特斯拉 (TSLA) 2012 Q3 法說會逐字稿

Welcome to the Tesla Motors third quarter 2012 financial results Q&A conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jeff Evanson. Sir, you may begin.

Thank you, Shannon. Good morning, everyone. Welcome to Tesla Motors third quarter 2012 financial results question-and-answer conference call. I'm joined today by Elon Musk, Deepak Ahuja, and George Blankenship, key executives of the Company, to answer your questions today. We announced our financial results for the third quarter at 3.30AM Pacific time today. The Shareholder Letter, financial results and webcast of this Q&A session are all available at the Company's Investor Relations website at ir.teslamotors.com. Today's call is for your questions, but we would like to keep the call to 45 minutes today, so ask that you be succinct in your questions. We will conduct the Q&A session live.

(Operator Instructions)

Now, 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 filing 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, Shannon, could we please have the first question?

Adam Jonas, Morgan Stanley.

First question. How many vehicles are coming clean off the line with no material rework at this point? I'm just curious -- has any model really come pure off the line at all without much rework? Thanks.

Sure. We do get some cars that require vehicle rework, but generally we are trying to maintain an extremely high standard of quality. So if we something that is even a minor aesthetic issue, we want to correct that. So, yes, right now most vehicles require some work to correct minor issues. A lot of those issues are not something that most people would even notice, but we're trying to get as close to perfect as possible. Nonetheless, we are able to get to a production rate which is annualized at 10,000 cars a year. So, I feel really good about where we are with respect to manufacturing the vehicles.

Okay, thanks Elon. Which -- if you think of all the issues that were affecting the early production of the vehicle, what are the key ones that you've solved, which ones have yet to be solved, and is the list of new problems growing -- or, meaning are there any additional new problems that you're finding or are all the issues that you know in terms of either quality or supply known and that's a shrinking list now? Thanks.

Yes, I think, the issue has been getting all of the parts of the vehicle on time from suppliers and at the quality that -- at a very high quality. I think we are through those issues. There are no supplier issues that I am aware of right now that prevent us from achieving a production rate -- an annualized production rate of 20,000 vehicles a year basically within the next four or five weeks. It's looking good. That's not to say something couldn't crop up, but it's looking quite good. We are seeing a rapid decline in the number of issues that need to be corrected as vehicles come off the line. So, it is getting better very quickly.

So, right now, I feel very optimistic about -- with the way things are. I'm not aware of any issues in front of us getting to the 20,000 units year annualized production volume.

Okay, thanks Elon. Deepak, just a couple very quick ones for you. On the reservation outlook, I know you're targeting a new high watermark in terms of unit reservations over 13,200 by year-end. But when we look at the reservation balance on the balance sheet, should we assume that is going to be lower? If it is lower, can you give any kind of lower bound to that? Meaning, should it be -- can it still be over $100 million, end of year?

Yes, I think it definitely will be over $100 million. You are right, to the extent that Signature reservations come off, we have collected a much higher deposit on them compared to general production reservations. So there will be some adjustment in our reservations balance to account for that.

Okay. Then, on R&D you gave the flat 4Q guidance at around $60 million. That is quite a bit higher than I think many people on the call would've expected. If you're able to explain, why is it running higher and is $60 million a quarter a run rate we should use going into next year? That is my last question. Thank you.

Yes. I think what we should be -- as the Letter has indicated, this is still a 19% reduction from the prior quarter. That's primarily as we have pulled out all the manufacturing related expenses. Most of our R&D headcount now is stable at this point and we are focused on future product development, a bunch of actions to continue to improve our product. I think that is a fairly reasonable rate going forward.

Patrick Archambault, Goldman Sachs.

Congratulations on being on track with the benchmarks here. I guess I just wanted to -- one clarification and then a separate question just on Adam's question. We can affirm that what is left in terms of challenges is really fit and finish challenges, that are related to the assembly process rather than the availability of the right amount of components. Is that a correct interpretation?

Yes, so right now, we are able to build cars at the 10,000 unit a year annualized rate with the parts we need. Like I said, as of today, I don't know of any parts that would prevent us from getting to the 20,000 a year level in four or five weeks. It looks like it's -- I wouldn't say plain sailing, but it looks like solid sailing in that direction. Something could always come up, but I am not aware of any obstacles to that -- to getting there right now. It's looking -- touch wood, it is looking quite good.

Okay, great.

I should say, overall I feel Tesla is really past the point of high risk. Several months ago, I said I thought that the coming several months would really be the test for Tesla. The classic phrase, go through the valley of death, and I feel as though we are through that valley at this point.

