and what sort of environment it saw. It will still be a very useable pack and we are expecting the packs to actually have a useful life that's somewhere around double the warranty level. People probably want to just replace it sooner than that, but these really last for a long time. And even our first-generation pack in the Roadster, we've got one customer in Europe who just passed the 200,000 kilometer mark, and he is not someone who drives the car slowly. In fact, he passed the 200,000 kilometer mark in a race.

Sorry to interrupt but that kind of leads to my next question. Is the relationship you have with Wells, and because of what you just stated, that you believe the battery pack is going to last twice what it's currently warrantied for. I'm assuming that the residual value, that price point given, there just aren't a lot of comparable vehicles to be able to set what the residual value is going to be and therefore, the leasing terms. But you feel comfortable that's not a sticking point as you suddenly saw people wanting to lease the vehicle even though you don't expect that to be the case for probably 12 to 18 months at a minimum?

Right. Exactly. We don't need to lease a single car until maybe second half of next year at the soonest. We think it could just be only sales, but we have had many discussions about residual value. The thing that's important about residual value is just to make sure that the depreciation of the battery pack isn't -- it essentially matches that of the rest of the car. And if you had a gasoline car, after 10 years, it's on the order of 10% to 15% of its original value. So, it's depreciated almost down to nothing.

Do you expect that to be comparable or do you expect residual value to the higher?

I actually think it will be higher. Because the other thing is, once you put in a new pack into the car, it will actually be better than new from a range standpoint.

Okay.

You can continue to recognize the savings versus fueling your car with gas over the next 10 years, or whatever so you get huge benefits of that.

Gasoline is probably not getting cheaper in the long run. It is, the price of gasoline is an upward sloping sine wave.

I agree with that. Have you guys actually booked any warranty expense in anticipation of having to replace any of the batteries?

Yes, with each car there's a warranty reserve.

Warranty reserve for each of the cars. (multiple speakers). That's related to the entire vehicle, not just to the battery. Just to clarify your other point with Wells Fargo, we are not offering lease financing. It's traditional retail financing, so residual values or leasing is not really an issue in our present offering with Wells Fargo.

With Athlon it is.

Athlon is offering their own lease program in Europe, that's correct for corporate clients.

Yes, so we did sign our first Model S leasing deal in Europe.

My last question for before I pass on is just, have you seen a mix of reservations change as 2012 has unfolded, are you still seeing a similar rate of the Signature Series versus the other range models or has that stayed fairly consistent? Can you talk about your expectations may be about how that may change over time as well?

Absolutely. I think it is fortunate that the Signature Series has been sold out for months, for several months now. And not only is the Signature Series sold out, we have a long waiting list for people to get on the Signature Series and arguments about what place they are on the waiting list. We're sold out at EU on Signature Series as well.

Basic we all the reservations that we are getting now are for general production, and our customers when they make a reservation are basically just getting in the queue for a car, they're not locking in which battery pack size they are getting so that we will find out over time when they start to lock in their specific order.

On the higher end than we expected, but that could change. It is hard to say as you get, to general production whether people are going to go to cars with fewer options, but the trend has been that they are picking more options than we expected.

I'm trying to get at, given you have a fairly significant amount of your cash in reservation payments, just trying to understand how that mix has potentially shifted over time. All right, I appreciate your time. I'll pass it along. Thank you.

Thanks.

Amir Rozwadowski, Barclays.

Thank you very much and good afternoon folks. So just touching on the production ramp a bit more, Elon. Just want to clarify, so in the past you had said really that 20,000 production line is really focused on sort of one shift operating at one point in time. What type of flexibility do you have to either add additional personnel, overtime, or anything along those lines in order to meet your production targets?

It is almost entirely on one shift. There are a few areas where we had some capital intense equipment where it is on two shifts. But that's easily addressed to expand volume. I think, in principle we could I think comfortably have a production rate -- that's 50% greater than 20,000. I hesitate to predict of when in the year we would be sort of comfortable maintaining that at a steady pace, but I think that's not, loot at it this way, at the end of next year I think that there's a pretty good likelihood that we're at least at the 30,000 unit a year run rate at the end of next year.

I think maybe more generally, Amir, we have flexibility. In the flexibility allows us to do a lot of things, overtime, add second shift, we can do a lot so I think whatever the target, it will be what they are depending on the demand, we have flexibility.

