特斯拉 (TSLA) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tesla Motors Incorporated third quarter 2015 financial results Q&A conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Mr. Jeff Evanson, Head of Investor Relations. Sir, please begin.

Okay. Thank you, Liz, and good afternoon, everyone. Welcome to Tesla's third quarter Q&A webcast. I'm joined today by Elon Musk, Tesla's Chairman and CEO, JB Straubel, our CTO, and Deepak Ahuja, Tesla's CFO.

Our Q3 results are announced in the shareholder letter at the same link as this webcast. As usual, this letter includes GAAP and non-GAAP financial information, and reconciliations between the two.

During our call, we will discuss our business outlook, and make forward-looking statements. These 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 Form 10-Q filed with the SEC. And now, Liz, let's go to the first question, please?

Sure. I can probably -- (multiple speakers)

Oh, do you have some -- ?

I can say, make some comments.

Actually, Liz, we will have our CEO, Elon make some initial comments. Go ahead, Elon.

I just wanted to note that we have made two very significant hires. The first of which is Jason Wheeler, he will be our CFO starting next month. Deepak and Jason will be working closely together for the first few months to have a smooth transition. And once again, I would like to thank Deepak for his [awesome] contribution to Tesla.

Thank you, Elon.

And so, Jason comes to us from Google, where he was basically the number two finance guy at Google, responsible for their global finance function, and just thought he was a super smart guy, and really understood what we were doing, and was like a great cultural fit to, with the company. So I think that's going to be great.

And in addition, Jon McNeill has joined as head of Global Sales and Service. John is the former CEO of Enservio, has been named the most admired CEO in the small and mid-sized company category. In fact, I believe this is the first time in maybe a decade or more, that John actually has not been head of the company that he was working at.

So and before Enservio, he co-founded Sterling Collision, which where he was able to reduce industry repair times by 90%. So the average repair time went from 18 days to less than 2 days, while growing the business at 40% a year. So I think Jon is an awesome addition to the team as well, and he is actually, he has been doing great. He has been working now part-time at Tesla for a few months, and just started full time, and has already gone a lot of good. So I'm pretty excited about those two people joining the team, and we expect to have some additional announcements in the months to come, as we add bench strength to the Tesla management team.

Okay. Thank you, Elon. All right, Liz. Why don't we go to the first caller, please?

Colin Langan, UBS.

Great. Thanks for taking my question. In the press release, you seemed to address it a little bit, but there has been a lot of chatter about cancellations for orders for the X. And I think the press release has Signature series, is that across the models, and how should we think about the different versions of the X rolling out over the next couple of quarters?

Want to answer that?

I don't think there has been anything fundamentally different. I mean, so far on the Signature Series Model X, we have seen a much higher, or a higher conversion rate than we had seen on the (inaudible) when we launched S. So overall, the demand for the X, after the launch of the X, and has been higher. So we don't see any fundamental issues.

Yes. I mean, as we talked about before, really the main thing with the X, is just getting up production. We're making steady progress with each passing week. Actually seven days a week, every day I get an update on manufacturing progress, and what the issues are, and we see no fundamental issues on the production ramp. It's just a question of how quickly we can solve each issue. And they are really down to the little things, like the placement of the seal on the door, and whether that results in the bright trim alignment being correct, this is quite nuanced. So we feel very confident of being able get to [several hundred] vehicles per week by the end of year.

Okay. And can you give an update on stationary storage? Is that still trending to your target of $[3] billion to $[5] billion by 2017? And that, I think the release mentions, that there is some institutional orders. I mean, are there any noteworthy orders that you'd want to call out on the storage side, that we should kind of look at as being big drivers? And are you still confident in your 15% gross margin for that?

So that was like a whole bunch of questions.

Sorry.

The -- with respect to stationary storage, I mean, that has gained sort of a production limited thing. So we are trying to scale our production as much as possible. I mean, we've -- by almost any metric where by -- if we imagined the most, we could possibly make in 2016, we've already sold out of that.

Or at least, if you were to take even a small fraction of the number of people that have placed orders, and assume that those orders are valid, even if a small portion of those were valid, we would be sold out of all 2016 production, and be well into 2017. So it's really, mostly about predicting our production rate, and we expect very dramatic increases in the stationary storage production. But the reason I feel a bit cautious about giving exact estimates is that when you have an exponential increase, the exact calendar window over which the -- that you place, that exponential, has quite a big impact on the numbers. So and in fact, in general at Tesla, I want to be a little more cautious about giving quarterly numbers, particularly when we have very dramatic ramps, like the example, is with the Model X.