Great, thank you. Maybe one for Deepak. Just at a high level, can you maybe just give us a little bit on the landscape of capital investments? You have clearly -- from an R&D point transitioned to the X but then there's also, I assume, some early engineering done for the Gen 3. So how should we think about the lumpiness of your R&D and capital spending patterns as we look out to the next 18 months or so?

I think what I would prefer to do then is that the next earnings call is provide a far more -- a sense of the things we would have on our R&D expenses for 2013. But I think broadly speaking, the factors that affect R&D would be as you said, our new product development which includes Model X, Model S, we are going to be working on a right-hand drive version -- European version, there are a few other things. It's our continued improvement in manufacturing and design that we will be focused on. There will be some degree of lumpiness. But nothing that will be as significant as we saw in 2012, because of all the manufacturing expenses are no longer in R&D and will continue to stay that way.

Yes. Again, just to clarify what may have been determined by Deepak's statement is the left-hand drive, European version has very little work left to do to it. In fact we have two EU approved vehicles in the EU right now doing the initial marketing, we just started marketing in the EU. The real incremental R&D is with respect to, as Deepak mentioned, the right-hand drive version of the EU version which also would apply to Japan and Hong Kong and a few other places. Then there are a few other variants of the Model S, that we'll come out with the next year that I think are going to be pretty exciting. In addition to, of course, really getting into the Model X and starting the initial design work of the third generation mass market vehicle.

Amir Rozwadowski, Barclays.

Touching on the new reservation activity, you had mentioned new reservations in the quarter were roughly around 2,900 with net reservations around 1,700 as cancellations have crept up. I was wondering if you could give us a little bit of color in terms of what is driving the cancellation activity. Do you expect it to diminish at some point? Perhaps also, do you expect to transition to much more of a real-time order/delivery type Model versus what we have seen obviously in the early stages of the launch of the vehicle with a reservation type model?

Sure, I can answer that, maybe at a floor level. Then turn it to George to add some more details. I think that the way things are going with Tesla, it will be a while before we transition to any kind of real-time, meaning like, you can just go in and buy a car. Given that it's -- the wait list is effectively several months, right now and I would expect that it would be -- at least for a few quarters, continued new high watermarks in new reservations. I think it could be quite a while before someone could just walk in and buy a car. It could be as far as 2014 before that's even possible. So, I'd certainly encourage people if they're interested in a car to put down a reservation and not be under the impression that they will just be able to at some point buy a car and just to have there be no line. In fact, I often encounter this sentiment with people where they think they can just wait and then they'll just go and think they'll buy a car. I think that is going to be a long time before that is the case. George, would you like to add anything to that?

Yes, sure. I spent a lot of time in the stores and I think here's what is happening, is our increase in reservations is a combination of several things. One, is we have more stores open. As we open more stores, we're getting in front of more and more and more people everyday. We have seen 1.8 million people through our stores year to date, but the last quarter was a significant increase over previous quarters because of more stores being open. We've got five more opening by December 1 of this year, all in high-traffic, high visibility locations. As we open up new stores, more and more people are coming in and say, I've never -- Who's Tesla?

Great.

We are getting that increase in awareness in significant ways. I think we're reaping some of the benefit of having been open now for about 18 months with these new design stores when we're getting a lot of traffic. Then, I think next is the awards. We're getting some very, very positive awards that we're letting people know about and that is reinforcing that the car is quite extraordinary and somebody else is saying it besides us. We got a lot of press right after the June 22 start, and now we've gotten more recently with Automobile Magazine, Yahoo Autos, that's thinking real positive.

Then there's one other element that I am experiencing in -- that we are experiencing in California specifically where we've delivered a lot of cars, is that we are putting cars on the road now that people are taking other people out to dinner with. They're going to movies with, they're going to shows with, they're going to their house and people are seeing the car and going, oh my God, how do I get one of these? So, our customer base that have actually received their cars are actually selling cars for us, making reservations for us. So we've got that really big effect going on right now, which is really positive. As far as a timeline to when people will be able to come in and buy a car right away, I don't see that anytime in the near future, in fact that's not even the goal. The goal will always be that there is a reservation time, so that we can build your car specifically for you. So, I don't see that on the horizon at all at this point.

Sorry, it's actually -- I get to meet a customer who has received a car who hasn't told me immediately how many additional cars they have sold to people that they know, or in some cases, strangers on the street. (laughter) It really is spreading quite virally by word-of-mouth. It's worth noting that Tesla still does not spend any money on advertising.

