特斯拉 (TSLA) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Tesla Motors third-quarter 2013 financial results Q&A conference call. At this time, all participants will be in a listen-only mode, but later there will be a chance to ask questions, and instructions will be given at that time.

(Operator Instructions)

And as a reminder, today's conference is being recorded. And now I would like to turn the call over to your host, Jeff Evanson.

Thank you, Jon, and good afternoon, everyone, and our welcome as well to our Q&A webcast. I'm joined today by Elon Musk, Tesla's Chairman and CEO, and Deepak Ahuja, Tesla's Chief Financial Officer.

We announced the financial results for our third quarter shortly after the close of trading today. The shareholder letter, financial results, and webcast of this Q&A session are all available at our Investor Relations website at ir.TeslaMotors.com. A replay of this webcast will be available at the same site later today.

Please note that certain financial measures that we used on the call, such as revenue and income, are expressed on a non-GAAP basis, and have been adjusted to exclude the effects of lease accounting on Model S sales and changes related to stock-based compensation, and non-cash interest expense. Our GAAP results and reconciliations of non-GAAP to GAAP measures can be found in our earnings press release.

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 expectations as of today. Actual events or results could differ materially, due to a number of risks and uncertainties, including those mentioned in our most recently-filed 10-Q with the SEC. And now, Jon, why don't you give the instructions for asking a question, and then we'll turn it right over to your first question.

(Operator Instructions)

Jamie Albertine, Stifel.

The first question I had was, going back to some comments you had made on the last quarterly conference call around gross margin visibility, I think if I heard it correctly, you basically said you had a pretty good feel where the fourth quarter was going to be about a month before the fourth quarter happened. So, given the sequential gross margin expansion that we saw in the third quarter, what update are you able to give us for the fourth quarter at this point? Thanks.

Sure. So, we expect to track to 25% gross margin in the fourth quarter, excluding ZEV credits -- excluding the zero emission vehicle credits. Yes, I feel pretty confident about that outcome, unless there's some force majeure event, and also we're roughly halfway through the fourth quarter. So, I think that's almost half, halfway through so I think that's pretty secure. And then, we'll probably deliver more cars.

One thing that I hope was clear in the shareholder letter, but maybe it wasn't, is that we really are production constrained, not demand constrained. So we're working hard to address the production constraints and then improve the effective deliveries, because the thing that people still don't quite get is that we're different in a fundamental way from other car companies. And it doesn't make sense for us to do things to amplify demand, if we can't meet that demand with production. So, what we spend our time doing here, the Management team is trying to figure out how do we ramp up production faster and obviously maintain good quality and keep improving the product. And, so that's where -- we expect to alleviate a lot of those production constraints next year.

That's great, and as a quick follow-up, maybe, given some of the announcement that you made intra-quarter and that you alluded to in your shareholders letter. What does your feel on the current assembly-line capacity, as it stands today -- look like today, versus maybe how you felt 3 months ago? Thanks.

The main constraint on our production is really the cells, and I think I mentioned that before in talks, and I think I alluded to that on the prior earnings call. So we're addressing the cell supply constraints, and any constraints that are -- non-cell constraints that exist, but really the critical thing is the cell production constraint.

We announced a deal recently with Panasonic, which is for much increased volume, and that's -- when we think about the constraint on growth, that's the biggest item, and that gets most of our attention. And like I said, I think we will see some relief on that constraint next year.

Very good, thank you for taking my question.

Craig Irwin, Wedbush Securities.

Elon, I wanted ask a more philosophical question of you. We're hearing from different sources that the cost of your Model S drive train is more or less in parity with some of the conventional ICE vehicles out there, some of the premium vehicles in the market. Now, with some visibility on battery costs coming down fairly significantly over the next few years, when you look at the Gen III vehicle. Would you still want to price that at a premium versus comparable vehicles, where you would basically be benefiting from the ROI that you offer the customer, basically less expensive gas in the tank, considering they're not using petroleum, they'll be using clean electricity? Or, would you consider pricing that more or less at parity, or possibly at a discount versus the conventional competition?