And you can imagine, if you have strict calendar windows, and you place them over the beginning of an exponential -- or slightly to the right, or slightly more to the right, the actual differences are quite dramatic. So like you know where it's going to end up, but not what it looks like in that rapidly changing [esco] situation. Yes, so.

And on the margin side, is it still on target? And thank you very much for taking my question.

Sorry, in the -- you're breaking up a little bit -- on the margin?

No, the gross margin, is it still at your -- are you -- is it still trending to the [15]% target I think you mentioned on the last call?

Oh,15%? Yes. Yes, I don't think there was going to be any problem meeting a 15% margin target. But obviously, the margin improves as the production ramps up, so yes.

Yes, I don't know if we want to discuss the specific margin targets, but it should be in excess of 15%. That is our internal target.

Yes. I mean, yes. Once you get away from the very early stage of production, I think long-term margin of 15% is no problem.

Okay. Thank you for taking my questions.

Liz, next call, please?

James Albertine with Stifel.

Great. Thanks for taking my question, and good afternoon. Just a point of clarification first. On the announcement of the 40,000 vehicles that you've rolled the autopilot feature out to over the air, can you just clarify, once it's rolled out over the air, is there then a point at which the consumer has to determine to spend -- I think it's $2,500 to activate it? And is there any detail you can provide us on those that are paying to activate the autopilot feature at this time?

Most people who actually ordered the car, actually ordered it with the autopilot convenience features. So the autopilot safety features are default on -- in all vehicles. This is automatic emergency braking, side collision avoidance, forward collision warning, that kind of thing.

The convenience features like autosteer, autopark are $2,500, but most people who have actually already ordered that. So those that haven't ordered it, can actually turn it on for -- it's actually slightly more if you get it after the fact -- turn it on for $3,000. And that something that we will be allowing people to do at some point in the coming months. Sort of like in-app purchase, I guess. Yes.

Okay, great. And then, I wanted to ask a question as it relates to -- now that we are past sort of the -- as I understood it the peak spending period in advance of the Model X launch, how should we think about capital expenditures, and our cash flow models for the fourth quarter? And maybe, it sounds like you have reiterated the positive free cash flow guide you had originally stated earlier this year. But just some thoughts as it relates to the cash flows in the fourth quarter would be great?

Yes, I mean, Q4, we are still in the peak of our Model X investment. A lot of our equipment and tooling is being paid off in Q4, as our production are proving out their production -- as our suppliers are proving out their production tooling, as well as the equipment is getting installed and getting signed off in our factory. So Q4 is going to be a peak for Model X. Clearly 2016, our CapEx should be less than 2015, and then we will provide you further guidance on that in the next earnings call.

Much appreciate it, and -- oh, sorry go ahead.

So I was going to tell you, we do have a very strong push towards free cash flow. I mean, that is, our aspiration is to be positive cash -- I'm sorry -- this is an aspiration, not a promise, but our aspiration is to be positive cash flow in Q1.

Understood. Thank you for that color. Deepak, best of luck, and we look forward to meeting Jason, when he is fully ramped and onboard.

Thank you, James.

Take care.

Adam Jonas, Morgan Stanley.

Thanks, everybody. Elon, just thinking longer-term here. Assuming Tesla establishes itself as a leader in autonomous transport, do you see a business case for selling autonomous cars to ride-sharing firms, or can Tesla cut out the middleman and offer on demand electric mobility services directly from the Company's own platform?

(Laughter) I think we would have to say no comment.

Elon, it's kind of unusual for you to punt on strategic questions of a long-term nature. Is this a dumb question? (Laughter). Or a funny question?

I think it's quite a smart question actually, but still no comment.

Why? (multiple speakers) Okay, I won't antagonize (laughter). Let's move on. It's just, it's just odd because you normally -- I've never heard you punt like that. That's all, but in any case.

You know,

Is it because of a competitive sensitivity, or is it because the concept itself is just to in flux?

I think there's a right time to make announcements. This is not that time.

Fair play. All right. Can I ask one on autopilot (multiple speakers)?

And nor is our strategy fully baked here. So for us to state what it would be -- it's not fully baked. So there's no -- we would prefer to announce something when it's -- when we think we've got the full story understood.

So saying, it's not fully baked, does it -- implies there's something in the oven, but just?

Okay. We kind of need to move on (multiple speakers).

Let's move on. JB, all right, let's go to JB, real quick then. Autopilot, can you share any early data you might have collected with us, post the automated driver software update, how many miles have driven with autopilot engaged? How many accidents prevented, things like that would be really interesting and I think illuminating? Thanks, guys.