It does seem like you folks are benefiting from this halo effect as you get vehicles on the road. Just on the flipside, with respect to cancellations however, do you expect to reach a threshold at which there is less cancellation activity just given that now that you have more stores out there perhaps it is a little bit -- the timeframe while there is a timeframe to wait for a car perhaps it's compressing a bit as you start to deliver these vehicles. Just trying to understand the dynamics for net reservations there.

Sorry, George go ahead.

Yes. We do a lot of watching of this and analysis of it and what is happening is the refunds that are happening now were very, very expectant. We're going through people -- through the reservations that were made in 2009, 2010, lots of changes have happened at different points in time. By the time we get into Q1, what will happen is the waiting time for between when you make your reservation and when you actually configure your car will go from 2.5 to 3 years and then down to literally a couple months. So the time will just be minimal. The time will minimal; therefore, there won't be a reason to be canceling. We see this becoming a non issue in North America as we get into the beginning of next year. The refunds will go down very, very -- a lot.

Great. Then, lastly if I may, looking at your guidance for deliveries this year, it seems as though there was a modest down tick from your prior expectations around 2,700 to 3,250 versus now according to the release around 2,500 to 3,000. Is that largely attributed to some of the supply issues that you've already mentioned? Should we expect this to be -- now that it seems like those are behind you is this a fairly achievable target from your perspective?

Just to clarify there, Amir, our guidance hasn't changed. The 2,500 to 3,000 deliveries is for Q4, while the 2,750 to 3,250 was the full-year guidance and that includes Q3 deliveries.

Got it. Thank you very much for the clarification Deepak.

[Aditya Satghare], Lazard.

I wanted to better understand your prepared remarks about the gross margin target by the end of the year. So, could you give us a sense of, if you were to take away the cost of the ramp-up and say, cost of additional rework where would your gross margin today?

That's an interesting hypothetical. Well, I guess I would say -- assuming that we are at the 20,000 unit per year production rate, which we're not quite at, because -- gross margin is going to be affected by the ramp, but assuming that if we were to fast-forward five weeks or something like that, and if you take out the short-term cost issues associated with the ramp and things that we have put on hold, if you take that known cost down issues that we put on hold to ensure that we make the ramp, we would be at the 25% gross margin level.

Got it. My follow-up question was on delivering mix for 4Q. Could you give us some more color as to how is the mix shaping out versus your prior expectations into -- going into the last quarter?

It is right on track. Exactly what we expected.

Aaron Chew, Maxim.

Wondering -- I know you offer a decent amount of updates on reservations. Is there any way you can offer some insight into how reservations on a gross or net basis were churning in October and maybe even some general highlights and how they trended on a monthly basis throughout 3Q?

I think we would prefer not to give specific monthly numbers, but I think George gave you a good sense earlier that given our continued store openings, the visibility of the car and the recent awards that the car has won, we've certainly have seen a good uptick recently.

Okay. Fair enough. If I made for my follow-up, wondering if you can offer any further insights beyond what was mentioned on the website, with regard to the lawsuit. I'm sure it's a sensitive matter, so there's only so much you guys can say, but maybe some general thoughts on timing, what the damages are being sought and what implications you guys think may be to your store strategy if they were to win. Thanks much.

Sure. We have to be a little bit cautious about commenting on ongoing lawsuits, out of respect to the judicial process. But we feel -- we're really quite optimistic with respect to our legal position. We really feel strongly that we are in the right and it's worth noting that at least, thus far, no injunctions have been issued. So we are -- we feel optimistic in that we will prevail in these cases. And that we are strongly on the side of what the Lord intended to occur. But other than that, no great insight except to say that we feel reasonably optimistic about where we are.

Carter Driscoll, Capstone Investments.

The first question is trying to get a little closer to an ASP figure. Could you talk about what the average option package size or range has been so far for the Signature Series and how you see that potentially playing out as you are mix shift changes? Should that stay similar, range, as a percentage of the base model, your expectations there. Then I have a follow-up.

Right now, we're still working our way through the Signature Series, which is quite a heavy options version of the car. We have been surprised by the level of interest in the performance version of the car that actually takes us a bit by surprise and actually caused us some slight challenges in meeting the production ramp for components that are specific to the performance version of the car. We were just surprised by how many people were interested in that. Looking ahead, our option mix still looks like it's quite rich actually. It's really looking -- I'd say maybe a little better than anticipated, but obviously that could change. We don't have a crystal ball as to how things will go long-term, but it's been better than I expected in terms of the number of things that people are interested in having on the car. George or Deepak, if you want to add to that.

