Tesla is hosting its quarterly earnings call for the second quarter of 2019 this afternoon at 3:30pm Pacific Time. Hop onto our livestream of the call, where we have partnered with Ben Sullins of Teslanomics to compile a rich video stream of the event. We’re pulling in all the questions being asked by the analysts alongside the analysts’ current and historical targets for TSLA. Click the image above to jump to our livestream of the event, or here to read Tesla’s Q2 2019 quarterly earnings letter, or here to listen in on Tesla’s web stream of the earnings call.
Highlights From The Letter
- Record Deliveries & Production with deliveries of 95,356 vehicles and production of 87,048 vehicles
- Record Model 3 Deliveries: 77,634
- Generated $614 million of free cash flow (defined as operating cash flow less capex)
- Ended the quarter with $5 billion of cash and cash equivalents
- GAAP operating loss of $167 million
- GAAP net loss of $408 million, including $117 million of restructuring and other charges
- Automotive business running at a gross margin of ~19% in spite of reductions in vehicle average sale price (ASP) and lower regulatory credit revenue from the sale of Zero Emission Vehicle (ZEV) credits
- Model 3 average selling price (ASP) was stable at ~$50,000
- Model 3 production rate of 7,000 vehicles/week demonstrated across all equipment, targeting 10,000 vehicles/week by end of 2019
- Gigafactory 3 in Shanghai is on track to produce first cars by end of 2019 and Model Y by fall of 2020
- The Tesla Model 3 received the highest ever safety ratings in the Safety Assist category using Euro NCAP’s newer, more stringent testing protocols
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It’s 3:33pm and the call is starting!
Brief introduction followed by some opening comments from Elon.
Elon: “Last quarter, we delivered more than 95,000 vehicles, which is a record for Tesla.”
Elon: “It might be the fastest any complex manufactured item has grown in history. Really great work by the Tesla team to achieve that outcome.”
Elon: “Model 3 was once again the best-selling premium vehicle in the US, outselling all of its gas-powered equivalents combined.”
Tesla Model 3 won the Motor Trend Car of the Year award despite not spending any money on advertising in Motor Trend, which speaks to the integrity of the publication.
Elon: “Something on the order of 3/4 of all the parts are common between the Model 3 and Model Y. We expect manufacturing costs of the Model Y, despite additional content, to be approximately the same as Model 3.”
Elon: “This quarter, we opened 25 new service locations and added more than 100 mobile service vehicles to our fleet.”
Elon: “Tesla is almost doubling all cumulative production every year. This is a totally mad thing. To make as many cars in a year as we have in our entire history and to have that be an ongoing trend. It’s difficult for people to really feel an exponential. We didn’t evolve to feel an exponential. We can feel a linear, but we can only really understand an exponential at a cognitive level.”
Elon: “In fact, if you look at Tesla’s cumulative deliveries chart, it’s about the cleanest exponential graph I’ve ever seen. Obviously, if that trend continues, our results will be amazing. And I think that will continue.”
Elon: “We believe Tesla is now at the point of self funding.”
Elon: “Expect free cash flow going forward, except at critical points of new product launches.”
Expects being at about break even this quarter and profitable next quarter (Q4).
“Zach, anything to say about our results?”
Zach: “Nah, I’m cool. Thanks, Elon.” Oh, not that Zach. …
Zach Shahan: $50K ASP for Model 3 is significantly higher than Elon’s much earlier (years ago) expectation of $42K.
Zach Kirkhorn: “3 years ago, we unveiled the Model 3. 2 years ago, we brought the product to market. 1 year ago, we demonstrated our ability to build the Model 3 at high rate. So far this year, we have demonstrated our ability to manage global deliveries and logistics at a higher rate, but the most important thing is that we’ve demonstrated our ability to generate significant organic demand, as nearly all orders in Q2 were from non-reservation holders.”