Well, I don't think we want to share any particular details on specifics around user feedback on that, but certainly people are using it in a variety of situations. This has gone out to the whole fleet of autopilot enabled cars, and those are racking up miles extremely quickly. At this point, I don't have the exact number at the tip of my tongue, but it's -- I believe several hundred thousand miles of driving.

It's a [million] a day I think.

It's almost million a day of cars that have autopilot hardware. So I think, but the early data -- this is early data -- I want to emphasize -- is that it is very positive. So we are aware of many accidents that were prevented from autopilot, and we are not aware of any that were caused by autopilot. But this is still early, and but it's a good indication. So it appears to be quite beneficial from a safety standpoint, and I believe some of our customers have posted videos to this respect.

Excellent. Thanks, everybody.

Our next question comes from --

But I do want to emphasize, we discourage -- there has been some fairly crazy videos on YouTube. We are -- this is not good. And we will be putting some additional constraints on when autopilot can be activated, to minimize the possibility of people doing crazy things with it.

Joseph Spak, RBC Capital Markets.

Thanks, good afternoon. I guess, it's been a while since we've heard anything about it, so I just want to get a better sense of how you feel you're set up to deal with potential issues on the cars -- on the hardware side, where a fix can't be [OTA'd] to the vehicle both -- when you look at the coverage, at least in the US, the ratio of service centers to stores and galleries is still trailing a little bit. So how does that build out look going forward, and how would you potentially handle a hardware situation at this point?

I'm not sure, I fully understand your question. So you mean, can you give an example of -- ?

If you had a hardware recall for a -- ?

Like, just like, you mean like -- sure. I mean we have handled recalls in the past with our service team. It's gone quite well. In general, we try to be proactive. So if we -- without -- well before we are forced to do a recall, we proactively try to fix things in the cars that we think might in the future be an issue.

And the customer happiness is -- as measured by -- the really the key question that I think people should be concerned about which is, will your next car be a Tesla. That is like the key question on Consumer Reports, 97% of respondents said that their next car would be a Tesla. Frankly, this is the only question people should care about.

Okay. And then, thanks for that. One more, I guess, sort of hardware question. As it relates to autopilot, where this is clearly stage one, and you could add sensors over time, and maybe some new features as well. So how do you think about managing the brand and the vehicles, when that happens? Because as the sensor's suite changes, it can create two potentially different experiences when -- and I guess, a little bit more -- the reason I think it's a little bit more of an issue for Tesla, is just you don't have the strict sort of model year nomenclature. So you're not -- so I guess, I just wondered how you think about that? And maybe some thoughts on how, on your current sensor suite, and how you see that evolving as well?

Okay. So I think that's is a pretty open-ended questions, but we have -- plus we have just continuous improvements. So every week, there are approximately 20 engineering changes made to the car. So it's not really -- it's not nearly as discreet as you're alluding to with other manufacturers, they tend to sort of by delivered in together in a model year. In our case, it's a series of rolling changes, so model year doesn't mean as much.

There are cases where that step change may be a little higher than normal, as for example, with having the autopilot, camera, radar and ultrasonics. But we try to actually keep those step changes as small as possible. And so, that's essentially the kind of questions that I get is from friends is, hey, when should I buy a Model S? And my answer is always right now, because -- and they say well, aren't you going to make a better one in six months? And I am like, yes, of course. But if their goal is to only buy a Model S when there aren't significant improvements happening, then they will never buy one.

Okay, Liz, why don't we go to the next caller?

Patrick Archambault, Goldman Sachs.

Great. Yes, thank you. Good evening. A couple of questions, just one on the battery side. I think a lot of us were surprised at the GM Analyst Day, they put a slide up, which said that they were working on a battery that was $145 a kilowatt hour. That probably did not include the [pack] cost. But even adjusting for that, that seemed like a pretty low number. And I don't know, maybe JB, how do you guys react to that presentation, is it realistic? I mean, are you worried about the threat of a large form factor battery being the same cost of yours, within a one to two year time frame would be my first question?

Well, we definitely read the report, and we are not terribly concerned about it. I think also, there was a lot of confusion in that particular report, and some of the comments following about cell price versus pack cost. And in general, we're quite comfortable in our position with the type of cells and the form factors we are using, and we think that's going to be the best cost position and cost road map in the future.

And so -- (multiple speakers)

I mean, we are constantly agonizing about the cell costs and pack costs, and we don't think anyone is on a path to be even close to us. If they are, I would be the first to congratulate them.