Yes, it is not totally willy-nilly. You do need to hire a second shift, you need to get them trained and you need to make sure you're making the quality on second shift, you don't want to have cars that are in the second shift that are worse than cars in the first shift. So it doesn't require a significant capital injection, in fact, miniscule capital injection to increase the rate which is great. So there's an upside opportunity there. But I don't want to trivialize how you do that, just to find good people and get them trained and make sure everything is good and you don't have the B-team on the second shift, that's very important.

Certainly I appreciate that color. And if thinking about the demands on your cash for the near term, I was wondering when do you expect to start paying back the DoE loan?

We start paying that back in December of this year.

We're required to be paid back in December. We will pay it back no later than December. We will start paying it back no later than December.

Then its quarterly payments thereafter.

Okay, so in terms of the demands on your cash that's factored into your expectations for where you will end fourth-quarter cash at in terms of a relatively okay position?

Yes.

Okay. Then lastly if I may, we've certainly have seen a number of new stores open up in terms of building sort of retail points for you folks as well as building brand awareness. How should we think about the trajectory for OpEx over the course of perhaps this year and the duration of 2013? What is sort of the plan at this point?

Yes, I think, as we've indicated in a shareholder letter, certainly our R&D expense will drop as a lot of those costs move into cost of goods sold. And on the SG&A side as we opened stores, and there an acceleration there, we will see a moderate increase in our sales expenses, I would say -- in the 10% to 15% range or so as we add in more stores.

Stores are really kicking butt, George, is there any color you'd like to add to stores? We just opened the Third Street Promenade store on Santa Monica Boulevard, in people are in the LA area and want to get a sense for the latest Tesla store technology.

I think our goal with the stores, the rest of this year is to try to address some new markets. One of the markets that we really haven't solidified up until now is that Northeast corridor and our goal is to open several new stores in that corridor in order to hit one of the most densely populated areas of the country and try to do it in sort of an accelerated way. Because we think there's lots and lots of potential up there and what's really nice is we already have an embedded number of people there. The beauty of our model is that we already know where the first 12,000 cars are going, we know where customers who are interested in us live, so we can use that data to open up stores because if there's certain people there who are already with very little effort already reserving our car, think what happens if we actually do put some effort in there. And that's what we are doing this year, is we're hitting the hottest spots where we have really strong demand already in order to leverage that and that word-of-mouth from customer to customer and the way people, the people who have already gotten their car, they are like kids in a candy store with their car. They cannot wait to drive it, they cannot wait to take people to dinner. They cannot wait to take people out.

So when we put more stores in and amongst where those people are and they have a place to gather and share stories and stuff, that's what we are doing with the store growth this year. We're focusing on places where we know there's existing demand in order to leverage it more. A lot in the Northeast, we're going to open another one down in Miami Beach and the traffic through the stores has been incredible. I think you probably saw in the shareholder letter that year-to-date we've had over 1 million people go through the new design stores in North America. That's an incredible number. They keeping bringing more people, more friends and stuff like that so the stores are really performing well and I think by going after the Northeast corridor we will substantially make a difference a year and. I have a goal in this year that in the month of December we can have 1 million people go through our stores in one month. It is that crazy of a number. That's the kind of thing we are shooting for.

Well, the best of luck with that and thank you very much gentlemen for the color.

You're welcome. I think really Tesla is not a demand constrained Company. We are production constrained, so that must be our focus, but not at the expense of quality.

Patrick Archambault, Goldman Sachs.

Hi, good evening and congratulations on the launch. I just had unfortunately a couple more questions on the ramp. I was wondering whether we could get just a little bit more color on sort of how that process is going to work? I take it, it sounds like from what you've said already so far that what's sort of holding things up in terms of, or one of the things that you are hitting to get to the next stage is really having to lock down decisions on certain components.

Not really decisions, it is ensuring both internal production quality and supplier quality. But we are not changing the product, for change sake certainly. If there is a change it is because we have to redesign improve manufacturing ability in a few cases here and there, but we are not -- the product, the physical product of course, from a software standpoint, we will continue to provide updates because Tesla is the only Company that does wireless updating of the cars' software and firmware. We are going to keep as customers will get their car and then they will find that new functionality and improvements have been uploaded overnight while the car was in their garage, so that will continue, but we are really on lockdown on any physical changes that aren't absolutely required.

