特斯拉 (TSLA) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tesla Motors fourth-quarter 2014 financial results Q&A conference call.

(Operator Instructions)

I would like to turn the call over to your host, Mr. Jeff Evanson. Please go ahead.

Thank you, Patrick, and good afternoon, everyone. Welcome to Tesla's fourth-quarter Q&A webcast. I'm joined today by Elon Musk, Tesla Chairman and CEO; JB Straubel, our CTO; and Deepak Ahuja, Tesla's CFO. We announced our financial and operational results today in a shareholder letter that's available at the same link as this webcast and a replay of this webcast will be available later today at the same link.

The shareholder letter includes GAAP and non-GAAP financial results, as well as reconciliations between the two. Our non-GAAP measures add back deferred revenue and related expenses for cars delivered, where the cash has been or will soon be collected. These non-GAAP results also exclude stock-based compensation and non-cash interest expense. Revenues and costs associated with cars leased directly through us are treated the same in our GAAP and non-GAAP financial information.

During our call, we will be discussing our business outlook and making other forward-looking statements, which are based on our predictions and 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 recent 10-Q filed with the SEC.

Now, Patrick, if we could assemble the queue and have our first question, please.

(Operator Instructions)

Andrea James, Dougherty & Company.

Hi, thanks for taking my questions and congratulations on the rocket launch. Just quickly, can you help me get to a free cash flow figure? It looks like you are going to do in $1.5 billion in CapEx, but what is going to be the operating cash flow to offset that?

We will have clearly significant -- Deepak here, hi Andrea -- we will have significant positive operating cash flow, obviously as our volume growth and our gross margin continues to improve. We will also have some cash used on our direct leasing program. Our expectation is that we will establish a shopping warehouse line for leasing cars and that will continue to grow and fund a big portion of our leasing funding required. So overall, we feel pretty comfortable where we are in terms of how 2015 looks from a cash burn perspective.

Maybe about $1 billion? Is that about in line, cash burn?

It should be less than that, considering that we will have a lease warehouse line which continues to expand.

Got it. Then another point, it looks like you expanded your residual value guarantee into extra markets late last year. Then I saw last week you are giving free home charging to folks in China.

So my question is, it looks like you have really pretty good demand, global wait times are increasing. So why continue to give incentives to buy the cars if demand is so high?

Fundamentally, in China, we want to make sure we are not creating any hurdles or issues that create a negative customer experience. Charging installation, given the varied regulations and challenges there, has been a difficult customer experience, and we want to overcoming that by providing a [trade].

Yes, but this is also something that's considered standard in China. If you are buying an i3 or a Leaf or something, that is just considered the standard thing, so we are just matching what competitors do.

But this whole China thing has been blown way out of proportion. We didn't execute people well on China last year, but it didn't really matter. People don't quite get that.

It's not like there were all these extra cars we could have produces, and if only we had a bunch more customers in China, we could have sold some of those cars. We had -- we were production constrained. I wish we weren't, but we were. We look forward to getting demand constrained in the future.

Essentially, it didn't matter whether we, meaning to the Company as a whole, whether we sold a lot of cars in China or a small number of a cars in China. We would have to steal volume that would have headed to the to US or Europe and sent it to China. So it wasn't a high priority for the Company because it wasn't a constraining factor.

Obviously in the long-term, we do want to succeed in China and make sure we're doing a good job. ' Just like the rest of the world, China wants to have the best product and we think the Model S is the best car in the world and that has been indicated by a multiple outside assessments. I'm pretty sure that people in China want the best car in the world. So that's something we've got to make sure we lay the right foundation for, for future growth.

But it was essentially irrelevant for last year. That's an important point.

The biggest issue, which we are still fighting to address, is the perception that it is difficult to charge your car in China. This is false. It is not difficult to charge your car in China. Unfortunately, this sounds brain-dead, but our sales term was telling people that it was difficult to charge in China, even though this is not true. That is pretty silly.

I put the guy who was in charge of the Supercharger roll out in China, who was doing an awesome job, an engineer, basically, he's no sales person, in charge of China to make sure that charging is super easy and excellent. He's not a marketing guy or a sales guy, he's an engineer and an operations guy and he's going to just make sure that people have -- that customers are trying to have a fantastic experience. And then, just like in other countries, those customers become our sales force and the product sales growth by word-of-mouth.

Is this a Company philosophy? Because it seems like you are putting engineers in charge of customer service, even globally, with Jerome. Is customer service an engineering problem?

If you have got people that are good at creative problem solving, then they will be good at creative problem solving. I tend to view, it's my own bias, but most things, since I'm an engineer, I view things as an engineering problem, but not everything is an engineering problem.

But it is -- you have got to design the system and sometimes those systems are in the form of a car or it's a charging thing or it is the way that you communicate with prospective customers. It's just creative double solving, so what you're looking for at the head of it is a creative problem solver who just cares about getting it right. That is what we're doing. I am confident that by the end of this year, that we will be in really good shape in China.

