Aftermath of Tesla Earnings Call

After hours share price hit $659

Highlights:

• Cash
  • $930M increase in our cash and cash equivalents in Q4 to $6.3B
  • $1.0B operating cash flow less capex (“free cash flow”) in Q4
• Profitability
  • Profitability $359M GAAP operating income; 4.9% operating margin in Q4
  • $105M GAAP net income; $386M non-GAAP net income (ex-SBC) in Q4
  • Volume growth and successful cost reduction efforts were offset by normalization of ASP, mix shift towards Model 3 and a higher lease mix.
• Model Y production ramp started in January 2020, ahead of schedule
• Model Y took 10 months from prototype to production start
• Increased Model Y all-wheel drive EPA range to 315 miles from 280 miles (This extends Model Y’s lead as the most energy efficient electric SUV in the world.)
• We will start delivering Model Y vehicles by the end of Q1 2020. (website says March 2020)
• Record vehicle deliveries of 112,095 in Q4
• Record Q4 storage deployment of 530 MWh; 26% solar growth QoQ
• For most of 2019, nearly all orders came from new buyers that did not hold a prior reservation, demonstrating significant reach beyond those who showed early interest
• We were able to start Model 3 production in Gigafactory Shanghai in less than 10 months from breaking ground and have already begun the production ramp for Model Y in Fremont.
• In Q4, the annualized total vehicle production rate in Fremont was just over 415,000 units, about the same rate as the factory under NUMMI reached in its peak year of 2006. We achieved this production rate in spite of Model S/X running on a single shift and before the start of Model Y production.
• Our finished vehicle inventory levels reached just 11 days of sales(1) at the end of Q4, the lowest level in the past 4 years.
• Our Mobile Service fleet almost doubled in 2019 to 743 vehicles, and we continue to open new service locations globally. As customers are increasingly buying their Tesla vehicles online, vehicle deliveries grew 50% while our retail footprint remained unchanged with a stable total store count across 2019.
• We are planning to produce limited volumes of Tesla Semi this year.

Fremont

• The production ramp of Model Y started in January 2020. Together with Model 3, our combined installed production capacity for these vehicles is now 400,000 units per year.
• The ramp of Model Y will be gradual as we will be adding additional machinery in various production shops. After such expansions are done by mid-2020, installed combined Model 3 and Model Y capacity should reach 500,000 units per year.

Shanghai

• We have been gradually ramping local production of battery packs since late Q4 2019. The rest of the Model 3 manufacturing processes are running as expected. Due to strong initial customer response in China, our goal is to increase Model 3 capacity even further using existing facilities.
• We have already broken ground on the next phase of Gigafactory Shanghai. Given the popularity of the SUV vehicle segment, we are planning for Model Y capacity to be at least equivalent to Model 3 capacity.
• Model Y production in Shanghai will begin in 2021.

Berlin-Brandenburg

• The first deliveries from this factory are expected in 2021.
• Annual Capacity at each Factory
• Model 3 deliveries by region

Autopilot

• Understanding the environment around a Tesla is key to enabling our cars to react to traffic lights and stop signs and take intersections through city streets. We are currently validating this functionality before releasing to customers, and we look forward to its gradual deployment.
• Software will continue to play a growing role in our business model.

Energy

• Energy storage deployment reached an all-time high of 530 MWh in Q4, which included the first deployments of Megapack
• In 2019, we deployed 1.65 GWh of energy storage, more than we deployed in all prior years combined.
• In Q4, we deployed 54 MW of solar, 26% more than in the prior quarter.
• Solarglass: After organizing several roofing company training days at our training homes in Fremont, we already demonstrated dramatically shorter installation times versus previous versions of this product. Solarglass tiles are made in our Gigafactory New York, and we are hiring hundreds of employees at this facility
• Energy Storage Deployed

Volume

• For full year 2020, vehicle deliveries should comfortably exceed 500,000 units. Both solar and storage deployments should grow at least 50% in 2020.

Cash Flow / Profitability

• We expect positive quarterly free cash flow & positive GAAP net income going forward, with possible temporary exceptions, particularly around the launch and ramp of new products
• Factory Layout in Fremont / Shanghai