I think that -- go ahead, George.

I agree with that. One of the options that has been most favorably received has been performance. The Signature version of the car, as I said, was highly optioned and there really weren't a lot of options on that car specifically because of the Signature card. As we've moved into general projection and reservations, I'm a very happy with performance and some of the other options that we weren't sure how well they would be received and they've been received very, very well. I agree with Elon that we are slightly ahead of where we thought we would be with options.

Thank you for that.

We've had a lot of customers really ask for more options. We will try to roll out a few more extras that people can buy if they'd like and maybe a few that people can retroactively add to their car.

Okay, thank you for the color. Then just my quick follow-up is, I think you had talked just a few weeks ago about potentially reaching cash flow break even by the end of November. I think, in your written commentary, you think it's closer to the end of the year. If you could talk about whether that was expediting cost, supplier issues, some -- the net reservations changing, can you talk about what changed that date by approximately a month and why you are confident that it will be December now?

Well we haven't really changed the date by a month. I think we actually expect that to occur as we previously expected it. But things can shift around by a week or two, but I don't really much more than that. I think actually it will be as expected.

Okay. All right --

Just to reinforce that point Carter, that there is no change in that sense, it is pretty consistent with what you see.

[John Lovallo], Merrill Lynch.

First question is, if we think about the Daimler contract and the shift in timing, can you just talk about maybe what were the drivers of that shift?

Sorry Deepak, go ahead.

Yes. It was really not something significant. We were sorting out some of the technical specification for the milestones. That was required for us to make sure we were doing revenue recognition correction correctly. Those issues are all pretty much behind us.

Yes. Officially the project is proceeding actually at the expected pace. We're just being conservative about the revenue recognition and we want to make sure we don't run the risk of a restatement. What with respect to the Daimler contract, operationally it is proceeding as expected. But we're just being a little more on the conservative side here with rev rec, otherwise our revenue would actually be higher than what we currently stated.

That's a very good point. That operationally the program is proceeding very well and has been.

Our actual revenue would be higher, if we had been less conservative in the recognition of that revenue.

Okay, great, that is helpful. Then if I could just follow-up with maybe a quick housekeeping question here. I was under the impression that the interest expense would flip to closer to $2 million once production began on the Model S. Am I incorrect on that? Or was there some kind of change?

It will more in Q4 than Q3. We were still capitalizing since a lot of our assets were under construction during the quarter.

Elaine Kwei, Jefferies.

Congrats on the great progress in the quarter. I think most of my questions have been touched on, but just a big picture one. What is the eventual vision for the supercharger network. Is this going to be expanded to the 60-kilowatt and 40-kilowatt and possibly even the future mainstream mass-market Gen 3 vehicles? What is the thought there?

It actually applies to the APAC kilowatt version automatically that is just included. Then for a couple thousand dollars you can get the supercharger hardware added to the 60-kilowatt version. We're not currently planning on adding it to the 40-kilowatt version, because we see that as the customer buying that is really buying it because they don't really make long distance trips. It tends to be more of a car that you would want to use for travel just within a greater metropolitan area. We do expect to have the supercharger network be used by the -- certainly by the Model X and by a third-generation vehicle. But we are thinking that if you want to have a normal range at least on the order of 200 miles, at range at 55 miles for the supercharger network. That's the basic version. We do expect the vast majority of cars that we produce going forward to have access to the supercharger network. Like I said, apart from the very lowest version of the model, which is for those who just who almost never take long distance trips.

Okay, great. Then, just one follow-up. Will there still be any deliveries of new Roadsters in 4Q or is that done now? Had you always planned to also sell the pre-owned roadsters or was that a more recent development? Do you see yourself off the dominating -- that resell market for any future Model S or X or other vehicles?

Yes. There will be a few more Roadsters. These are just ones, in terms of Euros, in Europe and Asia, there's not very many left. So, it's not going to be a huge number just because there aren't very many left. But in terms of used Roadsters here, we do expect to do decent business and used Roadsters, that we resell to people who are interested and doing the same with the Model S and X. I think that's going to be an interesting revenue source for us in the future. George, is there anything you'd like to add to that?

Yes. All of the Roadsters that are remaining that are new are in Europe and Asia and right-hand drive is basically done except for a couple of demos. We're putting together an actual program that actually bring back Roadsters and this will translate to Model S in the future and Model X. So that we actually manage that process and so we control the value of that secondary part of the market, because we think that's very important. We actually have a staff that is dedicated to specifically managing used Roadsters now in North America, based out of California. We think its an important part of our business opportunity for us going forward.