Got you. Okay. I understand that the software piece can be sort of continuous, but it sounds like that there is still some components that are being made with preproduction tooling by some of your suppliers. And I guess the process of getting those finalized and with the right fit and finish is what helps you accelerate. Maybe you can just give a little bit of color, is there kind of a percentage in terms of components of the car where there's still some improvement to be made and a benchmark on that, that you might be able to think about as a guidepost for when that acceleration will take place?

Sure. There's several thousand unique products in the car. Probably 97% or 98% of them are fine. There's a couple percent that need to be addressed but you cannot ship a car that is 98% complete. So -- or where there's 2% of the element of the components are not of high-quality. So there's probably a couple dozen suppliers that, where we have some challenges and we've either got to fix the supplier, bring it internal or get a different supplier.

Okay.

These are not big things. That is very important.

Honestly, sometimes the most ridiculous silly things. It could be a piece of carpet or a bit of interior trim but that doesn't have a flush condition or there's a piece of bright molding on the dashboard which has, doesn't exactly follow -- where it has an intersection with another piece of bright molding, that intersection doesn't have the right press -- these little things that are extremely annoying. (laughter). But we just cannot be delivering cars where people with -- that don't have an outstanding fit and finish, of those couple dozen parts almost all of them are like interior sort of soft trim issues. It is not like there's something some important fundamental technology thing like, our a battery pack and powertrain is in great shape and chassis is in great shape and body and paint.

We actually want to keep our finding and make sure that the gaps and fits are as close to perfection as physically will allow. But honestly, the vexing things are a bunch of seemingly trivial interior components. Perhaps that was just because we assumed that those things wouldn't be problematic and they were more problematic than we realized. We've since beefed-up our interior trim engineering group considerably and it's not going to be a problem in the future.

Okay, that's hopeful color. In the shareholder letter you also said that you had received all the dies, maybe we can talk about that. Is everything pretty much approved now and are you essentially at the stage where you are stamping all the components in-house at the right specs or is there still some importing of components while you fine tune some of these remaining dies?

Yes. We are able to stamp everything in-house at this point. We are still tweaking some, as mentioned, the gaps and how well things shut. We really want that to be, we really want to set a new industry benchmark for the accuracy of body fit. We already asked anyone in this regard and actually, we're going to keep iterating on that to the limit of what is physically possible, so, but them most people won't even notice these changes, unless they have a very discerning eye. It is not a problem.

Okay, terrific. That's all I had. Congratulations on getting out what is already a great car.

Thanks. It really maybe this is, it's one of my character, I tend to be pretty perfectionist about these things, and the goal is we want the car to be so accurate you can use it as a yardstick. You can use it as a calibration device, that's how accurate you want the car to be.

Terrific, thank you very much.

The next question comes from Ben Kallo from Baird.

Going back to the capital raise question. Bloomberg is already reporting that you guys might do a small capital raise, can you talk about price sensitivity since the stock is trading near where your last second was done and you've created significant value since then in the Company. And also around timing, a lot of the questions here are focused on the ramp so would you do a capital raise after that ramp was proved out?

I think it is best we don't comment on any of these. I think as Elon said, we will just opportunistically pursue at the right time and I think that's probably the best way.

But I'd like to exclude the very immediate future. We will not be raising money in the very immediate future.

Okay. Then you can give me any color on what that means?

No.

(laughter). All right, I tried.

I might get some color from the SEC if I gave you that.

Elon, and Deepak, on the, can you give us any update on the leasing program here in the United States?

I think as Elon a lucid, that's something we're looking into next year. We're continue to evaluate that and I think at this point our focus is on the key priorities of production.

Yes, maybe just give my views on leasing long-term which is, I'm a huge proponent of leasing, particularly for electric vehicles. As is the case in solar, leasing has proven to be extremely effective as a way to encourage seller adoption. And it sort of seems like it shouldn't be that effective because if you told someone, hey this system is going to pay back in five years and they say five years, that seems like a long time. Do you know how long your savings account is going to take to pay you back? You will be dead. (laughter). So people seem to be unable to do the math on that it is like -- it's like wow -- it is, excluding compounding, a 20% return if it pays back in five years, and with certainty. (laughter). Where do you get something like that. Yet amazingly, had trouble getting people to act so then we are basically out trying to sell them to people that understand, basically, people who are sophisticated in finance and are looking for yields, and said, okay, let's go toward people who really understand yield and take that problem away from the consumer so they don't have to think about it and they could just look at it like their electricity cost went down.