Yes, I'm pretty optimistic about it. I don't think there is some unique missing issue in China. If you look at sales in Hong Kong, our sales in Hong Kong are excellent. But we don't have that misperception of charging issue in Hong Kong. And everybody lives in apartment building, as well, so it's not like it is super easy to get local charging. I'm confident that just as we've seen high demand in every other part of the world, that will see it in China, as well.

And just to the point -- thank you for the clarity on China. Just to my point of the residual value guarantee, is that something you plan on keeping? Why keep it? What are your thoughts about that?

That's a good question. I've actually debated that, should we keep it or shouldn't we keep it, because it is moot. The residual value guarantee matches what other premium sedans as -- see after a three-year time period, but our actual residual values are substantially above that. So it never actually matters. We are not paying out residual value guarantees because the car is worth more than the residual value.

It does mess up our accounting because we have to treat it like a pseudo-lease. On the other hand, if we withdrew it, then does that mean -- would people take that as a lack of confidence in our product. They might. They might misconstrued as such. Even though it is moot and it doesn't really matter, it's just there to provide confidence to customers.

So we will probably keep even though it makes our financials look worse than they really are. It's important because we do get some criticism about GAAP versus non-GAAP, as though when we do non-GAAP, we're actually trying to people into thinking something is better than it is. But actually that's not true. The way the accounting rules currently work don't give a correct picture and we're trying to give a more correct picture of non-GAAP, not a less correct picture.

The difference between -- as you can see from our gross margin, GAAP and non-GAAP are basically the same. So when we -- for revenue -- the difference between GAAP and non-GAAP, it comes down to just two things, those residual value guarantees, where we, as we just talked about, it's moot. But because it's a pseudo-lease, we have to recognize the revenue over time, even though we got the cash immediately.

So our cash flow -- non-GAAP is an accurate representation of cash flow, which is what really, really matters. Then even in non-GAAP, we don't -- for leases that we do internally, they actually aren't covered in non-GAAP.

In receipts, the full cash upfront, so it's aligned with our cash flow.

Exactly. Exactly. It's aligned with cash flow.

Whereas in some other auto companies, the moment they sell the car to a dealership, we understand, they recognize the revenue even though a financing entity might lease that car and so they don't have the cash flows, but they have a GAAP in revenue. So in some sense our non-GAAP revenue is pretty clean and it lines up well with our cash flow.

This is a really important to emphasize because it might be -- are we perhaps exaggerated our revenues relative to how other car companies might representing the revenues. What Deepak just is a very good point. What the other companies will do is they will sell their cars to the dealer groups, but then they will then turn around and refinance those same cars. So they are sending it to the laundromat, is basically what they are doing.

In our case, since we are not sending it to a laundromat, it is actually more correct. Because if we do a lease, it's all internal and we're not trying to send it through some third party where actually the risk is still assumed by the parent car company.

Even for leases that we do ourselves, we can securitize those leases whenever we want. We can take those leases, funnel them, put them into a secure station program or just get a warehouse loan to recover the capital.

The reason we're using our existing capital is just basically sense because we have got a big bank balance that is earning 0.1%, or basically nothing, actually minus whatever the inflation rate is. So it makes more sense for us to put that capital to work with consumer leases and earn 2% to 3%. That basically what it amounts to. But whenever we want to recover that capital, we can do so through a warehouse [landlord] securitization.

Thank you for taking my questions.

Our financials are better than they appear, not worse. That's really the key point.

Brian Johnson, Barclays.

Yes, good evening. Want to explore a bit where you see the trajectory of CapEx and OpEx? You gave some guidance for next year, but as we think ahead to the Gigafactory, and as we think ahead to the Gen III launch, how do you see those trends going over the next several years?

We are going to spend staggering amounts of money on CapEx, for good reasons and with a great ROI. It's important not to look at the CapEx in isolation because that CapEx is obviously being done for a reason in order to capture a substantial future revenue flow.

I am just saying the back-of-the-envelope -- if you make certain assumptions, and I emphasize these are just certain assumptions, I am not saying they are true or that they will occur, but I'd bet that they do occur, personally, but just my personal opinion.

If you take this year's revenue, around $6 billion or thereabouts, and if we are able to maintain a 30% growth rate for 10 years, add to your 10% profitability number, and have a 20 PE, our market cap would basically be the same as Apple's is today. That's going to require a bit of -- on the order of $700 billion -- obviously, getting that rolling requires some significant CapEx. But I am hopeful that we can do this without any significant dilution to the Company, maybe minor dilution but nothing serious.

And how about in terms of operating expense? Do you have a target for reported margins versus thinking about your remarks in the second press conference [at Verguna], where margins would be if you would stop growing? Is there a difference between the margins on a non-GAAP basis we would actually see versus what they would be if you weren't making those kind of investments?

You mean profit margins as opposed to gross margin?

Yes, the operating margin?

We could easily get to 10% to 15%. Probably if we push it -- somewhere between 10% and 15%. Because some of that gross margin that this year will probably -- by the end of the year -- be somewhere around 30%, so if 20 of those points go to fixed costs and R&D and whatnot, and then there's at least 10 leftover for profitability. We are expecting to be non-GAAP profitable.

And we have been non-GAAP profitable for two years now, 2013 and 2014.