Well, I think as far as we want to try to price the Gen III vehicle around the $35,000 price point, and when you consider the savings from gasoline, depending on what you consider gasoline to be up that point, it's effectively like buying a gasoline car in the US for maybe $28,000, or a gasoline car in Europe for maybe $22,000. So, that makes it pretty competitive.

Over time we're going to get better and better at lease offerings with lower interest rates and just better access to capital with a track record and more visibility into residual values. I think our residual value is going to be very good but, therefore, to get the lowest cost of capital you have to prove that. I think long-term just like with SolarCity, I see leasing being overwhelmingly the path to go for electric cars. Because it just brings the cost of transportation, it makes it immediate, because you have the lease and you look at the amount you're paying for the month, plus the amount you pay for electricity, versus your gasoline car lease plus gasoline costs -- and I think gasoline cars also really inherently require more maintenance, so there is that as well.

And with a lease you don't have to worry about like capturing that savings over a certain period of time or worry about the battery life or anything like that, you experience those things immediately. Long term, I see leasing as being the main way that people buy our car. And, then it's going to -- I think it's going to seem like a very compelling value proposition.

Great. And then the second question I wanted to ask what about the priorities for R&D investment in 2014, and I guess over the intermediate term. Can you discuss the breadth of projects that you would be looking to fund, and whether or not this is an acceleration from your prior plans, or if this is consistent with what you have been thinking previously?

I think it's more or less consistent. The thing that we're looking to be doing in 2014 is expanding Model S deliveries worldwide, particularly into Asia, and more broadly into Europe. And as well as other parts of the world. So, it's international expansion and volume production expansion with Model S, and then development of the Model X, just refining all of that, getting tooling in place and building out a really high-volume production line, next generation production line for the S and X. Next year we'll also be doing the design work, the styling essentially of the third-generation vehicle.

Because we'll be done with the Model X styling, essentially the fine brush strokes in the next few months. So next year is going to be about really getting the design the third-generation car done, but then it's going to take us a while to build out the capacity for that third-generation vehicle and we're going to have to sort out cell and battery pack capacity, because we're -- ultimately we need, if we were to produce 500,000 vehicles a year from the former NUMMI plant, then we need cell capacity that's commensurate with that. Which is maybe bigger than all of the lithium ion production in the world today, or at least on par with it.

Excellent, then, my last question if I could squeeze it in, the Panasonic agreement, 1.8 billion cells over 4 years, my back of the envelope math is if we assume 85-kilowatt hour Model S, probably one of the larger batteries, what you're going to produce over the next few years, something like 250,000 cars. There's obviously been a lot of press coverage of your discussions and qualifications of Samsung, so I'm going to guess there's incremental demand on top of that, that you anticipate to have? Can you shape that for us, how you potentially see the ramp, and how you would look for the stagger in these supply agreements to work?

Well, certainly, I'd say people shouldn't look at the X number of cells over 4 years and assume that's the number of cars that we'll make. I think we'll make towards the back end of that, a lot more cars. And so there will need to be other agreements with a certain combination of Panasonic, maybe with others, but Panasonic is obviously our primary partner.

But when it comes to the high-volume third-generation vehicle, it's clear that there's going to need to be incremental production capacity created that doesn't exist in the world today. So we're in the process of figuring that out. There's going to need to be some giga factory built.

Fantastic. Thanks again for taking my questions.

Dan Galves, Deutsche Bank.

I wanted to ask about the current level of demand. We've seen apparently the order to delivery time has expanded over the last couple of months, customer deposit account went up quite a bit in Q3, and you confirmed that you're seeing demand increases. Can you quantify that at all in terms of how many orders you took in Q3 versus Q2, or just any order of magnitude? Is the US demand continuing to increase, where is your upstand compared to where you were, let's say at the same point in the US launch process?