Ben Schuman, Pacific Crest.

Am I right understanding the halfway to 25% gross margin expectation as sort of a snapshot exiting Q4? If so, can you give some color on what the overall gross margin could be in Q4?

Deepak, [for you].

Yes. We want to be sure we are beating our numbers here so I want to be careful. But it should be relatively close and I think we want to just help give the sense that we are on the right track and as Elon said, looking beyond we are on track to get to 25%.

Okay great. Then, have you hired all the employees you need in terms of manufacturing to get to the 20,000 unit run rate and how long is it typically taking you to get new factory employees ramped up?

We have hired almost all of the people that we need for the 20,000 unit a year ramp. Typically to get people on board and trained is around a two to three-week process. Yes. I think really everything is in place to get to that ramp rate in four or five weeks.

Dan Galves, Deutsche Bank.

Just wanted to dig into this comment on the absent cost inefficiencies. You are now at a production rate capable of generating positive operating cash flow. Just trying to keep it simple. Your operating expenses excluding stock based comp are running about $350 million annualized right now. If we use $25,000 gross margin per unit, you would need to do about 14,000 units per year to breakeven on that. Just wondering if you can give me any additional color on what is involved in that -- or what I am missing in that calculation. Then if you could talk about your cash breakeven point going forward as ASPs likely will come down at some point. But gross margin will continue to -- looks like it continues to improve from current levels. But if you could give us any more color on that calculation.

Dan, the other elements are the balance sheet items that I've said, including how our inventories and APs get managed and our reservations counts. So let me look at that on a combined basis from an operations perspective. We are comfortable with the message that we have provided in the Letter.

Okay, so that includes some working balance sheet changes in there?

Correct.

That is helpful. Could you give us an update on where you stand in terms of homologation of the vehicle in Europe? When you expect that to launch and how -- what is the ability of people in Europe to make reservations currently? How many have?

We have made huge progress on homologation. It should be pointed out that we design the Model S from the beginning to meet the European and American specs. In fact, specs in Japan and Asia as much as possible so those specs want initially exclusive. In fact we have two Model S with German plates currently driving around that we completed as part of our European media launch recently. Really there is very little to do to get the European spec and homologation ready for production. We could do so sooner -- we could start production of those up close units sooner than the March, April timeframe next year. But there's not really a need to do that since we have -- we can fully absorb our production with North American demand. Rather than increase the complication of managing a hopeless cause in Europe and North America. We want to stay focused on North America just for a few more months before we start to ship cars over to Europe and then Asia shortly thereafter.

Are people able to make reservations year in Europe now?

Yes, absolutely.

Okay, great.

George can add some more inside there. Clearly we've seen an uptick with our recent activities, since you've just begun to launch of the Model S marketing activities in Europe. Overall we have probably around 15%, 20% of our reservations in Europe.

Thanks for that color, I appreciate it.

Andrea James, Dougherty & Company.

If I make some assumptions on how many people you're calling to lock in, I think I calculate that the cancellation rate for lock-ins is about one in ten. Is that about right? How does that compare to what you were expecting?

I think our cancellation rates are for people that we reach out to confirm a booking is 10% to 15% range. It depends on how old some of these were. You're in the right ballpark there, Andrea. George, anything else you may want to add?

No, just that the number was completely expected to be where it is. Is expected to go down as we get into Q1.

Okay. Thank you. And then if I look at --

I'm very sorry. Maybe it's like your internet. Actually, you said that the price cancellations for people that have locked in. The cancellation of people that have actually confirmed their options is extremely low. There are very few people that cancel once they've decided what their options are going to be. Cancellations tend to occur before they have decided there. That's where the 10% to 15% cancellation occurs. That is important.

That makes sense. Then I look at your September 25 communication on gross reservations. Then I look at what you're saying today, it looks like you have booked about 300 new reservations in the last five days of Q3. Does that sound about right? I think that's about where you would want to be. It sounds like you got there already, per day.

George?

I would say it's a bit of rounding there. It's in the ballpark but there's a bit of rounding.

Michael Lew, Needham.

With regard to the superchargers, has it yet been a factor or do you expect it to be an influencing factor in the general reservations population and whether or not they choose, let say, an 85-kilowatt hour model versus a 40-kilowatt hour vehicle?