I'd like to emphasize that doesn't mean (expletive) profitable, it means really profitable (laughter).

It's difficult to parse your question, Brian, in terms of separating OpEx between a fast-growing Company like Tesla versus steady-state. Clearly we want to invest in the future, but we want to do it efficiently, and we are going to focus on being efficient with our OpEx fundamentally this year.

We are. That is a key thing. The simple math of headcount requires this.

We are basically a little over 10,000 people and aiming for somewhere over 55,000 cars this year, just to get to 0.5 million cars a year, if we do not improve our productivity per person, we would need, call it, 100,000 people. I'm not sure where we would park. Clearly, there needs to be dramatic improvements in productivity, which are underway.

Right, when you said 10% was that 10% while still growing to the million of cars target you talked about in 2025, or that is 10% when you get to the millions of cars target?

At a certain point, we'll actually be able to maintain 10% profitability despite nutty growth, because you just run out of ways to spend money. It's like Apple. They're just running out of ways to spend money. They spend money like it's water over there and they still can't spend enough it.

For us, we are a single vehicle platform Company at this point, so our engineering expenses have their ebbs and flows, so that has an impact. But as we grow, we become a portfolio of vehicle platforms, even with nutty growth, we can get to a very good operating margin.

And as I was pointing this, we doing this -- and it's mentioned in the letter -- but this massive infrastructure expansion, really massive, setting up service centers worldwide, creating a ubiquitous Supercharger network worldwide, logistics across all these countries, going with customs and the unique elements of each country. We're massively increasing the scope and scale of Tesla in order to lay a foundation for future growth.

Okay, great. Just final question, more for Deepak. When does CapEx flow into depreciation and gross margin? What time frames for the CapEx, in terms of depreciable life spans are you assuming on things like Gigafactory, factory tooling and so forth?

To answer your first question, when assets are put to use for production and delivery of cars, that's when depreciation kicks off. So a lot of our spend this year is on production capacity expansion and Model X tooling. Those assets were -- saw depreciation when Model X starts producing.

The Gigafactory assets, clearly, will go into -- will be depreciated when we start producing cells that are being used for production and our revenue growth. And the life of -- the depreciation life depends on the kind of asset. It can vary from five years for tooling to longer if it's equipment and if it's facility then it could be 15 years to 30 years. We follow the generally accepted principles there in our expected life of use to come up with those figures.

Okay, great. Okay, thanks.

Adam Jonas, Morgan Stanley.

First back to China, do you have any concerns about your ability to pursue business in China on terms that protect your interests? What I mean is I look at the German manufacturers, they don't seem to have any problem with 50%/50% JV structures or with local partners and not having control and selling through franchises. Are you able to -- are those terms that you are comfortable doing business with in China?

We're definitely going to want to have local manufacturing or get some among of local R&D, as well, in the future in China. It's not going to make a ton of sense in the long-term to the be building a huge number of cars in California and shipping them to China. But right now, we are still at the early stages, so it's difficult to say exactly what's happens in the future.

Our goals in the short-term in China are just very straightforward, which is just to build out our service and Supercharger infrastructure and just get the basic foundational elements there. We're not going through dealers, as we don't go through dealers anywhere in the world. Our activities in China are currently [home sensitive around] and it depends on what the evolving landscape is in China in the long term as to whether, where, and how a JV would have to be set up.

Elon, just on the patents. It's been eight months since you opened up the patents for competitors to use. Any takers of any significant technology?

I'm not aware of any. Are you surprised there hasn't been more? And is this just a function of -- is it hubris and pride of your competitors or is it they just don't have the intellectual capabilities or software engineering depth to contextualize what you have to offer?

I'm quite sure that they will be -- and that actually may factor into our currently [like to use] our patents. Just important -- remember the design cycle. From the point at which you can use intellectual property, you've got to incorporate into the design, that design has got get -- you've got to do detailed engineering and design, you've got to tool things up, and then you have to go to production. Probably the first time you see companies -- anyone using our IP, it would be about three years after we announced.

Okay. And finally, Elon, you mentioned, you said staggering amounts or obscene of money on CapEx. Companies that usually have those spending ambitions at this point in the growth phase also have pretty developed relationships with capital markets to help fund that growth. You are yourself, and your Enterprise has done that quite successfully.

Any heuristics you can leave us with, as people contemplate more cash burn being necessary to fund great things and great projects that will ultimately pay off. But any rules of thumb, or the minimum levels of liquidity, or the things you would look at to decide whether you need to refill the capital tank? Thanks.

We don't have any plans for raising money right now. We can get to it, the creative element that I described earlier with really minimal dilution. It's really going to be very much -- [oveling] amount of it would come from operating cash flow. I feel generally pretty good about it, about getting to that level with only minor to moderate dilution.

The only reason we would raise money is -- and I'm not saying, we really don't have any plans to raise money, but the only reason I mentioned we would do it earlier is just to have a bigger cash cushion in case there's a big downturn in the economy or something like that.

Thanks very much.

John Lovallo, Bank of America.

Hey guys. Thanks for taking the call.