So why is that relevant to Tesla? Because the cost of operation of Model S is much less than the cost of operation of any other premium sedan by far. It is going to feel like you have a car for free. And in particularly in places like Europe, $9 or $10 of that gallon in Europe, you can spend a couple hundred dollars filling up your gas tank. Or you could spend some negligible amount recharging your car. It really amounts to a huge effective discount on the cost of operation of the car over other premium sedans. And the best way to make that apparent is through a lease. So we're going to be very big on leasing in the future. We just haven't needed to do that because if there's enough demand for the car, we just tell people, you just have to buy the whole thing, you cannot have leasing.

If we have sufficient demand to do that then we should turn our attention to the key thing which is production, and then next year we will get to leasing. And we do have data from the Roadster that I think that's helpful to leasing companies and by the way, the Roadster has got really good residual value. I think it is significantly better than a Porsche, actually. Maybe it depends on which Porsche. Certainly it is got much better residual valid than the Porsche I bought about five years ago. (laughter). The thing's worth like a peanut after. It is like holy crow.

Okay, my last one on deliveries, Deepak you mentioned there isn't much risk around timing around production and deliveries. Maybe if you could just expand upon that, and how people are ready to accept their cars and also is it safe for me to infer from your comments about the quality issues in getting to your target quality that you're not currently delivering, and then when do you expect to actually start delivering vehicles?

My comment earlier was especially in the early part of our deliveries there's a bigger percentage of deliveries in California. Significantly reduces the gap between production and delivery. And as we go further out there is going to be a few days, but it is not dramatically different from the traditional OEM model, that was my point. Hopefully that's clear. And in terms of delivery, yes, we are making deliveries. We are also making a lot of cars for marketing and sales, even in Q3, so that we continue and show as many cars to our potential customers and folks who have made reservations that are locking in their cars. So it is not as if we're not making deliveries, we're just going slow on the ramp to sort out the issues before we go up the S-curve.

Great, thanks guys.

I just want to make a quick comment on timing here. We have about five minutes left for the scheduled call. We will add another five minutes on top of that so analysts if you could please keep your questions short and management, your answers brief.

Sorry. (laughter).

We will get to as many as we can. Thanks. Jamie, next question.

Sanjay Shrestha, Lazard Capital Markets.

The first question is on, can you talk about how are reservation sort of converting into the final order for you guys and obviously reservation numbers have been good, but what would you say is the final order number at this point in time, do you have 500, 5,000, how should we think about that?

How many have locked in their options? Is that what you mean?

Exactly.

12,200 reservations, net reservations. George is saying we've had about 1,000 people lock in but we only ask them to lock in --

A few months, but we haven't gone to all the folks, we've only gone to a small percentage of people.

Right, yes.

We have invited the signature reservation holders in the US only to configure and then we went out about 10 days ago give or take to our first group of general production people sending out the emails saying, it is time to build your Model S and then this week will go out to the next bunch of general production US, and then we will proceed from there to Canada signature then Canada general production. It is not like just be clear here, we haven't gone out to 12,000 people and said configure your car. We're doing it in sequential order based upon when they made their reservation.

Okay.

And as of today we will be about 1,000 fully configured cars that people have finalized their options and everything like that.

Basically more than covering what you plan to ship in Q3 kind of a thing, and then Q4, you think about that as we go --.

By far, yes.

By far.

Okay, that's all I had, thanks, guys.

Andrea James, Dougherty & Company.

Hi, thanks for taking my question. Just quickly on the ramp. Obviously Elon when you chose to slow production in Q3, you had to make a decision to ramp even faster to make up for it in Q4, or preserve the previous step function, so what went into that decision and why not push some of the 5,000 for this year into next year and build in some more contingency time?