US demand -- or North American demand has continued to increase. We have actually had to stop North American demand in order to feed Europe. So we have had European customers that were waiting for a long time, so we had to constrain deliveries to North America in order to get people their cars. They have been waiting, in some cases, 2 or 3 years. So, I think we could sustain 20,000 cars a year in North America, and maybe more than that. But, it doesn't make sense for us to try to amplify demand, if we aren't able to deliver to that demand. That just makes people unhappy.

Where we are in Europe is, we're still at the early-stage -- we're in Europe where we were in the US maybe in January or February of this year. So European demand, it's on the order of maybe 10,000 units a year, but again, it doesn't make sense for us to try to drive that demand higher, if we aren't able to meet it. We want to make sure that we're laying the groundwork for future demand increase, and I think we could get demand in Greater Europe to be similar to that of North America. It seems like that seems pretty achievable to me.

Okay, great, and I just wanted ask about the production ramp. You said that cell capacity or cell flow is the biggest constraint right now, you seem to be addressing that. Where do you see production per week going over the next few quarters? And also, I would expect you to continue to deliver significantly less than you produce, as you continue to have more and more vehicles on ships at the end of the quarter versus the previous quarter. Is that correct?

Yes. As deliveries to Europe increase, we necessarily have more inventory in transit, and then as we start adding Asia in there, we've got more in transit. We'll probably have 60%-plus of our sales going outside the US to Europe and Asia and the rest of the world as well, and I think there's Gulf States, South Africa, South America and so forth, over time. So we can expect a similar majority of our inventory to be on the order -- trains, that kind of thing, over time.

And yes, in terms of that being a capital issue, I think that's probably not going to be a capital issue is we can get pretty low cost funding for inventory in transit to customers. Because there's no question, unlike a lot of other products, these cars are going to customers, like to people who have actually bought the car. It's not speculative as to whether they actually want the car. We are shipping them their car.

Got it, and just one more quick one. We heard this morning that the City of Beijing announced that they would further constrain license plate issuances, but at the same time they would issue -- about 15% of the license plates they issue next year, 20,000 units is going to be reserved for EVs and PHEVs, and that percentage goes up to about 60,000 vehicles by 2017 reserved for EVs. Do you know if Tesla imported vehicles would qualify for that? And what are your next steps in terms of getting deliveries started in China?

Yes, I believe we would qualify. We certainly are an EV -- pure EV, so I suspect we would qualify. We have our Beijing store, which we've done a soft opening on and we'll start delivering cars in the first quarter, probably -- we're aiming for February, but it could be March, but we're aiming for February. We passed all of the China homologation requirements.

That's right, yes. Homologation is behind us, which is great.

So we have all the potentially approvals from the Chinese regulatory authorities to ship the car, and but we expect to probably ship up -- put our first cars on a boat in January, and so they'll be arriving in February, if things go according to plan. We'll still be somewhat production constrained, doesn't make sense for us to expand the scope of our sales territories too fast if we're production constrained, because that just amplifies the set of problems we have to deal with. But we do want to get some cars to China in the first quarter, and lay the groundwork in terms of service centers, Superchargers, and so forth, for hopefully significant growth in the rest of year in China.

And despite the soft initial opening, we're seeing pretty good, initial demand in China for the market.

We're not really even trying, like where really, softness, when we say soft, we really mean soft. We're doing -- we're not doing -- it's word of mouth, maybe, not anything beyond that. Yes, but it seems like things are going to probably go pretty well there, I think.

Thanks very much. Appreciate it.

Andrea James, Dougherty & Company.

Thinking back to the cell supply issue again, and you have got this great track record of insourcing and building your own ERP system and the like, and I guess, can we assume you've at least looked at building your own battery cell plant? I just wonder what your thoughts were there?

We're not quite ready to make a big announcement on the cell and battery giga factory, but we are exploring a lot of different options right now. If I were to guess, I think that we would do that, that soup to nuts giga factory, where raw materials coming in all the way to finished packs, with partners. That's probably my best guess and that factory would most likely be in North America, but we are investigating other options as well.