First question is cash burn continues to be pretty aggressive here. The question is, if demand is as strong as you guys are saying, and really the issue is on the supply side, why wouldn't you raise prices in all regions to at least offset the FX headwinds?

The reason I'm asking this, if you have more demand than you can handle, this won't hurt deliveries, it should also clearly benefit cash flow and investors and it will also support the residual values for your current owners, so it sounds like a win-win all around. Can you just address that please?

I actually think that car is expensive as it is. It's not a cheap car. For a huge number of our customers, it's the most expensive car they've ever bought. They didn't think they would ever buy a car that costs $100,000.

So I'm reluctant to raise that price, as we start running into fundamental affordability limits. As it is, we are expecting to be significantly -- have significant positive cash flow in the latter half of the year. So yes, there will be short-term debt but it's going to be quite positive at the end of the year and then going into 2016, even more so.

And that's completely linked to a major product launch, especially in the automotive industry, you have to invest in the CapEx for manufacturing capacity and then the cash flow comes through when you launch.

Just to be clear on that, when you say you're going to be cash flow positive by the end of the year, that is after CapEx?

Yes, that is our expectation. We've got to here focus on the long term. This is a short-term issue in terms of timing of CapEx versus revenue.

But to answer your question, yes, even in the face of significant CapEx, we expect to be cash flow positive in Q4.

In Q4, okay.

It will happen somewhere in late Q3, but it will be reflected most clearly in Q4.

And it is linked with the volume production of Model X.

Exactly, we have got to get Model X -- because we have a ton of CapEx related to Model X. And we also have also invested in a bunch of things that actually, our volume numbers that are really better associated with Model III. So that our $0.25 billion paint shop upgrade is intended to be able to handle 10,000 cars a week.

Okay. Thanks.

The next question, there has been a lot of discussions about persistent drivetrain issues. We've heard everything from different customers from persistent humming noise to complete failures. The question is, how pervasive is the drivetrain issue?

What is the cost to replace the drivetrain? I was a little surprised to see that the warranty reserves would not move up quarter-over-quarter?

There's a lot of noise on the forums, but it's not quite as bad as people make -- certainly, for most people, they don't experience any drivetrain issue at all. But there was a period of time, basically for a month or two about a year ago, where -- this is getting into the weeds -- the application of grease on the spline of the motor was incorrect. And that caused the spline to wear out and the strip the spline on the drag in on the motor.

That particularly effected sports, and unfortunately, it happened to coincide with when a whole batch of cars headed for Norway. So unfortunately, it disproportionately affected Norwegian customers, which we've taken great pains to try to address. Essentially what it amounted to fix that [sure] for example, is just to you've got to pull the drive unit and then send it to get remanufactured where we replace the rotor.

And maybe to the warranty, this is JB, to the warranty reserve question, we've actually improved quite a bit a lot in our efficiency at repairing the drive unit. So it might be swapped for a given customer, but that unit doesn't get trashed, it gets repaired. The elements that need to get repaired are increasingly narrow and we're really targeting them quite directly. Even the rotor can be repaired at this point.

There was a differential clunk that was causing a differential clunk, which can actually be fixed with a two-part shim in the service center. So we were able to figure out a service center fix to address that, without even dropping the drive unit.

All of the new units being built today, of course get all these fixes proactively. As we learn, the new product improves.

That's helpful. Finally, Elon I just wanted to ask you about your comment about GAAP profitability not being reached until 2020. I know that you guys say that the non-GAAP is the way to think about it and I'm not disagreeing with that here.

But what I'm suggesting is if there's not going to be GAAP profitability until 2020, and we walked down from The Street's consensus non-GAAP number to a GAAP number by adding back stock comp, adding back non-cash interest expense and making an assumption on the leasing, my estimates would suggest that Street estimates are 30% to 60% too high because the GAAP component of that non-GAAP number would need to be eliminated. If you guys could just help me think about if that math is incorrect, and more importantly, what is the path to profitability for Tesla?

People read too much into my comment. I was asked, when do I think Tesla will have full-year GAAP profitability. Then you get into the residual value guarantee question, like do we continue doing that or do we not continue doing that because about one-half of cars are financed. So that basically chops our revenue in half in a lot of cases.

Leasing, as well.

And then leasing. So if leasing and residual value guarantee are one-half the cars, that would basically naturally affect the revenue recognition.

And then is it -- if it is a quarter basis or is it a full year. That's why I said, okay, probably 2020 it's the full year and it's GAAP. What that actually means is that Tesla's free cash flow is incredible in 2020, is able to overwhelm even the non-GAAP stuff. People didn't understand that what I said was an extremely optimistic not a pessimistic statement.

Okay, thank you guys.

Ben Kallo, Robert W. Baird.

Thanks for taking my question. A couple different ones, first a lower-level one.

As far as the X goes in timing, could you just talk about, I know you reiterated deliveries in Q3 and just your confidence level around that. One of the questions we get a lot is if we extend that to the Gen III and your 2017 time frame. Can you just talk about the work you are doing there and how confident you are in getting to that timeline?

Yes, that's a fair criticism -- entire criticism. This feels -- this paradox here is we are halfway there at any given point. But really at this -- the X design is done.