Elon or Zach Kirkhorn: Nearly all orders in Q2 were new — not backlogged reservations — and order rate so far in Q3 is higher.
Tesla CTO JB Straubel is transitioning to a senior advisor role.
Elon: “I’d like to thank JB for his fundamental role in creating and building Tesla. So, thank you, JB.”
JB: “Thanks, Elon”
Elon: “If we wouldn’t have had lunch in 2003, there wouldn’t be a Tesla.”
JB: “I’m not disappearing. Drew and I worked closely together for many, many years. I’m not going anywhere, so if there’s anything I need to do to be helpful for Drew or the whole team or any of the ongoing projects … I’m actually really happy with how we’ve phased and transitioned him in.”
Questions From Say.com
Question 1: It has been stated that Tesla is supply constrained and not demand constrained. Can you help shed some light on why Tesla is lowering car costs if still supply constrained?
Elon: “There’s really 2 key dimensions for demand. There’s value for the money and there’s affordability. … It’s very important to parse those two.”
Elon: “In the US, the cars got $2,000 more expensive due to the tax credit dropping off. We only dropped the price of the Standard Range Model 3 by $1,000.”
Zach: “I would expect some adjustment to our Model 3 ASPs as a result of this pricing change, but the trim mix will offset some of that. We continue to make great progress on cost efficiencies. Overall, in net, our expectation is that the Model 3 gross margin will continue to grow.”
Elon: “Full Self-Driving is an extremely important part of the margin calculation. The features for Full Self-Driving are … only a portion of them have rolled out, so the revenue realization is limited at first until those features roll out. Also, the demand for the FSD package is limited because it is mostly prospective instead of current.”
Question 2: Many of us who follow Tesla closely are incredibly excited about a battery and powertrain Investor Day and its technology implications. Can you provide us any more details on when this will be and what will be covered?
Elon: “For battery day, we’re going to do a comprehensive review of cell chemistry, module and pack architecture, and manufacturing plans that have a clear map to a terawatt-hour per year. The timing on this is probably 6 months, so probably February or March of next year.”
Question 3: You stated on the Q4 2018 earnings call that customer service was a personal priority for 2019. Can you update us on what has been done to date to ensure all owners are receiving an industry-leading customer experience?
Elon: “I meet with the service team multiple times per week and get multiple updates daily on the reliability of the vehicle.”
Elon: “We’re opening new service centers as fast as we can and we already opened 25 new service centers this quarter (Q2).”
Elon: “For parts delivery, we have made massive improvements in terms of getting parts to service centers. Jerome is helping to manage service.”
Jerome Guillen: “I track this daily and fewer and fewer service visits are required for newer cars.”
Jerome: “We stock more parts in all the service centers and we ship everything same day pretty much, so that people don’t have to wait for parts. We accelerate service and increase capacity.”
Jerome: “The number one visit is how to use Autopilot, so a bit of education is helpful there.”
Elon: “A whole bunch of things that are quite elementary to reduce service load.”
Question 4: In April, GF1 had an efficiency of about 23 out of the 35 GWh theoretical capacity. Has this been improved yet, and is Tesla still cell constrained? And are there any near-term plans to increase the plant’s theoretical capacity?
Drew: “We have seen improvements in the 23 GWh number. We are in the high 20s now, with the trajectory continuing upward.”
Elon: “We’re about 28-ish?”
Drew: “Yeah, we’re about 28-ish, yep. I’d say we’re not cell constrained for any of our activities at the moment.”
Elon: “Cell volume is approximately matching the production ramp rate.”
Question 5: What is the new Lathrop facility?
Elon: “It’s a parts distribution warehouse.”
Elon: “I think Tesla’s fiscal discipline is dramatically better than at times in the past.”
Efficiency of the factories has been incredible — Fremont and Giga.