Wow, thanks for that. And where does that rank? I imagine if you work at building a more mass-market vehicle car, the cell issue would be probably one of multiple. Where does that rank? Is it in the middle of all the challenges you would look at or is it close to the top?

Cell production is the biggest single constraint, but there are certainly many others that we do want to look at that aren't too far behind it. But I think if you look at, say what's the critical path item, it's cell production. And I think we can ensure that everything else is no slower than the ramp in cell production.

Thank you. And then just one final, the raw material though, that seems -- is that correct assume that's not an issue, raw material supply?

Raw materials are not an issue, that's correct. I wouldn't worry about, say, lithium supply. There's a lot of lithium out there. And, the main constituents really in the cell are, by weight, are actually nickel and cobalt, aluminum then lithium, lithium is maybe like 1% of the cell mass,1%-ish, maybe 2%.

Very exciting, thank you very much.

Sorry, 2% of it's the pack mass -- or 1% of the pack mass, I should say. 2% of the cell mass.

Elaine Kwei, Jefferies.

Just going back to the new Panasonic supply agreement, real quick. Does this require a new factory or alliance on their part, or is a significant portion already covered by their existing capacity? In other words, how should we think about what needs to happen on their side, to meet the supply obligations?

I think as far as next year is concerned, they've got it covered. We've been working closely with them, and we spent [a lot] time in the Panasonic factories and we -- pardon me? I think we've got -- we have high confidence that Panasonic can deliver on their commitment.

Okay, great. And then the shareholder letter mentioned that you accelerated development work on the X. Does that mean the launch may not be quite as late as 2014? And if you're starting Gen III design next year, are we still looking at that 2017 timeframe production as well?

I think for the X, we're aiming for, maybe a few units at the end of next year and volume production is -- into the high-volume production, is probably Q2 2015. High-volume meaning volumes comparable to the Model S at the time.

That's the normal ramp of production is we --

Yes, exactly --

While maintaining a very high level of Model S production in the factories, so these are very large numbers at that point.

Yes, exactly.

Okay, that's very helpful. And just lastly, in the letter you also mentioned that you'll be starting production to support a launch by Daimler in early 2014, can you remind us what vehicles you'll be supporting, and other any new ones that would be under consideration as well?

The main one is really the Mercedes B class, which is going to be the biggest electric vehicle program in Daimler history, and it's really going to be a great car. I think it will be the most compelling, affordable electric car on the market.

Great, thanks so much.

There isn't anything beyond that.

Thank you.

And it's just, particularly when you look at the fact that we're we have these cell supply constraints, it doesn't make sense for us to be finding new ways to use cells. (laughter)

Right. It makes a lot of sense. Thank you.

Ben Kallo, Robert W. Baird.

Good quarter. As you think about what you've learned from logistics shipping to Europe, and then we think ahead to next year, is there risk around that? Or have you got that ironed out, as far as shipping to a different continent and delivering there?

I think we've mostly got it ironed out with Europe. There was initially a bit of challenges shipping because we shipped partially-built cars to our assembly facility in the Netherlands, and then they get put together there. We're actually ramping up our investment in our Tilburg plant in the Netherlands, adding more and more capabilities to that, and just making that whole process a lot more efficient.

In addition to the myriad of challenges delivering to a dozen different countries, there are also the challenges with the electrical system. So just the nature of the electrical grid is that almost every country has their nuances, which we experience as a consumer when you got this plethora of plugs, that we experienced the same sort of thing with electric cars. Norway is our highest sales per capita, but one of the challenges there is it has a plug-in grid, so it's got a somewhat unique electrical system, so it took a fair bit of effort to make sure we were able to charge properly in Norway, and --

Overall we had delivered zero cars in Europe in Q2, and in Q3, we delivered over 1,000 cars and the first of the cars got delivered in early August. So in just a matter of 2 months, we could deliver over 1,000 cars which was a significant achievement for the Company despite the logistics that Elon mentioned in several countries as well as different electrical infrastructure.