It's just a question of tooling and supply chain at this point, and in making sure, as we do the ramp-up on X, that our quality is excellent. It doesn't do any good to -- obviously, we want to make sure we have a really great experience. We don't want to have them have any issues or problems.

But it's really, at this point like I said, it's just tooling and supply chains and we're trying to make that go as fast as possible. We are highly confident of delivering our first customer cars this summer and then spooling up to significant volume in Q4.

With respect to Model III, we definitely -- we don't want the delays that affected the X to affect the Model III. We are really -- we are being quite contentious about this. There are things that we could do with the Model III platform that are really adventurous, but with schedule at risk.

So what we're going to do is we're going to have something that is going to be an amazing car but it won't be the most adventurous version of the Model III to begin with. But we will have then have the more different version of the Model III on the Model III platform following the initial version, so that we can stay on track for Model III.

We got quite adventurous with the X and we don't want to be -- that would be too risky, given the Gigafactory and everything has to happen on time. We're not going to go super crazy with the design of the initial version of the III. I do feel confident that we can make that happen in the second half of 2017 as long as we stick to those principles.

Great. And a question on innovation and releasing new features.

What did you learn from the dual motor as far as the timing of new releases and how that impacts demand and how you do that going forward? I know you guys are constantly innovating on the car, but does that disrupt demand at all and how do you do that, that you don't specifically do in the model years big advances?

This is a problem that we struggle with. It's really tricky because we basically have one car with variations. This would be much easier if we had different cars.

It's tough for us to announce way in advanced if there's going to be some new version of the car because then we are worried about starting the interim sales while people wait to see what it is. So it's a real tricky thing.

Then we also -- it's difficult to forecast the exact demand, since we haven't told people about the car, we really have to guess, like how many people want to the P85D? We have no idea. It's got a lot, it's got really a lot.

Then, it's, uh oh, we have too much demand for the P85D and now we've got to figure out how to do that. And then how many people are going to pick the next-general seat? As it turns out, also a lot, so we couldn't make enough seats. I would love to figure out how to be less stupid about this in the future.

One thing in particular that we are working toward is to be sure that we're really ready to meet the production demands at a much higher percentage mix as we announce something new or an innovative new feature. That is definitely a lesson we learned.

Yes, agreed.

Great, and my last one is on the storage side of the business. Can you just talk about any developments there?

We've heard some utilities looking for RFPs for utility-scale products. Are you guys at a position where you can start bidding on those RFPs or entering those RFPs? Just give us an update there? Thanks, guys.

You mean for stationary storage?

Yes, stationary storage?

For basically dry battery packs. We're bidding on a lot of RFPs already. Do you want to [ever on this, JB?

I don't want to go into a super amount of detail on this, but you are correct. Of course, there's a lot of interest and a lot of utilities are working in the space and we're talking to almost all of them. It's early stage of stuff and a lot of these projects are very far out since the procurement cycle for utilities is so long, but this is a business that's certainly gaining an increasing amount of our attention.

What we're going to do -- we're going to unveil some of the Tesla home battery or consumer battery that will be for use in people's houses or businesses, fairly soon. We have the design done, and it should start going into production probably in about six months or so. We're trying to figure out a date to have the product unveiling, but it's probably in the next month or two.

And it's really great. I am really excited about it.

Thanks, guys.

Ryan Brinkman, JPMorgan.

Hi. Thanks for taking my question.

Can you give us a sense for what you think your gross margin would have been in the quarter if not for the 1,400 deliveries were pushed into 1Q?

Actually, maybe better I say this, there were a bunch of things that coincided because we had a whole bunch of expedited shipping because even to make those numbers, we had massive overtime, massive extra shipping. And then the euro was also falling. If those things hadn't occurred, it would be somewhere in the order of 28%, somewhere around there.

Okay. That's helpful. Last question, I'll be quick.

Is there any additional color you can give us on just the cadence of sales and production throughout 2015 -- beyond -- I am curious why the deliveries are expected to be flat in 1Q versus 4Q, given that they should benefit from the push-out of those holiday deliveries? And why production is forecast down sequentially, given that the full year is guided up so much?

Beyond 1Q, what can you tell us in terms of when you expect the implied inflection to occur, in 2Q or 3Q? What the catalyst is for that? Whether it's a capacity bump up again or Model X or something like that?

Just to clarify, that estimated 28%, that's 28% excluding ZEV credits, so if you added ZEV credit to the top line, it would 29% or 30% or something like that. In terms of production from Q4 to Q1 being relatively flat, there's a couple reasons for that.

There are actually two fewer weeks of production in Q1 versus Q4. One is because we had to give -- we wanted to, and certainly so, gave people the first week of January off because they had been working over Christmas and New Year's and Thanksgiving in a lot of cases. So just to give people a break, we didn't operate the factory in the first week of January and also gave us time to do some equipment upgrades. And then there is also one fewer production week in Q1, so it's basically minus two weeks.

In Q1, we are focused on productivity improvement and laying a groundwork for higher volume in the remainder of the year. But obviously, you could do the math. It does mean there is going to be a fairly big scale-up as you get towards the end of the year.