Yes, I think so. Yes. I think there are a lot of reasons to pick the higher range car. Assuming the performance elements, it goes a little faster, it's accelerations at our higher top speed. The warranty it'll look better, but I think the ability to travel long distance with the supercharger or the fact that you can travel really -- you'll be able to travel for free anywhere in America long distance, I think, is pretty appealing. We've only just opened the supercharger system up to the public and I really think it's a wonderful experience when you use it. I actually drove with all five of my kids in the Model S with luggage in the front trunk, fully loaded all the way from LA to San Francisco. It was really a great road trip. With no hitches and when we would stop for a meal or to go to the restroom, by the time we came back the car was ready to go and I think it's really exceeded my expectations actually for what I was hoping it would be and how well it would function. I am really excited about it. I think as people use it, it's really going to open their eyes as to what an electric car can be like. Just not having to go to a gas station and be immersed in fumes and pay a whole bunch of money for gas. Tesla's free, free long-distance powered by sunlight, I think it is quite a revelation I think. Yes.

Okay. Have they also drove incremental demand or increase from OEMs for power train agreements just given it's high rate or fast charging capabilities?

With our partners with Mercedes and Toyota -- both of them have been more interested in shorter range vehicles rather than tackling the long-range problem. Certainly it's something we would be happy to give access to, give access to it but I think it needs just a bit of a larger factory packed than they're currently expecting for the car -- the cars that they're getting with the RAV4, V class Mercedes.

Yes, I guess I meant were there new inquiries since the unveiling of the superchargers from OEMs for like new platforms in the future? Let's put it this way. Ten minutes is a lot faster than eight hours.

Yes, true. Surprisingly there haven't been a lot of inquiries on that front. I believe it's just taking time to sink in, but I think this is currently in the mind frame that it's going to tend to be more of a greater metropolitan area travel vehicle in the case of the RAV4 and the V class Mercedes. I think perhaps once they see how customers are adopting it and using the supercharge network they will -- their interest will peak. I really don't think people realize how cool it is. It is just works. It's one of those things where its even better than it sounds. It's better than the marketing.

Okay and one last question. You have highlighted the role of word-of-mouth as how the girl that's played in driving reservations. Could you give us a sense or gauge of what percentage or what number of net adds in 3Q were by word-of-mouth? If there is a figure out there. I don't know if you have tracked it that way.

It's essentially almost all our word-of-mouth or media because really, there's no advertising that we do.

I guess I meant versus store walk-ins.

Sure. George, how would you answer the question?

We don't have the exact numbers of which ones were customer references because some of them are multiple customer references, some of them come to the stores specifically because they went to dinner the night before with somebody who has received a car and then they come into the store, they get more information to make a reservation. We don't track it's specifically by customer but when we start to look at geographic areas where we have the most delivered cars, those areas are really starting to escalate very quickly in reservations for more cars. We don't have it down to a specific percentage or number. Just when you look at the overall picture you can see that where you have the most cars delivered reservations are escalating significantly.

So, on that note, I guess you would also apply it towards cancellation rates? So it's fair to say in the areas where there were fewer vehicles on the road? You probably experienced more cancellations? Is that the right way to look at it?

I haven't really track it that way. I haven't really backed into it that way. I couldn't really quantify anything like that for you.

That is probably true anecdotally. Just given that the word-of-mouth for cars is incredibly good. I have not encountered anyone who has said that they try the car and then didn't like it. It tends to be very opposite.

All right. Thanks. We have maybe time for one more quick question. Operator?

Ben Kallo, Robert W Baird.

I was wondering, we get a lot of questions about the 25% gross margin. How much of a battery cost reductions are built into you meeting that target if any and then how do you view any cost reductions on the battery side as upside to the gross margin? Thanks.

Sure. Just to separate out the battery, there's the cell cost and then there's the battery balance and system cost. We're really not building any significant production in sale cost into getting to the 25% gross margin. There are a bunch of reductions associates with the pack costs but we're really good inside of those and a clear path to get those done in a fairly short period of time. So not really worried about the battery pack costs at all. In fact, I think just overall, we've got a really good handle on getting to 25%. I have very high confidences of getting there. I should point out our goal is to exceed 25%, not to stop at that point.

Thank you. I would like to turn comments back over to Jeff Evanson for closing remarks.

Thanks, Shannon. Thank you everyone for joining us this morning. We look forward to seeing you in the coming weeks either on a factory tour, tomorrow in Chicago at RW Baird's Industrial conference or at other events through the remainder of the year. Goodbye, everyone.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.