I know we made a hard commitment that we were going to do 5,000 units this year, there was effectively a soft implication that we would do for 5,000 units this year. The hard one was the 20,000 extra and the 25% gross margin and the start of deliveries in no later than July. Those are the three hard ones and the others stayed relatively soft, but I still want to aspire to meet something, even if it is a soft commitment, a softer commitment, and it is going to mean that we are going to have to work pretty hard over Thanksgiving and Christmas and New Years, and all that, but we want to try to do the right thing for our investors.

Okay, so it was because of the commitment and not -- okay. And then, I hate to go here, but there's commentary on the blogs and message boards, you have people with low reservation saying, I'm not told I'm going to get my car until October or Q1. I guess what do you make of that commentary, I imagine some people on your team are looking at it as well?

Sometimes things can go a little awry on the message boards. I wouldn't read too much into the message boards but I think some of those people can get the wrong information and they can panic or. George, do you want to?

Yes, I monitor them, I watch them on a regular -- I watch them on a daily basis and I squelched one the other day where somebody came out and specifically said I have it on good authority that there are 200 founders series cars and everybody's going to be pushed back. And it is a blatant factual inaccuracy, and so I went and I shut it down. Those kind of things happen all the time. I try to stay -- I try to not contribute to the message boards much at all but sometimes things just run awry. Some people -- early on we had gone out with a more firm date, whenever people would configuring their cars early on in early April and May and they were configuring, in April and May they were configuring their cars. And our system kicked out a date. It was a projection and then we sort of left it there is a placeholder. Some of those people have thought that was a firm date and it never really was, so we are correcting that. But I watch the boards all the time. You cannot go by what's on the boards but you cannot go by what's on the boards.

Yes, exactly.

I don't know how else to describe it.

I think I'd just judge things by what serial number of cars are being delivered and that will give some sense of where -- how we are tracking to actual deliveries. You will see that number rise quite dramatically and I think we will see some of this activity on the boards just die down, because in the absence of information you can get rampant speculation that's just not based on anything, and while I, (laughter). I have to be careful not to say anything about [short salaries]. (laughter) I think one of the most short sold stocks on the stock market and there's certainly people with means, motive, and opportunity to say things that are negative and untrue. Not saying that they are, but there's means, motive and opportunity to do so.

I think that's helpful, thank you. One final, what leads you to say you'll have 20,000 reservations by the end of this year? George, you have talked about it a little bit but I was wondering what gets you there?

I think we have not said that will have 20,000 reservations by the end of the year. We might have that but I wouldn't say it is, it's not out of the question of but it is inclusive of deliveries, I think it is very likely -- it is likely, perhaps take the very away, inclusive of deliveries I think it is likely that we would have a cumulative essentially 20,000 sales, I think there's a pretty good chance of that.

What does 2013 sold out mean?

I actually think that 2013 is a likely to be production constrained again. I do think it is going to be demand constrained.

So your saying that over the course of 2013 you'll have more reservations or more demand than you can produce cars, that's what you mean when you say it will be sold out?

I think, yes but I think that we will -- I think that we will sell more cars than we can -- there will be more orders for cars than we were reasonably able to produce at high-quality next year.

We will not have inventory.

We will not have inventory.

So are not saying though that you'll get to the end of 2012 and you'll be sold out on 2013? You're just saying over the course of 2013 you expect to be sold out, is that kind of what you meant by that?

Yes.

I think the way to look at this is that we never plan to have inventory. And what will happen is demand, we have a plan in place with stores and marketing, et cetera to get up to a demand rate by month that will always stay ahead of production, and we can adjust production depending upon where demand goes. And what will happen is we don't expect to have 20,000 reservations on an ongoing basis because that's way too far out. We will have -- our goal is to have three to four months of active reservations at any given point in time ahead of production. Whatever the production rate is.

Exactly.

So the idea is to get a run rate of reservations that's three to four months ahead of whatever's production rate is so that we never have the expense of inventory, we never have any of those things, we just have run rate of three to four months of ongoing reservations.

That's fundamental to our retail model.

Right.

That model continues and we always expect to be ahead, and in fact, we don't want it to be too long because that's a detractor for more reservations.

Right. As we get closer to being able to deliver cars faster our reservation demand will be stronger because people will -- it will be more predictable and people will be able to say I have a lease that's coming up in three or four months, now is the time to reserve. What will happen is it refunds and other things, refunds at that point go almost to nothing because someone will reserve a car and literally go right into the configuration process within the next 30 days. They'll configure their car and then we'll deliver it in another couple of months and so that's the business model and that's why it works so perfectly.