Elon: We need to reform market for ZEV credits. Part of the issue here, too, is some of the automakers are waiting to see how their EVs sell before deciding to do a deal with Tesla. (Elon seemed to abruptly cut off here, perhaps getting into topics he should avoid, or perhaps I just read that wrong. —Zach)
Question 6: Dan Gauss, Wolf Research: Can you update us on Gigafactory China? I don’t have a great sense what delivery volumes are of the Model 3 in China at the moment. What order flow do you have that makes you believe you can sell 3K a week in that market?
Elon: “If you ask me what do I think the long term demand for Model 3 is in the greater China region, I think long term demand is about 5,000 cars per week.”
Question 7: Gauss follow-up: Have you considered potentially sourcing cars to Europe from that China Gigafactory as well?
Elon: “Nope. The plan is to source cars to the greater Europe area from Fremont until the European Gigafactory is operational. It’s probably 2021 when we have the European Gigafactory operational.”
Elon: “Long term demand for Model 3 is probably 15,000 vehicles per week globally.”
Question 8: Toni Sacconaghi, Bernstein: Do you feel like Q2 benefited from consumers in the US rushing out to buy Model 3s in advance of declining federal tax credit, a phenomena you saw in Q4? Are you still confident that Q3 orders can continue sequentially?
Elon: “Yeah, I think demand in Q3 will exceed in Q2. It has thus far and I think we’ll see some acceleration of that. I think Q4 will be very strong. We expect quarter over quarter improvements. I think Q1 will be tough. Q2 will be not as bad, but still tough, and I’d say Q3 and Q4 of next year will be incredible.”
Zach: “The step down from Q2 to Q3 was significantly lower. It’s also important to keep in mind that there’s seasonality in the auto business in Q1, which is also part of the impact. Generally speaking, our order rate this quarter is higher than where we were in Q2.”
Question 9: Sacconachi follow-up: Can you comment on whether you believe Model 3 is having any cannibalization impact on S & X sales? Or why else there might be a structural step down in demand and delivery levels versus we’ve seen over the last 5 or 6 years?
Elon: “We’re not quite sure ourselves. I think there’s some cannibalization. Maybe there is some false expectation in the market that some big overhaul in the market is coming for S & X, which then could cause people to hesitate to buy if they think some radical change is coming.”
Elon: “The S & X today are radically better than the ones when we first started production. … Maybe there is a communications issue where people just don’t understand how much better S & X are.”
Question 10: Emmanuel Rosner, Deutsche Bank: Previously, there was a target out there of 25% margin guidance for Model S/X/3. Is that still the case?
Elon: “If you factor in the FSD option, I think it is in play for the year. We just need to get the features done, make sure they’re great, roll them out, and recognize the revenue and increase the take rate on FSD. Also, for the existing fleet, there is a very significant opportunity to upgrade the existing fleet to FSD because most of the fleet has not upgraded to FSD yet.”
Elon: “Absolutely, I think long term, we are talking 25–30%. Long term meaning a year in Tesla vernacular.” (haha)
Question 11: Joseph Osha, JmP Securities: Is there maybe some potential to reconfigure the floor space in Fremont to optimize S&X?
Elon: “We are reconfiguring the floorspace in Fremont. There’s a lot of factory space that’s taken up with parts warehousing for S&X line and we don’t really need that, so that’s where we’re putting a lot of the Model Y activity.”
Jerome: “We’re improving the material delivery for S&X just like we have for Model 3. We’ve reduce parts warehousing cost 90% since last year.”
Jerome: “We’re much more efficient with parts delivery. It helps that we’re increasing production, actually.”
Question 12: Joseph Osha, follow up: Could we see you managing to make 7,500 or 8,000 Model 3s [per week] in Fremont by the end of the year?
Elon: “Yep. The trend is very clearly towards trying to get to 10,000 vehicles per week. Rough numbers, that’s 8,300-8,600 Model 3 and the balance in S & X. In round numbers, 8,500 3s and the balance in S & X.