And we had over 10,000 orders on hand so it's not a demand issue to be delivering the guidance number. We had a lot a cars in transit, thus we are, again, adjusting our global mix of deliveries.

A lot of cars in transit. It's crazy.

Thank you.

Patrick Archambault, Goldman Sachs.

Thank you. Good evening.

I just wanted to follow-up actually just on some of the comments you made about being less adventurous for the Model III relative to the X and playing at a little bit safer. Can you just give us a sense of what some of these characteristics and features are that you might have, at one point, been considering for the initial version that may be put in place for a later model upgrade?

We can't tell you that. Come on.

With the X, we had the falcon wing door, which is the first double-actuating gull-wing door, basically, or we call it falcon wing door. Getting that right and make sure it works really well isn't a gimmick but is a fundamental improvement in utility and aesthetics for the cars. It's extremely difficult. There's a reason that other people haven't done this.

Then the second row seats on the Model X are a piece of sculptural beauty. They are amazing. They are the nicest second row seats you have ever seen in any car ever. That actually might have been harder than the door.

There are some other things about the X that people don't know about yet, but those weren't driving schedule, which will be second row seats and the door.

Then going to Model III, I don't think we want to have, particularly at super-high volume, something that for this feature we lose one year of production. That's -- it would make more sense to just go with something that we know people are going to love, that's going to be incredibly beautiful and functional and amazing car. And then innovate in more avant-garde directions on that platforms with future iterations where we are not -- we can then put aside any schedule and volume concerns.

Understood. Certainly looking forward to seeing the X.

Have you guys said when -- is there going to be any advanced showing of it at any auto shows or anything, some of the more advanced prototype ahead of the launch that we should be looking forward to?

Because there are these different features that I mentioned, I'm being intentionally obtuse, we're not going to show it until it gets delivered.

Interesting. Okay, okay.

Switching gears a little bit, back on China, just on orders. I understand that deliveries have been significantly impacted by a number of the issues that you've described, but how have orders been trending in China?

Especially now that you've made some replacements on the Management side? You seem to have a solution well in hand that is being implemented to address some of the concerns, whether they justified or not. How have you seen the Model S order book track pre and post those issues?

Tom has only been in charge for a short period of time, but the trend is positive already. We see it improving every week.

There's some elementary things that we were missing before, like maps and directions, so the car didn't have maps and directions in China, which is important. Now it does. And we don't have the on-board music player working, which we will have soon. There's a lot of functionality that's just getting added over the software upgrades that are pretty helpful.

So yes, the trend is positive. I don't have any significant concerns about it right now.

It had been -- some had reported that orders had been coming in somewhere in the neighborhood of 100 a day, which obviously point to a pretty good annual run rate. Is that at least the order of magnitude that you were trending at and that you can get back to in the shorter-term?

The problem with last year was that we had a whole bunch of speculators that basically plan to buy large numbers of the cars and then resell them at a higher price, which is not something we allow. So it gave an inflated sense of demand in the beginning. It wasn't real.

I don't think we were at 100 a day at any time. That would sound like 50,000-plus cars just in China alone demand at annualized rate. I don't know what the source is.

Okay, that's helpful color though. Last one for me is just more of an accounting clarification.

In one of the pages, you talk about direct leasing impacting -- reducing both non-GAAP and GAAP profitability. We understand why it reduces GAAP profitability, we've actually addressed that a lot in this call, but non-GAAP, I was just wondering why that would be impacted?

Yes, because we still hold titles to the car and we haven't collected full cash on the car. And so we don't recognize those direct lease cars even in our non-GAAP financials. Pretty simple.

Understood. Thanks a lot guys.

But as I mentioned, we can always free up that cash by securitizing our internal leases or by getting a warehouse loan facility. So the important point is that our -- what I would consider our real revenue is actually higher than our non-GAAP revenue because of the internal leases.

Got it. Okay. Great. Thanks a lot guys.

Vehicles delivered to customers is really the key metric that I focus on. We don't give people a car unless they pay for it, so they paid for it somehow, and the average price per car is pretty obvious. That is really the key number.

All right. Thank you.

Rod Lache, Deutsche Bank.

I apologize if this has been answered. I'd had some phone problems here.

But I was hoping you might be able to help us with what you see as the run rate of sales for Model S right now and that bridge to 55,000? Should we look at the 40,000 deliveries, or maybe it's 46,000 if you annualized what you did and add in the delayed Model D? Is that a run rate? And then to get from here to 55,000, where is China now, what does it need to be, and what actually are you including for the Model X this year?

Even if our sales in China were zero this year, zero, I am still confident we can do the 55,000 cars. They won't be zero.

As far as what the mix is between S and X, it's really tricky. I wish I could tell you with accuracy but it really depends on how the production goes with the X when we start up this summer. Even small changes in that ramp can have quite a dramatic effect on X production.

Actually for the calendar year, because it is -- long-term makes no difference.

Exactly. And you could be like -- if we are producing I would say 800 Xs a week, and several weeks is several thousand cars. So it's really tricky to predict it from -- It'd much easier predict next year, assuming people like the car, that is where you start to see -- I don't know -- 40,000, 30,000, 40,000 leased, 50,000, call it 30,000 to 50,000 Xs next year.