I agree. I've heard from some customers in different parts of Europe that have waited longer for deliveries, and the rumor out there is that you're shipping to Holland ahead of a tax reset. How do you balance situations like that, and meeting customer satisfaction?

It is tricky. There was in some countries, there are some tax credits that were due to expire, or that we thought might expire because they had not yet been renewed, as was the case in the Netherlands. So obviously, if there's a danger of some of the tax credit not being renewed, than I think the right thing to do is to accelerate deliveries to that country, which is what we did with the Netherlands.

Now that they went ahead and extended the tax credit, so it turned out to be a false alarm. But in balancing what's the right thing to do, it seemed like the right thing to do was to try and accelerate deliveries to the Netherlands, to make sure that people could take advantage of the tax credit. Now we're more in a normal delivery mode.

Great. My final question is, as you think about the battery capacity for Gen III, what timeframe, if we're building in North America, a factory for cells, would you need? And how difficult of a permitting process is that? And I'll jump back in queue and thanks very much.

Like I said this is the right time to talk in detail about our plans for a giga factory. Except to say that obviously we're acknowledging the fact that one needs to be built, and we're looking at a variety of different locations. I don't think permitting is going to be the driver here, this is going to be a very green factory, it's going to be with a lot of solar power and it's going to have essentially zero emissions, no toxic elements are going to come out of this factory, and we would be building recycling capability right into the factory so old packs of come in one side and get reprocessed into new packs.

So the way to think about this is, a factory is the machine that builds the machine, and that itself has a version, just as have a version of a product, it's like a version of a factory. So we're trying to figure out what's the right way to do version one of this giga factory, and we want to be thoughtful about it, and this is going to be a really giant, giant facility. Like I say, we're talking about something that's comparable to all lithium ion production in the world. In one factory. Big.

Thanks.

Adam Jonas, Morgan Stanley.

I don't know if this is a question for Elon or for Deepak, but I was curious if the third quarter, or even your outlook for the fourth quarter, benefits from any true-ups from suppliers who might have been gouging you on production that they didn't expect you to do, and you're able to do. And we were hearing there could be some potential for true-ups. Curious if you could comment on that?

No, Adam, no such luck. There are no such one-time benefits from suppliers, this is a clean quarter

Okay, that's good. And then could you comment on the wait time for a car order today in Europe on average? I know it can vary dramatically by country, but maybe could give some examples of an order place tomorrow morning, for example, how long someone can expect to wait for a car? And also for China -- Mainland.

Right. Well bearing in mind that from the point which a car is manufactured a California, it's about 6 weeks-ish, maybe 7 weeks before it actually gets in the hands of the customer, because we make the sub-assembled car kit. That then gets transported to the Netherlands, gets assembled into a car, goes through final checkout, and then will be scheduled for delivery to a customer, so all that takes 6 or 7 weeks.

And then there is a bit of a backlog, so I think it's something on the order of 3 to 4 months. You order a car now you get one in 3 or 4 months, because there's are couple months of lead time on top of that.

And then for China and Brazil, maybe you'd add then just your -- I would presume maybe to add your live launch for the Beijing dealer, for example. Like you add a couple months on top of the or is that --? For China?

So if you order a car for delivery in China right now, you probably get it in mid to late Q2.

Okay.

And I'd certainly recommend anyone who -- in China, who does want to order the car, to place their order fairly soon, because it looks like that wait time may be accelerating. So, in other words, the longer you wait, the longer you will have to wait. At least, that's what it looks like.

Got it, and Elon, just finally, any update won when you are going to take that cross-country road trip with your family. Everyone is curious to see that goes, or if you've already done it, and we just didn't see the production of it yet? Thanks.

No, you would have seen it. But I -- in looking at kids schedules and everything, it looks like we might do that trip during spring break instead of over the Christmas holidays, because well it's going to be pretty snowy and yes --

You don't want to put your kids in the car with that?