Thank you. I appreciate that.

Michael Lew, Needham.

Thanks and good afternoon. With regard to the ongoing nationwide tour, how much incremental demand has that generated?

The tour is going really well and what's happened is I think our July, our end of June and July demand has been -- has increased from a couple of reasons. One is the news we are delivering cars, one is because of the incredible reviews that we've gotten on the cars, and I think the third is that we are putting a lot of people behind the wheel for the first time. They are getting out of the car and saying incredible things, they're then going home and telling their friends and coming back and getting their friends involved. So we are seeing incremental demand because of the tour, but I want to keep a focus on the fact that the tour is really designed for our reservation holders that currently have reservations. We haven't actually gone out and started having lots of test drives slots available for new customers. So again, that's another opportunity for us in another two -- in another month or so when we actually take the test drive cars we have and the ones we are building now and we go out and we say, okay, now we've gone out, we've done 5,000, 6,000 test drives of reservation holders. And then we start actually giving people who don't have reservations test drives for the first time and that's part of the kick that we will get on the reservations.

Yes. This is an important point that George just made. The test drives, all these test drives, almost all of them are just for existing customers. We actually -- essentially we could generate more sales if we wanted to. We could grow the rate faster, but there's not much point in growing the rate faster if it's 9 or 10 months before you get the car. There's just not much point really in trying to add additional orders.

We have an incredibly loyal base. We have an incredibly loyal customer base and if you look at the people who have already received their cars and you look at the videos they are putting together and posting and the people they are talking to, we are getting incremental reservations already from the cars we have out there from the people who are driving them and going to dinner and going to show or whatever with other people who are then calling us and saying I need to have one like Steve. I want a car like Steve, I want a car like Nancy. So we are getting incremental from having the cars we have out there already, when that starts escalating and we start doing new test drives with people who don't have reservations --

Essentially, we are seeing demand acceleration without trying. If we tried it would be -- if we really tried hard it would be more than this.

I think to point out and we don't -- you don't have the visibility into where all of our cars are. Here's something to think about on the demand side is we have the Get Amped test drive Tour which has the marketing cars out there that are doing test drives. We don't have a Model S at all in Europe or Asia. We don't have a component tour, we don't have anything at all in either one of those major markets and we are sold out in signature in EU and so we are not doing anything outside of North America and yet we've got the backlog we have now. As we go in to the end of Q3 and into Q4 we are going to start transitioning those markets to Model S and at that point trying in Europe and Asia for the first time. (multiple speakers).

I think a reasonable definition of trying would mean you've got at least one car in the market. Obviously we're not, it's surprising the articles out there questioning whether there's demand for the Model S. Maybe -- there may be demand issues with other electric vehicles, there's certainly not a demand issue with the Model S.

Okay. And so as I understand correctly, there will be a slight pause and then possibly another tour, let's say, going into the Northeast market since you mentioned that and possibly even the Midwest?

Absolutely.

The Get Amped Tour?

Just in terms of markets that have not been tapped.

We barely touched the greater New York area.

Yes. We are opening more stores this year, this fall in fact, one of our next stores will be in the New York Metropolitan area, and then we will come back with another two and then we will go further north from there into the Massachusetts area and down into the DC area. We think that market holds lots and lots and lots of potential because we already have the number reservations we have there without a lot of presence. When we have presence, I think my retail history tells me that there is lots and lots of untapped potential there that we are going to begin tapping starting in September.

A think a lot of people on the call are probably from the greater New York area, maybe just listening, the stores that we've opened in the greater New York area and the ones that are -- will be opening in the next few months.

Sure. For those of you in the New York area, you're probably aware we have the store on 25th Street that's been there for a while, and then we opened up in the Westchester, up in Westchester County and it is doing very, very well, very, very nicely. And we see where all the reservations are coming from through each a store and it is actually increased the reservation flow in the West 25th Street store, so having two stores in the market has helped. For those of you in North Jersey, we will be opening up in Garden State Plaza, at Short Hills Mall. Then for you in Long Island we will be looking to open up in Roosevelt Field. Going from one store on West 25th Street to having two in northern Jersey, one in Westchester County and one in Long Island, it is a pretty good capture of the New York metropolitan area with those particular centers surrounding the city.