Got it. Well, that's very helpful, and quite reassuring to know. My second question just was on -- in the press release, you talked about orders having increased 50% year on year. And maybe just a little color on that. I mean, that's obviously impressive, given the model that's been out there for a few years. Just any additional color on regional breakdown, or what that's being driven by?

We haven't provided that in the past. Other than -- let me, I think the way to put it is that Europe and APAC were really strong and --

And so, was North America.

North America has always been strong, and with Europe and APAC being strong too, we were at 50% year-over-year.

Yes, I'd maybe, quite frankly, can put it the other way around. I think we were actually relatively weak in APAC (multiple speakers) and mostly weak in most countries in Europe. And we're fixing those fundamental weaknesses, by ensuring that we've got a good supercharger infrastructure, a good service center infrastructure, that any perceptions about the Company are addressed. And in a lot of places, it takes time to both build consumer confidence. They need to hear, they need to hear about Tesla a lot, before they are comfortable making a significant asset purchase so.

Yes, it's just a matter of the execution by the team, brand awareness, and our expansion of our global network.

Yes, so it's -- but I wouldn't say it's not like really, I mean, all regions have improved quite significantly.

Yes.

Got it. Helpful. If I could squeeze one last one in really quickly. On the topic of autopilot, there were some reports of the car like taking accidents and stuff when it wasn't told to, and things like that. And I don't -- and I just didn't know, if there was much validity in any of that stuff? Have you guys -- are any of these things true, because you sound very confident about the technology, yet initially there were some reports of errors and things like that?

So I don't think it should be a surprise that there were reports of errors. We described (inaudible) as a beta release, and that the system will learn over time and get better. And that's exactly what it's doing. So I think it's exactly what we described is occurring, and the system is getting better with each passing week. So I would expect that learning to accelerate, and for it -- and I think it'll start to feel quite refined within a few months.

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

Rod Lache, Deutsche Bank.

Hi, everybody. I had a couple of questions. Just first on Model X. I just wanted to confirm, did you say you thought you could get a few hundred produced and delivered by year end? And just so that we understand what's been happening here, is it just the seat at this point, or are there other unique challenges that you think prospectively affect the ramp of the vehicle?

No, to be precise, I said [several hundred] per week, that we expect to reach the production rate of [several] per week next month.

Okay.

And it's difficult to predict the exact number that will be developed, because of what I was mentioning earlier of like -- we are on kind of an exponential ramp. So exactly, one week this way or that, can actually make a significant number -- a significant impact in the absolute number of vehicles delivered. We do feel comfortable at this point of reaching [several hundred] per week production rate before the end of the year, i.e. next month. And the issues are a bunch of little things. Door seals right now is a challenge, for example.

The monopost seat in the second row is still a challenge, but less of a challenge. It's not the gating factor. They're basically going through a series of constraints, and those constraints can change from one day to the next. But the important point is that we don't see any fundamental obstacle to achieving the production rate of [several hundred] per week sometime next month.

Okay. And it sounds like the target that you laid out, the 1,600 to 1,800 a week, it sounds like you might think that that's achievable in early 2016 then, and I wanted to confirm that. You didn't provide CapEx for next year. But also if you could just confirm is that, what you are sort of thinking you need to achieve that free cash flow breakeven?

Yes. We I think it's likely that we can be in that 1,600 to 1,800 range per week range in Q1. I mean, I'm guessing we will probably be towards the lower end of that range, but then maybe exceed that, behind of that range towards the end of next year, if things go well. I mean, there are some caveats there, but it depends on what macroeconomic conditions are like around the world next year. But right now, we do see that 1,600 to 1,800 per week on average as occurring in Q1.

Great. And just lastly, if I can slip one last one in. You ramped up your CapEx, presumably in part to achieve some increased targets for Tesla Energy. Could you just give us some high level thoughts on what you might be able to ramp up to, for that business line maybe in 2016?

Well, the CapEx requirement for Tesla Energy are not that significant as a percentage of the total for (inaudible).

Yes. And I think, just to provide a broader perspective around the CapEx increase, so for -- let's talk 2016. The CapEx in 2016 is primarily for Model 3 and the Gigafactory. As we are looking at [2016] and beyond, it's not necessarily for much of the capacity required in 2016. Clearly, there is a little bit of CapEx there for Tesla Energy, but that is not the driving factor. Much of that CapEx has been put in place by end of this year for our needs next year.

Okay. Great. Thank you.

John Murphy, Bank of America.

Good afternoon. Just a first question on insourcing. I mean, obviously, guys are pulling the second row seats in-house for the Model X, and there has certainly been some acquisitions and work you've done on forging and casting. Just curious, as you look at production going forward for the Model X, and even the Model 3, if there would be opportunity to in-source more parts to really kind of solve the issues you're facing with some of these suppliers? And as you think about that, how you make that decision around cost and capital intensity? And if you get that right and can in-source more, if you could potentially increase the cadence of your product introductions and the product launches themselves?