Okay. Clearly up until now, as you've pointed out, you have been able to hit all these numbers without any advertising and marketing?

And no endorsements and no discounts.

Right. To get--?

We haven't paid anyone to pretend that they like our car. Very important point.

And no franchise dealers and all of these things that people had said that you might need to do, you have been able to do it without any of them. But I'm just curious about longer-term, to get to the volume objective that you are looking for this year and beyond, are all of those in your view achievable while avoiding the franchise dealer model? While holding back on advertising and marketing, and while in some cases even raising prices, for example, in Europe to adjust for currency? Are any of those impediments to the demand objectives that you have and would you modify the strategy in any way to achieve these fine numbers?

We're going to be okay on the demand side for this year. Maybe something changes next year, but we been the okay and I don't think we'll have to do a bunch of advertising or throw in the towel with the dealers or anything like that this year. Or discount the cars or anything like that.

In fact, I do want to emphasize that whenever you see a celebrity or some prominent person driving our car, they all paid full retail. There was no discount. We didn't give them the car. They are buying the car and they are driving it because they really believe in the car not because someone paid them to pretend that they do. So I've going to give credit for the people that have bought the car.

I do have a secret weapon on the demand side that probably start to deploy this year for demand generation. We'll see how that goes. It isn't totally necessary, but it could be pretty interesting and a good weapon against the dealers.

Okay. Just one last question I had, you mentioned in your letter that the margin was pressured half by revenue and half by cost factors. The FX part of this was pretty clear. There was a comment in here about deferred autopilot revenue. Can you maybe explain, maybe just elaborate a little bit on what you meant actually in that description of the margin variance?

That particular one, Rod, we announced several features that the autopilot functionality or hardware will deliver. Those features, although the hardware is in the car, some of them will get activated with software releases later this year. So based on the (inaudible) aspect of revenue for accounting, we had to defer some of that revenue into 2015. It's as simple as that.

Okay, and that variance was versus the 28% original objective or is that versus -- what was that comparison against?

That was -- yes, it's part of that because we had to figure out the accounting for it, work through the whole thing. As we deferred a significant amount there, that had an impact to our otherwise delivered car gross margin, that would have been--

It's on the order of 0.5% or something like that.

Yes, that's right.

Maybe 0.5% to 0.7% or something. But most of that deferral will be taken care of this quarter with the software release next month, which will add a bunch more functionality to the car. Right now, I'm very excited about the software release we have planned for next month. There's a bunch of features in it that are going to possibly affect the entire fleet and then of course we will add more autopilot capability.

That should be something.

Yes. It's a really, really good release.

Thank you.

Patrick, before we go to the next questioner, I just want to do a time check with you, Elon. We're coming up on the hour mark, we have several more questioners in the queue.

We can keep going.

Okay. All right, Patrick.

By 5:30, call gets [canceled].

Dan Galves, Credit Suisse.

Thanks. Good evening. I just had a question on the delivery guidance.

If you adjust that for additional in-transit vehicles, I'm just trying to get a sense of whether you feel like that's your best guess on your max production for 2015? Because my sense, coming into the year around 1,000 a week is you could produce a lot more than that. So I'm just getting a sense of what part of that is demand constrained and what part of is production constrained?

We are going to try to do a little better than the 55,000 number. So we're saying 55,000-plus, but we are going to try to do a little better than that.

But it is, as I mentioned earlier, it's really dependent on how the X ramp goes, that, that can quite a -- if it happens -- depending on how long it takes to spool out that could affect the delivered number quite significantly. Also when we say delivered, you've got to also factor in that there's a lot of cars on ships.

Correct, there's a gap between production and delivery time. And then we need to consider, there could be a disruption during launch of X and so when you are looking at the broad number of 55,000 over the year, there are things we need to consider through the year what happens.

55,000 is a number that we're pretty comfortable with achieving on deliveries. I was necessarily making a conscious decision to focus on productivity this quarter, not just on ramping production.

Production stability.

Yes, production stability. In order to get that efficiency, we need to be building it from a foundation for future growth. If we're just in helter-skelter production ramp, just trying to grow production numbers, it's really hard to get the productivity and fix the foundational elements.

So the conscious decision this quarter to say, okay, but we've got to improve our core productivity. We are running out of parking spaces (inaudible). Our Fremont plant is pretty big and it's hard to park so we need to get these productivity improvements in place so we can grow our production volume without proportionately growing headcount.

That makes a lot of sense. And then just one housekeeping question.

You put the chart at the beginning of the shareholder letter with a revenue guidance for 2015. Is there anything in there for trade-in sales, for used car salesman, and do you have any sense of what type of drag on gross margin sale of trade-ins will be?

There is a small amount of that. We are just getting into that business now and our goal is certainly not to make that same kind of money on our used cars.

But used cars will also affect the capital. We don't have any capital in them, really. So you have a turnaround in capital that's all -- so it's actually the used car margin is actually, its ROI base is extremely good.

And the dealers, too, make a lot more gross margin on used cars than new cars. That's not our intention, but the ROI is really good for us.