Question 13: Dan Levy, Credit Suisse: Is there any quarterly cadence to think about regarding regulatory credits? To what extent are you willing to sacrifice pricing in Europe to generate more regulatory credits and are you having discussions with automakers about this?
Zach: “We expect regulatory credits to become a more meaningful part of our business. On a quarter-to-quarter basis, it is very difficult to forecast them.”
Zach: “Generally, we’re selling cars in markets at prices that we think are appropriate and regulatory credits come after that.”
Question 14: Colin Rusch, Oppenheimer: Can you walk us through the plan for battery sourcing in China? How much of the supply is coming from internally produced batteries and how much is coming externally? What is your expectation around watt-hour as you start to ramp?
Elon: “We don’t expect to be cell constrained in China for the next year.”
Drew: “In terms of internal versus external, I think we should wait until we have our discussion next year.”
Elon: “We probably need to do a reset. I’m not saying like a Master Plan part three, but in some ways, the battery day will be like Master Plan part three. Which is like, how do we get from in the tens of GWh per year to multiple terawatt-hours per year? That’s a pretty giant scale increase. It’s an increase of roughly 100. It’s more than that when you think about the factories in Japan. And think about how we get to like 2 terawatt-hours per year.”
Elon: “In order to really make a fundamental shift in the world’s energy usage and really transform things to a sustainable energy future, if you’re not in the terawatt-hour range, it’s a nice news story, but it’s not fundamentally changing the energy equation.”
Question 15: Colin follow up: How should we think about sustainable pricing on the lower volumes we’re seeing on Model S & X? What are the right numbers to think about from a planning standpoint on S & X?
Elon: “Long term sales demand for 3 is probably on the order of 3/4 of a million cars per year and it’s probably 1.25 million vehicles per year for Model Y. The combined for those two vehicles is 2 million per year. S & X are probably 80,000–100,000, so 4% of 3 & Y. Then you throw a pickup in there and it just gets smaller and smaller.”
Question 16: Pierre Ferragu, New Street Research: Could you give us an update on how it is progressing [regarding online sales versus stores]? Do you see it becoming an online distribution model? I see that you opened 25 new retail locations in the quarter.
Elon: “We opened 25 new service locations (not retail stores). Really what we find is that word of mouth for Tesla is incredibly good. So once there is a new base of Tesla customers in an area, they like the car and talk to all their friends about it. So you can think about a Tesla retail location like a viral seed. … They’re not needed, but they help.”
Elon: “Supercharging is incredibly important. You can’t have 80% of the routes a person wants to take. You need 100%.”
Question 17: Joseph Spak, RJB Capital Markets: Elon, you mentioned the importance of FSD for gross margin and you’ve also mentioned the importance of China. Do you plan to offer the FSD suite that you offer in the US in China and Europe?
Elon: “We expect to be able to offer FSD everywhere except the EU because there are just some committee rules put in place a few years ago that need to be changed. It’s not from a technical standpoint, we just need to work through the regulatory committees to get the regulatory approvals to get the rules changed.”
Question 18: Joseph Spak followup: How do you plan on increasing parts availability without the corresponding working capital commitment that would be required as the fleet continues to grow?
Elon: “It’s actually just taking the parts that were stored in a bunch of warehouses and moving them to the service centers. The thing that makes sense is to have the service centers where the parts are … kind of all on the wall. It’s like a supermarket — you always know where the Coco Puffs are and you can just reach up and grab it and you can just replenish the shelves with parts. We’re basically putting all parts that are used more frequently than like 6 weeks literally on walls in service centers. So there’s no ordering of parts, you just take it off the shelves. We want to get not to same day service, but same hour.”
Zach: “We have a significant amount of service parts inventory, it’s just not at the service centers. By localizing the parts, I don’t expect it to be a capital drain on the company. It could actually be the opposite.”
Elon: “Also, just having parts if we make them internally, or if they’re made at a supplier, sending them directly to a service center instead of having them go through a bunch of distribution outlets.”