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Call Notes 3:30pm PST

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• Elon: Hard to think of a similar product that generates such insane demand with $0 advertising dollars spent. Speaks to the nature of the product… and that the product is compelling in itself. Expect to exceed the NUMMI rate of production this year. Congrats to the Shanghai Factory. Really excited and optimistic about the potential. Incredible asset. We also broke ground on the Model Y Factory in Shanghai. Cybertruck: Tried to create a truck that is superior in every way without paying attention to pre-assumptions. Sci-Fi movie set from the future. Demand is incredible. Never seen such demand ever. Gonna be pretty nuts. I think the product is better than people realize even. They don’t even have enough information to understand the awesomeness of it. Thanks Tesla team for their ongoing work. Model Y, Giga Berlin, Tesla Semi, Solar glass roof, cybertruck, battery technologies, full self driving, next gen roadster, and a bunch of other projects will come up as well. Hard to think of another company that is this exciting! Hard to think where we will be in 10 years. We’ll product 1000 times more cars in 2020 than we produced in 2010.
• Zack: Past year was transformational. Increase in ASP of S/X. Learned from the launch of Model 3. Basically summarizes the letter. Forecasting higher gross margins on Model Y than Model 3. Q1 is always impacted by seasonality. Coronavirus may impact the ramp of the Model Y a couple weeks due to the factory shutdown. Monitoring the suppliers as well. We have more than sufficient cash.

Q&A:

Retail Questions:

• Since solar is required… do you have any solar glass roofs for any CA home builders? 2020 target?

Exponential growth in demand and output for solar glass roof. Difficult to predict except that demand is really strong. Working through new home builders, roof industry, and everyone. See a lot of interest. Question of refining the installation process. Getting lots of crews trained. Significant percentage of new roofs will be using solar glass. Do you want a roof alive with power or dead without? Plus it looks good and lasts a long time. Significant and revolutionary product. A lot of challenges to overcome.. and we will overcome them. Buffalo factory doing great.

• Will you release the Tesla Ride Hailing network/app before full autonomy and change the terms of Tesla Insurance to allow owners to be drivers on the network? If so, when will this happen? Might want to target California airports first. Also good place to add Superchargers.

Will make sense to enable car sharing in advance of the robotaxi fleet because the car sharing can be done before the FSD is approved by regulators. It is our intent to put their cars on the FSD network using Tesla Insurance.

• How many CA owners are currently insured with Tesla Insurance? What’s the target for Tesla Insurance in 2020? When will you start to significantly leverage the data you have from Tesla fleet to lower your cost of coverage? Will we get premium discount for % of miles drive on AP?

Expand Tesla Insurance to other locations. Preparing to meet the regulatory issues. Working on the algorithm’s to adjust our rates since insurance is heavily regulated. Will be rolled in over time. Yes there’ll be a discount for using Autopilot. The CA price already considers the safety features. We have a fundamental information advantage that insurance companies don’t have.

• You set expectations that you would be feature complete on FSD by the end of 2019. Can you please provide an update on when we may see this with end users? Where are you in retrofitting the FSD computer to older models?

I said I was ‘hoping’ to be FSD complete. We got close. Looks like we’ll get there in a few months. Feature Complete just means it has ‘some chance’ of going from home to work. It doesn’t mean it’s working well though. Looks like it’ll be a couple months from now. The foundational elements of Autonomy is really what’s been advancing. AI team is really strong in making great progress. We’re only beginning to really take advantage of the full FSD hardware. Next is moving to ‘Video Training’. 3x magnitude of efficiency.

• Since most retail investors seem to understand Tesla better than analysts and are risking a larger part of their own personal wealth on TSLA, doesn’t it make sense to take mostly questions on these earnings calls from us via Say? Do you even have to answer questions from analysts

I guess we don’t have to. I guess a lot of the retail investors have more insights than many institutional investors and analysts. If people really looked @ the smart retail investors.. then maybe you’d get the highest accuracy and predictions from those people.

Institutional Questions:

• You have spoken previously about Shanghai Giga being 65% lower capex per unit of capacity. Have you learnt to do anything better or differently from an opex perspective and if yes what kind of impact might we expect on the long-term gross margin?

Labor cost, material cost due to localization, localizing supply chain, outbound logistics, etc.. all help with costs. Less Import related costs. Really helps to make a car on the continent where the customer is.

• Given the recent run in the share price, why not raise capital now and substantially accelerate the growth in production (i.e. Gigafactories), investments in supercharger and customer service?

We’re actually spending money as quickly as we are spending it sensibly. There’s no ‘artificial holdback’ on expenditures. We’re spending money efficiently… and not artificially limiting our progress… and yet we’re still generating positive cash. In light of that it doesn’t make sense to raise money. We’ve learned during the Model 3 launch period that we grew too quickly with too much complexity. More products / factories next year.

• Can we please talk about cost control and opex sustainability in terms of growth vs gross profit growth? How did we achieve the recent opex trends and how should we think about opex needs as we grow both vehicles and geo workloads?

We did see an increase in operating expenses. I think we as a company are at a point where we’ve learned a lot. OPEX will start to tick up to support our intl’ footprint and the growth as a company. Our job is to grow that

• the sales of Model S and X have stayed flat for several quarters, the main reason is that they still use 18650 battery, when will Model S and X use 2170 battery? manufacturing capacity of 18650 may be used for battery storage systems instead.