Yes, I totally agree with that. That's exactly -- that's the reason -- like we're only actually in the whole history of Tesla only done one tiny acquisition, and that was for Riviera Tooling in Michigan. And we are planning to use that as a hub to recruit a top tool and die manufacturers, or basically tool and die engineers to Tesla Michigan. And with that exact goal, which is how do we reduce our critical path to market -- our time to market for new products, because we ended up being constrained by basically tools and molds.

And anything we can do to tighten that time frame, either organically or with an acquisition is a good thing. I mean, the great thing is that $10 million or so that we spent acquiring Riviera was less than what we spent on expediting our stamping dies (laughter). So it's like a no-brainer, and we want to do that in general. We're looking at all of our critical path items and saying, okay, how do we execute faster on, and reduce the critical path for new product introductions, obviously, with an eye toward Model 3, and making sure that Model 3 happens as soon as humanly possible.

But is this significantly just around tool and die, or are there other parts, like I mean, where you can actually be doing all the seating internally, or start doing -- thinking about wiring harnesses or stuff that would be that intensive, and as far as in-sourcing?

We actually are -- we have substantially in-sourced the seats at this point. So Tesla is producing its own seats. So yes, that is actually something we've already done.

Okay. And then just a second question on the fourth quarter, you are talking about 17,000 to 19,000 units being delivered. I mean, is that sort of low-end and high-end of the range really dependent on the ramp on Model X, and you sort of see 17,000 at the low end, as sort of base with your Model S? Just try to understand the range, and sort of how we should think about mix in the fourth quarter?

Yes, the big variables are exactly in which week, do we -- are we able to really spool up Model X production. And a few weeks, pretty much one way or the other, has quite a big impact on Model X production. And then, of course, we still have to get those cars delivered. So and at the end of the year, there can often be logistical challenges, because it's like Christmas and New Year's, and all the logistics channels are jammed, and people are not home. So and there can also be adverse weather events like blizzards and things. So that's what -- it's the logistical challenges at the end of quarter, and when exactly does the -- and what exactly does the Model X production ramp exponential look like, that's what introduces the uncertainty.

Okay. So we shouldn't think of the 17,000 as sort of a base level for Model S. There's a lot of variables that are going in here, in addition to the Model X ramp rate? Right?

Yes, end of quarter logistical challenges around Christmas always throws -- is a bit of a wild card.

Got you. Okay. And then, just lastly real quick, I mean, with everything that's going on with Diesel gate, obviously your ZEV credits might be a lot more desired by a lot of folks out there. I know you guys are talking about no ZEV credits in the fourth quarter, as far as the sales, or actually at all, for sales of gross profit. But I mean over time, I mean, is there an opportunity to maybe sell them at a much higher price as they become available? I know it's not a big part of the business, but I mean it does seem like an opportunity to maybe in the short run to make a lot of money on some increasing demand?

I mean really depends on what happens with zero emission vehicle regulations over time. You'd think, given Diesel gate and all that, that there should be a tightening up of zero emission requirements like -- but we are not seeing that yet. Frankly, the -- we do not think that the California Air Resources Board as being sufficiently stringent in this regard. I mean, if we can't sell their credits, then it's obviously not -- the regulations are not strong enough.

Okay, great. Thank you very much.

Dan Galves, Credit Suisse.

Hey, thanks for taking my questions. You made a lot of changes to the plant in Q3. Do you have any metrics to share with us, in terms of the improved production and efficiency, and how does it make you feel about kind of the ability to hit production numbers and margin in 2016?

Dan, I am not sure what changes, are you referring to in Q3?

Well, what you guys did during the shutdown, to final assembly and the body shop?

Well that was essentially at that point, to put an additional capacity in our -- for Model X, and it sets us up for our production needs in 2016. Overall, clearly, we will provide further guidance in the next call, but our goal is to keep on working on manufacturing cost reductions. On S and X, we see the opportunities, and the team is going to be focused on that, while also working on Model 3. So we're truly a multi product company, and working on several directions.

Okay, great. And then, just one question on autopilot. I mean, a lot of automakers talk about mapping as a key constraint to getting to higher levels of vehicle automation. Does your, does the experience of miles been driven by Model S autopilot help you guys in that regard at all? I mean, are you planning to come up with your own mapping?

I think this is -- I think it's [not] the time for future product announcements -- in general, this is not meant to mean anything. So in general, we are going to punt on making product announcements in earnings calls.