We're going to separate that out so we can see new car gross margin versus used car, service, and other things.

Which brings up a good point that, as we said towards the end of our shareholder letter, starting for 2015 financials, we're going to show our income statements slightly differently, where automotive revenues and cost of good sold is truly new car sales. And then we have services in other section of the income statement that has all of these other things including trade-ins.

We'll break it out so that you can see clearly what's new Model S gross margin, what's used, what's other things.

That's very appreciated Thanks.

Trip Chowdhry, Global Equities Research.

Thank you. Two quick questions.

We see a lot of similarities between Apple and Tesla, both companies go for perfection, performance, and design, but we don't see Apple making a $30 iPhone. I was just wondering, instead of focusing on Model III, and we just focus on say Model S and Model X, but make them even better? We just focus on increasing the range to say 400 miles, 450 miles?

You already have the Roadster, which is like 400 miles now. That would make (multiple speakers)

Not quite 400 miles just yet. The Roadsters are more like 360 but close to 400 miles with the upgrade. Capable of doing LA to San Francisco.

But the goal at Tesla from the beginning has always been to accelerate the advent of sustainable transport and to make electric cars happen much faster than would otherwise be the case. In order to do that, we would have to make lots of cars and we would need to make them a heck of a lot more affordable than the S and the X are today. Even with the Model III, though, it is a mass market premium car. It's not -- it still premium, but it's mass market premium, and it's at $35,000, it's above average price.

It's also not an either/or decision. We definitely will keep making S and the X better and will keep improving that platform, really, as much as the technology will allow. We'll go in both those directions.

Perfect, thank you.

Andrew Fung, CLSA.

Thanks for taking my question. The Gigafactory seems to be making some good progress in terms of construction. Could you provide an update on how the development of the battery supply chain is progressing? And perhaps any notable challenges or perhaps positive surprises that have occurred with that process?

Sure, I can take that one. This is JB.

So far we've been pretty pleased with the supply chain developments. We're spending a lot of time visiting more and more of the supply chain partners and understanding and learning about all those different markets. That learning is progressing quickly and we're getting a much more clear picture of exactly how we will achieve the cost reductions we have talked about.

I don't want to go into too many specifics on exactly what we have learned in which places. But I would say there is a lot -- maybe more incremental positivity on some of the commodities and some of the ways that we can secure and procure pricing on some of the larger commodity prices that go into the cell.

Great. Any sense of when you guys may announce additional either suppliers or partners for the Gigafactory?

We want to be a little bit cautious about doing that too soon. There's obviously a lot of work going on in discussion with all of those partners, but we want to be careful to make sure that all the agreements and decision on where that partnership is headed is very clear. So we will wait until it's really done and ready to announce.

Great, thank you.

Andrea James, Dougherty & Company.

Thanks for taking my follow-up. Why did you guys promise the Roadster 3.0 this year?

It's just a long-standing obligation we have. It's not something that economically is a win for us, but it's just an obligation to our early adopters of Tesla. We said we'd provide a significant upgrade to the Roadster and that's what we're doing.

It's okay. It's not a big thing one way or the other. It's slightly economically just [agitated] for Tesla.

If I read through on the range communication on the Roadster 3.0 and I just apply that same range gain to the Model S, I get a 350- to 400-mile range on the Model S by, say, 2017. Is that right -- is all of the gains there translatable?

It's difficult to put an exact time on it. 2017, probably not in 2017. At some point, yes. I don't know whether that's 2017.

It's not 2017. It might be, say, 2019 or 2020 or something like that. It's more the varying model. We can make the Model S go 400 miles today if we wanted to by just increasing the pack size.

Right, at the same pack cost, say give it, $22,000 pack would be 400-mile range in the next couple of years, but it seems that's a bit too aggressive?

The next couple years would be too aggressive. If you go five years out, that might be the case.

That's not a prediction. That's just speculation. I'd say it's not two years, but it might be five years.

And I feel like we should just generally ask your thoughts on oil, although it's a pretty broad question, so maybe just general thoughts on oil, but then more pointedly what it does to the residual value of the cars? And also maybe the corresponding offset with lifting the value of the ZEV credits as more gas guzzling cars are sold? I don't know. There you go?

As far as oil is concerned, I'm not an expert on the oil business, but obviously fracking has naturally increased the available reserves worldwide. Fracking is also more expensive than standard oil drilling, so there's a cost of doing it that sets a floor on fracking, but it's really anyone's guess as to what happens with oil prices long-term.

Demand is certainly going to increase, how will the supply, grow to match that? But for sure, oil companies are going to be scaling back their investments in new oil fields massively with the low price of oil today, so I would expect that.

But as it translates to the impact on demand for your vehicles and then also the residual value of those vehicles?

It certainly has some effect, but I wouldn't say -- it's not a dramatic effect. I call it a moderate effect. It's not changing any of my projections. Put it that way.

Thank you.

Thank you. This ends our Q&A session today. I'll turn it back to Management for closing remarks.

Thank you, everyone, for joining us a few hours later. Obviously, that was important to get the launch off. Thank you and good night.

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.