Yes. Just going through the country, when it's the shortest day of the year, and it's mostly night time is probably not the best way to go. I want to make sure they enjoy the trip, so I think we'll probably end up doing it in late March.

Well the car is built like a tank, it seemed to go through those Mexican concrete walls pretty well. So, pretty strong build quality. Thanks a lot, everyone.

You're welcome. Actually, the post around that, it's even crazier than that. The car actually sheared off something like 17 feet of curb wall, then went through a concrete wall -- 6 foot concrete wall, then smashed into a tree. It was like holy crow. (laughter)

John Lovallo, Bank of America.

The first question would be, it looks like in the second quarter North American volumes rose by about 250 units sequentially. The third quarter looks like they declined by 650 units sequentially, and I know you have talked about the supply constraints. But I guess the question is, do you think that we could be getting a point where maybe the early adopters have been -- their orders have been filled and maybe demand is leveling?

No, I think there's a huge amount of untapped demand in North America.

And we saw a pretty solid increase in reservations in Q3, in North America, compared to Q2. The fact that we delivered less cars is not an indication of demand, it's just a matter of how we mixed the production between Europe and North America, so we don't want to create any misimpression of our production happened versus demand.

Yes, we just had a finite numbers of cars we produced, and at some point, we had to start delivering cars to Europe so --.

That's helpful, thank you. And then looking at free cash flow, it looks like you generated about $26 million in the quarter, which is encouraging. Now you're forecasting about flat free cash flow in the fourth quarter, so that looks like -- looks like you'll burn through about $50 million this year, and the expectation would be that CapEx is going to continue to ramp, given the capital intensity of this business. So how should we think about free cash flow, maybe heading into next year and maybe even further out? Just high level.

Do you want to say anything?

We prefer to give the 2014 guidance in a bit more detail at the next call, but certainly our goal is to generate a significant amount of cash from our operations, and offset as much, if not all, of our capital expenditures as we go forward. It also depends to some extent on when we accelerate development of new products, and how much we continue to grow globally in 2014. We have big ambitions of that. So I think it's probably best that we hold onto give you a bit more granular sense of this in the next quarter.

That's fair. Sorry, go ahead, Elon.

The general course we're trying to take is to make steady, modest improvement in our available cash, while growing the business at a really rapid percentage rate, relative to the rest of the industry. These are super big percentage growth rates, compared to what's normal in the car business. So if we can actually generate a little bit of positive cash flow while having an ongoing very high percentage growth rate, that seems like a pretty good outcome.

That's how we look at Q3 results, considering how much we have invested globally in our infrastructure and our growth. And we still generated positive cash flow, it's a great outcome for the quarter.

Yes, exactly. It's like Supercharge alone, we're aiming to have essentially all of North America covered in detail by the end of next year. So not - in some cases it will be some frequently traveled routes will be potentially double or triple covered with Superchargers. And we expect to be able to travel anywhere in Europe or at least Western Europe and many parts of Eastern Europe by the end of next year. So, despite all that and growing production volume, and developing the Model X. Despite all that, I think we can still be positive cash flow.

That's very helpful. If I could just sneak one more in, can you just tell us what the effect of the GHG and CAFE credits were in the quarter? The effect on gross margin?

It was really small, that effect continues to decline every quarter, John. And it was slightly over 1%.

1%? Okay, thanks.

Colin Rusch, Northland Capital.

Can you talk about the improvement in Takt time and elimination of overtime in the quarter for your production run rate?

Yes, I think overall our production efficiency is continuing to reduce, so as a result, we are use less over time, and our cost per car per unit continues to decrease.

Yes, I think there's room to improve on our labor costs per car, and we have a number of initiatives underway to reduce labor costs per car, which we need to do otherwise we simply can't fit enough people at the factory. So it's not as though -- we'll continue to grow our headcount but our headcount per car should get much better in the ensuing quarters.