Okay. Maybe just to squeeze in one more. The newer drive unit, how is kind of the quality level then on that, versus I think you had kind of a bigger drive unit that you used initially for the first couple of years?

Right now, we're actually very happy with the quality of the drive units. Internally, our goal -- we changed the goal of the drive unit endurance from being approximately 200,000 miles to being 1,000,000 miles. Just basically, we want drive units, that just never wear out. That's our goal, and I think we've made really good progress in that direction. So the drive units going out now are, and for the last several months have been excellent so.

Yes, you should probably note that -- I mean, we've also made improvements to the large drive unit, and those issues were really limited to early population large drive units. So today, we hold the same standard on both units that are being built.

Yes. Exactly. There was like this one period of time where we had -- I mean it was like we're getting into the weeds, like when transitioned from manual -- just before we transitioned to automatic [resubjection] and into the spline of the large drive unit, we had variation in how much grease was put into the spline. And if not enough grease was put into the spline, it would have premature wear. So that's like one example, but other than that, the large drive unit have been great.

Andrea James, Dougherty & Company.

Thanks for taking my questions. A year ago, you guys have been targeting [20]% to 30% gross margins by around this time. But clearly, the world changed on you, with the currencies and so forth. So what's the right way to think about gross margin over the next 18 months?

Well, we --our goal is to steadily improve gross margin, and hopefully exceed 30% on the S and X vehicles within 18 months, hopefully sooner than that. But it does require quite an intense effort to -- for every fraction of a point of gross margin. So and that does seem (inaudible) currencies, unless there is some radical shift in currencies that happens again. So the -- if -- according to our plans at least, we would exceed 30% gross margin within 18 months on the S and X line.

Okay, and that would be -- (multiple speakers) go ahead.

It's a combination of various initiatives in the Company, from material cost reductions, manufacturing, production efficiencies, and labor hours per unit reduction, combined with the economies of scale that as our volume goes up, our [cost allocation] is more efficient, which brings our labor and overhead costs from a per unit basis down. So clearly, as we act on all of those directions and add volume, we see a path that we can achieve that. And it's a lot of hard work, and we need to do it.

Okay. Maybe you'd prefer if the Street kept the model a bit low, and let you guys get there? (laughter)

Yes. Absolutely.

Yes.

And we're describing, this is our goal, and we believe we've got a plan to get there. But we -- there could be unexpected issues along the way that prevent us from getting there. But I think we will certainly be better than where we are today.

Yes.

I mean, that's quite certain.

Assuming constant dollar and some of these external --

Yes, yes.

And just two more, when -- can you give us -- ?

Andrea, we really got a lot of people that want to ask questions yet, so maybe just one more?

Just one more, okay. So I guess, I will just take a step back. It seems like in the Silicon Valley centric world view, autopilot is where driving is going, and all the cars going to be driving themselves. But I just really want to know, is that Tesla's view? And how central is autopilot to your long-term revenue profit, and vehicle electrification goals?

Well, I am actually on record as saying that, I think that all cars will go fully autonomous in long-term. I think it will be quite unusual for -- to see cars that don't have full autonomy, let's say in, before new car production in the 15 to 20 year time frame. And for Tesla, it will be a lot sooner than that. So I actually think in the -- at the point at which cars are being made that have full autonomy, that any cars that are being made that don't have full autonomy, will have negative value. It will be like owning a horse. We're not -- you're really owning it for sentimental reasons (laughter).

Thank you.

Emmanuel Rosner, CLSA.

Hi, good afternoon. I wanted to first ask -- just put a finer point on the fourth quarter. So deliveries of 17,000 to 19,000 units seems like not a huge contribution from Model X within this. How do you ramp up the Model S deliveries sequentially so fast? I mean, it doesn't look like in the -- I guess, in the Model S history, we have seen sort of such a sequential increase in deliveries. Like so, what are you doing, I guess, better in these particular quarter?

And it's not as big as they leap, as it might seem from Q4 to Q3, because there is a whole week missing from Q3, and we continue to ramp the rate, all the way from beginning of Q3 through the end of the year for Model S. So it's actually not too much of a stretch, or less than a stretch than it may seem. And certainly, we've had much bigger sequential jumps before than this. It's worth noting that 2015, in 2010 Tesla was delivering 500 cars per year. We now deliver 500 cars in just over two days.

Okay. That's helpful. And then, just on the -- again, a final point, just on the Model X for this particular quarter. It sounds like your -- have you actually started production? It sounds like you're still working out some issues there. And what has essentially surprised you, as you sort of like ramped this up, which is causing maybe the actual production in larger numbers to be maybe slightly later than it would have been?