Our store in Chelsea, we've got that lease because it was the only lease we could afford back in the day and it is all basically a version -- maybe it's version 1.5 of store technology. If you want to see the latest in store technology and I'm not using the word, there really is sort of store technology, you want to go to Westchester or one of the stores that's opening up in New Jersey or Long Island. They'll share the latest and greatest in the retail experience. But just to give you some sense, we basically had, I count the store in Chelsea as like a half store. We had a half store until a few months ago in the entire greater New York, a half store.

What's happened, like I said, what's happened, is when we opened up the Westchester, got that awareness, and a little bit of publicity and media, we now have two full stores, because it took the half store and made into a full store with reservations. Not from a technology standpoint but from a productivity standpoint.

Thank you.

I think we will take one more question, Jamie, please.

Jesse Patel, Jefferies.

Thank you for taking my call, I apologize for missing the earlier queue. Deepak, for modeling purposes, what is the targeted cash cycle days conversion we should be thinking about at full ramp? Can we assume sub-20?

Sorry, I'm not sure what your question is, Jesse, exactly. Are you referring to our inventory turns or were working capital needs, I'm not exactly sure.

If we take days inventory, days receivable and days payable and basically add them up, how quickly can you turn into cash?

I think the way we look at it is that fundamentally we have zero receivables, we deliver the car within a few days of production and we get full payment. But our supplier payment terms are on average about 45 days so we tend to deliver and receive money before we have to pay to our suppliers so I think from your point of view more focus is working capital usage and our working capital actually doesn't, our need for working capital doesn't increase as we ramp up production. It helps us in fact from a cash flow perspective.

Asked the question, which is a good one because the capital needs of the business, if the business needs to raise equity or something to build working capital as it grows, the effective return on investment for investor is much lower than if it is the other way around. In our case it is the other way around. The faster we grow the business, the more cash we have available.

That's what I thought and why I question the Bloomberg article. Are you picking out X reservations in the quarter?

No. We are putting zero attention on X reservations. That's not really a metric we want to call people's attention to. That's something that we will turn our attention to next year.

Do you think some of the reservations for S and X are US delivery from European or Asian clients?

Definitely we have reservations. (multiple speakers) As George mentioned, our Model S reservations includes European Signature Series, where we are sold out. We have reservations from all over the world for both S and X.

There's also some people who just cannot wait and they order a US car and they're just going to ship it to Europe.

That's why I was kind of wondering if the launch in Europe and Asia is really going to increase the reservations that much or if they're already reserving today.

It will increase it massively.

Your question is appropriate in that, do I think there are 5 people, 10 people who have bought US cars that are going to take them to Europe? Yes, but we have hundreds of reservations in EU and we are getting more and more every month and so that is not going to impact -- that's going to impact not all. That will be no impact.

Yes.

(multiple speakers). I guess it's not quite as exotic as picking up your Mercedes from Stuttgart, but I guess you can give them a burger and send them on the way. You made an interesting comment Elon about battery pack replacements, allowing a car, the car to have better range versus today and you said this before, when can we expect the next battery chemistry improvements and what's your road map for that?

I think it is probably with the Gen 3 that we see -- a change in the fundamental chemistry as we did with Roadster where Roadster went from a went from a cobalt cathode to a nickel cobalt aluminum cathode, and effectively a 50% increase in -- roughly 50% increase in both gravimetric and volumetric engine density. Also a drop in cost because of the much lower cobalt content. I cannot comment on the specifics of some of the technologies that I'm aware because of confidentiality agreements. But I can say I am highly optimistic about seeing substantial reductions in cost per kilowatt hour in the three to four year time frame.

Thank you gentlemen. Congratulations on the ramp.

Thanks, Jesse.

Thanks everyone, I apologize we didn't get to everybody today but this is going to conclude our call. We look forward to seeing many of you in the coming weeks, either at test drive events and we'll also be at several conferences including in New York on August 7 for Needham's Advanced Industrial Technologies Conference, or on April 13 in Vail at Pacific Crest Global Technology Leadership Forum. Or, on the 14th, in New York again, at the JPMorgan Auto Conference. Thank you, everyone. Goodbye.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.