The core chemistry inside the 18650 has improved over the years. It’s more a form factor if anything that’s different. We’re happy with the cell and energy improvements we’ve made. We’re rapidly approaching a 400 mile range in the Model S… sooo it won’t be long before that. Lines are running smoothly… I don’t see a reason to turn that cell supply off. The Model S/X actually have more range than what we’re stating on the website. We just haven’t gotten around to updating it to the EPA. Existing cars that are being made. Somewhere in the 380s or something like that.

Phone:

• Adam Jonas / Morgan Stanley: Elon, do you see potential for tesla vehicles that end up being fitted with starlink terminals?

Something that could happen in the coming years. Not this year though. High bandwidth / low latency connectivity for homes/businesses/aircraft/boats/etc. About the size of a medium pizza.. but will probably be more bandwidth than you need. It’ll work. I think most cars will just use 5G in any cities. If you’re out in the country.. then possibly a starlink antenna could work well. 20/30mbps are probably fine. That’s something obtuse though. not thinking about it very much to be honest.

• Dan Gals, Wolf Research: Guidance on what CAPEX is going to be this year? Is there a rule of thumb we can use for CAPEX per unit of production capacity? Some rule of thumb?

I don’t know if we want to say what our capex will be this year. We’re spending money as fast as we can spend in sensible ways… the challenge is spending it efficiently. Core tech is improving rapidly. Internal Applications team e.g. improved our productivity.. etc. Tesla grow at 50%.

• Gene Munster , loop ventures: Cybertruck.. how many do you think you can make? Cost for production? We don’t comment on those #’s except the demand is far more than what we can make in 3 or 4 years. The thing we’ll focus on is increasing the battery production capacity… because that’s fundamental. That’s why partly we haven’t accelerated the production of the Tesla Semi.. because that uses a lot of battery cells. We need to make sure we get a steep ramp in battery production.. and improve the cost per kwh. Fundamental and extremely difficult.

Battery day after the end of this quarter. Tentatively in April. How do you get from here to a couple hindered thousand gwh.

High density passenger vehicle? We have to improve the total battery capacity otherwise we add complexity but do not add more vehicles on the road. People prefer to drive in their cars mostly by themselves. Average occupants in their car is 1.2. With Autonomy maybe 1.4? We have to scale battery production to CRAZY LEVELS.

• Jon Sager, Evercore SI: Model 3 vs Model Y… beyond the 10% rule of thumb.. any other differentiating features? We’re not quite sure what will happen. We’re not worried about demand. Worried about production. Hard to predict the exponential part of the S-curve. We won’t talk about it on this call. They’ll be impressed when they do a teardown. We’re working on having the 3&Y produced in China/US/Berlin locally.
• Colin Rush, oppenheimer: Pricing strategy in light of China? Target for gross profit on a per vehicle basis? We’re trying to make them as affordable as possible, as fast as possible, while staying profitable, growing the company like crazy, etc. Order rate supports our pricing right now. A lot of interest in our products. Price reduction in China is the first step to this globalization of our product. High Volume + High Margin obviously… high margin comes from Autonomy… For example, it’s not as good in China as it is in the US.. but as we fix that, more people will buy it. It will get more and more compelling. Higher voltage on the power train? Power train tech? cost reduction? Power train is pretty damn good. Way better than anything else out there. Model S has a 100kwh pack, Taycan has a 95kwh pack. Taycan has 200miles range,.. model S 400 miles. Coming out later this year. Plaid powertrain coming out later this year. It’s like alien technology. It’s insane. Congrats to the eng team. Hardcore engineering.
• Emmanuel, deuschbank: We’ll adjust prices according to demand. Yeah. It’s fair to assume the mix will be stable in regards to asp when you average them. Affordability in China improved dramatically.
• Dan Lady, Credit suise: Capital Raise… why wouldn’t it make sense to raise capital to pay down debt or pursue acquisitions? If you know of any acquisitions we’d love to hear about them. Who should we acquire? We’re not aware of anyone that we would want to acquire. We’re not constrained. We’ll pay down the debt as time goes by. We’ll keep steadily paying it down.
• Pier, newstreet research: Panasonic relationship is excellent. LG/CATL at a smaller scale. We’ll talk more about this in detail on battery day. probably april. We have a compelling strategy. We are super deep. The rabbit hole goes down pretty far. Wow. We really know a lot about batteries. It’s next level. Ramp of shanghai? Team in china did a great job managing cost. Slight drag. But nothing significant.
• Joeseph osho, jmp securities: maxwell tech plans? We’ll talk about this on battery day. very compelling story that we’ll present. It’ll BLOW YOUR MIND. IT BLOWS MY MIND. Retail investors have the most insight.