Yes, the thing about a car is, because there are several thousand unique components in a car, the production can only move as fast as the slowest component. So even though 99% of the Model X is ready for high production, less than 1% of the parts are not, but those are what drive the rate. So that's the thing that makes a car -- vehicle production really challenging, and the vehicle ramp really challenging. And you don't know in advance, what those issues are going to be, or you would do something about it. So that's the -- yes.

And then, you can basically think of like the production will move as fast, as the least lucky supplier that we have in our network. So yes. Most of -- there are sort of fires, floods, issues of various kinds around the world. And so, yes, several thousand parts -- in fact, if you go down to tier 2 and tier 3, several thousand suppliers, it moves as fast as the [thousandth worst] supplier.

Ryan Brinkman, JPMorgan.

Hi, good afternoon. Thanks for taking my question. Just maybe going back to the Diesel gate issue again, but from a bigger picture perspective. I'm curious what impact you see to the electric vehicle market from these revelations at VW. Could it increase the demand for electric vehicles to your benefit?

Does it maybe make non-electric vehicles more expensive to produce, to truly comply with the emission regulations? Does that help the Model 3 be more cost competitive? I'm just curious what impact you see overall to the industry, and then to Tesla specifically?

Well, I mean, the -- this really shines a spotlight on the whole emissions testing process. And I mean, it's now obvious to consumers that gasoline -- and well, especially diesel, but also gasoline cars have real-world emissions that are substantially greater than what's experienced in the test, when they go through testing. And I think that -- what one would naturally expect from this is that regulators will no longer turn a blind eye to these things.

And so, the cost of producing gasoline diesel cars that actually meet the legal emissions requirements is going to be quite a bit higher. So I would expect the car companies to accelerate their plans for electric vehicles, which is great. And there might be some near-term benefit to Tesla, but I mean thus far, we haven't actually seen it, but there might be one.

Okay, great. And then just last question, I understand that deliveries for the Model X initially are clearly a function of how many you can build, given your large backlog of orders. But in trying to estimate what demand might look like more medium to long-term, is there anything more that you can say now, or that can be shared about the pricing of the vehicle beyond Signature series?

Well, just what I've mentioned publicly, which is that we expect the similarly equipped Model X to be no more than $5,000 greater than the price of Model S.

Colin Rusch, Oppenheimer.

Well, thanks so much. Can you talk a little bit about the acceleration in the ramp at the Gigafactory? What are you seeing at this point, in terms of your ability to fully accelerate in 2016, and when you think we might see cells coming out of the factory and into cars?

Well, in particular, as we mentioned, we have accelerated the production of Tesla Energy products at the Gigafactory. So that's what has started just recently there, and that was quite a bit ahead of plan. That's happening in a separate section of the factory, from where the cells will be produced.

But also as we discussed, we do expect that cell production will start up in the second half of next year, which is again a little bit ahead of plan. And some of those cells would initially be allocated towards Tesla Energy products. And we still are targeting around 2017 for the first cell production that will be going into vehicles, and into the Model 3. So that remains on target.

And then, just in terms of the dynamics around leasing, are you seeing any real meaningful changes in terms of overall lease take rates, or a change in ownership kind of dynamics at this point?

Yes, we are seeing a slight increase in the lease take rate in North America. And as we indicated in the letter, that increase has been fully consumed or taken up by our bank leasing partners, rather than Tesla direct leasing. So whether we do a resale value guarantee or leasing, from our, perspective it's no different, and if it's a consumer preference, so there's nothing deep or too significant that we are seeing in that trend.

Brian Johnson, Barclays.

Yes, kind of three quick questions, or two quick ones, one more philosophical. First, again on the 4Q, it -- you talked about building up finished goods inventory. We don't have the final numbers yet. But for the last quarter, production outpaced deliveries, and you're guiding to that 4Q. So what's going to be different, in terms of hitting that ramp up on deliveries for Model S in 4Q vis-a-vis drawing down that inventory?

You are referring -- so for Model S?

Yes, for Model S.

Yes, I mean, as we indicated in the letter --

In the letter, we were carrying higher finish goods inventory in transit at the end of Q3 to support those higher deliveries in Q4. And it's the draw down of that extra inventory that allows us to do that. Our ending inventory at Q4, is going to be no different than what we've had a few quarters back. So it's still a fairly good level to support our all of our marketing and sales and service activities. So overall, the increase is demand-based, and it's fully doable.

And -- (multiple speakers)

Yes, go ahead -- (multiple speakers).