Okay. And then --

Yes --

Go ahead, I can follow-up off-line with a couple other things. And then on the evolution of the relationships with your battery suppliers, can you talk about how much they are contributing to the IP, and evolution of the cell designs, and new materials integration? Are you having to contribute more there then you would have thought, when you started working with these folks a few years ago?

Well, we're contributing a fair bit to the optimization of the cell for automotive purposes. In a lot of ways, the cell still looks the same from the outside because it's the same -- roughly the same 18 millimeter diameter by 65 millimeters long cell. Although there technically are tiny changes like 18.3 or 18.4 millimeters, that type of thing. But the internals of the cell are evolving quite a lot, and we're trying to be as helpful as we can with working with that partner, really our primary partner at Panasonic on that.

So, I think Panasonic is doing really a great job and has really exciting things in the pipeline for future cell chemistry improvements. And we want to try to bring those to fruition with them as soon as possible.

And just one final one. Can you just comment on the cycle time for some of those improvements? Are we talking about things that have been in the works for couple of years just making into cars now, or can you turn things around in 6 or 12 months?

Well our general goal is to make a meaningful step change improvements in the pack technology, cell and pack technology, every -- roughly 4 years. So, we started production 1.5 years ago. And so one would expect that in roughly 2 years there'd be a significant change. There will be small changes before then, but probably a more significant step change in the 2 to 3 year timeframe.

Okay, thanks so much.

Okay I think the key thing is to have that step change in place for the third-generation vehicle. Of course, that would have -- that would have benefits to the Model S, the premium line of cars as well.

All right, Jim, we probably have time for just one more question. We are going to go a little bit over here, but let's try to just fit one more in, please.

Patrick Archambault, Goldman Sachs.

Wanted to actually follow up on that last question. If I remember well, like part of the rationale for using 18650s was to take advantage of the scale that was already there. When you're talking about building a new factory on your own, you're bringing your own scale to the table, right? And probably opens up a lot of options, so as we think about that battery technology for the Gen III, might you actually rotate away from that 18650 architecture into something that's maybe a bit more compact and simple? That would be my first question.

I think you're asking -- it would be odd if an 18 millimeter diameter and 65 millimeter length just happened to be a perfect size for a cell. That said, if it's a flat optimization, there's no reason to go away from that form factor. So we're still investigating that, we're not 100% one way or the other. I would imagine though, that we don't go particularly far away from that size, we'll either stick to that size, or we'll have something that's not hugely bigger. It's somewhat of a misconception that a bigger cell is cheaper. It's not cheaper, in our experience, we have yet to see a situation where large format automotive cells are actually cheaper on a cost per kilowatt hour basis.

Got you, okay. If I could one more on how you're going to configure your manufacturing going into the end of this year? Does your current line have flexibility, or will it have flexibility to build Model Ss and Xs, going through the same line, or are you going to have to build a parallel one? Ultimately I think the original expectations you put out was 40 to 50 global units of demand for S, clearly that would probably tax at some point the set-up you have now. But just wondering when that additional capacity would go in and how it might be configured?

We have a game plan on that front, because obviously if we're doing 40 or 50 in Model S volume, if Model X turns out to have a comparable demand, and we're on the order of 100,000 units, then clearly our current production line is not going to do the trick, so we're going to need something else.

We're looking out reconfiguring part of the factory, maybe using one of the moving production lines that's still there from the NUMMI days. But I feel pretty confident, it's not going to be -- the production of vehicles is not going to be a constraint. That's not the limiting factor, nor do I think we've got some huge capital draining thing that's going to need to happen. I think we've got a handle on how to get there.

Okay, terrific. Well, thanks for taking my questions.

All right thank you very much everyone for joining us this afternoon. We look forward to seeing many of you tomorrow at RW Baird's Industrial Conference in Chicago, or next week at Barclays Auto Conference in New York City. Have a great day.

Okay, ladies and gentlemen. This does conclude your conference. You may now disconnect and have a great day.