And to clarify just the Model X pricing, is that based on a range and features, or is it just based on battery size, the $5,000 difference?

For a comparably equipped car with regular features.

Okay. And so, equipped would mean battery or range or?

Yes, yes, with the same battery and number of seats and that kind of thing.

Yes, and final question. And maybe this is one for Jason, Deepak. On conversation if, autos are a very capital intensive business. I mean, as much as you are pursuing a different model on the battery side, it looks like there's a lot of capital going into tooling, and all these complicated mechanical things, not to mention service. As you kind of think forward three years, is that more or less the way you're going to spend capital, or is there anything you could do to kind of be more asset light in the process?

I think, stepping back, maybe the better way to look at it, is that at Tesla, our CapEx spend for what we are achieving, in my mind has been really efficient in the industry.

Brian, and it's worth noting, that Deepak has spent a huge part of his career at Ford. So you have a good basis for comparison.

Right. And so, as we look at every year, and as we add incremental capacity and the CapEx related to that, we are continuing to increase on that efficiency, in terms of CapEx dollars per unit of production. So fully agree, this is an asset intensive business. And the key here, in terms of return on investment is how efficient we are with that capital. That's what we are focused on.

Yes, absolutely. We certainly believe in capital efficiency, and getting better with that over time. But we also believe that companies both build value by doing hard things, not outsourcing those hard things to other people, because then they deserve the value.

That's the key point.

Brad Erickson, Pacific Crest.

Great. Thanks for taking my questions. I guess, consistent with a lot of your commentary recently, you called out in the shareholder -- just wanting to emphasize quality on the Model X. And it sounds like it's warranting a little bit slower ramp here in the near term. With what you have gone through over the past few years in bringing this car to market, does this change your thinking at all over the longer term, when you think about the pace at which you'll bring Model 3 to market, relative to longer-term targets that are out there?

I think we're still -- aiming to have Model 3 in about two years. In fact, the cadence of future products should improve, as we have more resources to shorten the critical path on things -- like I mentioned earlier, like stamping tools, and molding dies, and things that tend to drive our schedule. Because from the point at which the car is designed, it can take almost two years to get fully tooled up. That's seems like a crazy amount of time to us, and but we want to try to reduce that significantly.

Got it. Thanks.

Ben Kallo, Robert W. Baird.

Thanks. Elon, could you talk a little bit -- as you guys have increased your sophistication around the market, what you think the addressable market is for the S going forward? And then, could we talk a little bit about getting to 20% or above gross margin on the X, what kind of volumes we need? And then third, can we touch on the energy storage industry? One thing that I hear a lot in the marketplace is that it is a commodity business. JB, could you touch on that, and anything you're seeing there? And Elon, last time on the call, you threw out some pretty big numbers for energy storage (multiple speakers -- laughter).

(multiple speakers) we talked about here

And I don't think that people really gave you a lot of credit there, so could you just talk about what backs up those numbers?

I mean, the -- I think it's just basically if as we mature in various markets around the world -- and then it's always the question of, how long does it take to mature in these markets? Some markets are a lot harder to solve than others. And then, there's also macroeconomic conditions, will there be a recession, or not will there be a recession, but when will there be a recession. And so these, will obviously make a difference.

But I mean, I think in the long-term, there is probably close to $100,000 sorry 100,000 vehicles a year of S demand, and maybe something comparable to for X, holding economic conditions constant and assuming full market maturation, which can take, like, quite a long time in some markets.

And maybe to your energy storage question, I mean, obviously energy is a commodity market, but I don't think that in any way really changes the opportunity there. In some ways, that is sort of what creates it, and creates --

Makes it bigger.

Exactly, it's what creates the opportunities for us to ramp much faster. And we still see a lot of technical differentiation amongst these different products. Just because energy itself is a commodity, doesn't mean that the ways that you create it are the same. And the storage technologies, and how well they are integrated, and how plug-and-play they are, for customers to just use them to solve problems, and do that very quickly is quite different, amongst all the different people trying to address this.

I mean, if you can sell a dollar -- I mean, basically if can provide a dollars worth of value for $[0.80], compared to your competitor's inter-commodity business, that's amazing. That's like -- you want to be in a commodity business.

Got it. And then, on the margins on the X volume?

Well, I think that they are going to be comparable to the S over time, but it'll -- but it is important to bear mind, that the S is a much more mature product, so we have been in production with the S for three years. I would expect the margins to be within a few points of one another over the long-term.

Great. Thank you very much.

It's what we indicated in the letter.

Okay, everyone, thank you very much for joining us today, and we'll look forward to talking with you next quarter. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.