Tesla’s earnings call transcript for Q1 2014 is presented below. Daniel Benton, Philippe Laffont, and John Griffin are among hedge fund managers with large Tesla positions. Here is Tesla’s complete earnings conference call transcript for Q1 2014:
Operator: Good day, ladies and gentlemen, and welcome to the Tesla Motors Q1 2014 Financial Results Q&A call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.
I would now like to turn the call over to your host Jeff Evanson with investor relations. Please go ahead.
Jeffrey K. Evanson: Thank you Patrick, and good afternoon, everyone. Welcome to Tesla’s first quarter financial results and question-and-answer webcast. I’m joined today by Elon Musk, Tesla’s Chairman and CEO; and Deepak Ahuja, Tesla’s Chief Financial Officer, as well as J.B Straubel our Chief Technology Officer.
We announced first quarter results today in our quarterly shareholder letter; this letter is available at the same link as this webcast. Also a replay of this webcast will be available later today at the same link.
Please note, that certain financial measures used on this call such as revenue and income are expressed on a non-GAAP basis and have been adjusted to exclude the effect of lease accounting on Model S sales, with the residual value guarantee and charges related to stock based compensation. Our GAAP results and reconciliations to non-GAAP measures can be found in that shareholder letter.
During the course of this call, we may discuss our business outlook and make other forward-looking statements. Such statements are predictions based on management’s expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent Form ten-K filed with the SEC.
So we are ready to take questions. Aaa, so please press star one to ask a question. We are going to try to limit the call to about forty five minutes, so please be respectful of other callers by limiting your questions. So Patrick lets have the first question please.
Operator: Our first question comes from Brian Johnson with Barclays. Your line is opened.
Brian A. Johnson – Barclays Capital: Yes, good afternoon. Amm, I know Elon you’re back from China. Just want to get a sense of what the order book in China is looking for? Amm, how much of a contribution that’s going to make to your especially second-half implied delivery targets? And then, you know, do you have to get beyond Beijing or Shanghai this year in order to amm grow in China – grow further in China?
Elon Musk: Well I really don’t think we’ve got amm, any kind of demand challenge in China, in fact I…I…I was blown away by my visit to China at the level of interest and enthusiasm for Tesla, and the amount of goodwill that I encountered from people at all levels, from the government, from amm people in industry aaa and sort of consumers in general. Amm, and I’m really optimistic for how things will go there.
Amm, we are trying to expand our service centers and Superchargers coverage as fast as possible in China. Amm, it’s not…it’s not to generate sales, it’s in order to be able to deal with the cost that we deliver in market. So we are really doing very few stores in China. Our focus is ninety percent plus on…on service centers and…and Superchargers. Amm and then I think we’ll…we’ll actually have to…to limit the amount of cost we send to China; otherwise it would starve the rest of the world production.
So I mean that’s really how we view things there. I did mentioned that we elected to do local vehicle production in China in three or four years, although I should mention the good will existed before I said that, goodwill wasn’t a function of that, amm…amm but that will be for vehicles amm…aaa delivered to the local market in China and perhaps to some aaa surrounding countries.
Aaa and actually, just to be clear that wouldn’t mean shifting any production from aaa…from California amm that would be something that California is going to reach its max production amm it makes sense for us to start looking at local…local country factories. Amm, and I think we would be looking at one in Europe as well amm…aaa just to – I mean these really end up minimizing our logistics cost because shipping two tons of metal over long distances is not very efficient. So it’s just a sensible thing to do is to…to try to satisfy local demand with local production over time.
Brian A. Johnson – Barclays Capital: In any sense of quantification the orders or the deposits, or the wait times in China?
Elon Musk: Aaa, we’re actually really trying to get the wait times down in China. That’s sort of…it’s really quite a long wait time. Amm, in fact, the only source of unhappiness that I encountered in China was that some customers who are in some of the mid-sized cities are…are unhappy that we’re delaying their deliveries, because…aaa…it will take us a bit longer to get the service and Supercharger access, but service is a necessary requirement, you cannot have a service center be like by five hundred miles away from subway sub-dealers. Amm, so that…that’s the…that…that’s our big – our biggest issue in China is like customer unhappiness they’re not getting their cars soon enough. Amm, and I think the wait time is quite long in some cases, like four months or five months or something like that. Amm, yes.
Brian A. Johnson – Barclays Capital: Thanks.
Jeffrey B. Straubel: Thanks Brian.
Operator: Our next question comes from Andrea James with Dougherty and company, your line is open.
Andrea James – Dougherty & Co: Thanks for taking my questions. Amm, your R and D expense is ramping pretty significantly sequentially in Q two, and I was wondering if you could talk about what components make up the R and D increase. And then also, in line with that, how are the costs to bring the Model X to market kind of tracking against your earlier expectations?
Jeffrey B. Straubel: Yes, hi James. Amm, our R and D expenses went up exactly as planned in Q one. And…and it’s primarily driven by all the aaa…aaa engineering design and testing work that’s going on, on our new product development. It’s the Model X, as well as what we’re doing to get the Model S ready for China and other markets.
Elon Musk: Yeah, for examples there is like right hand drive.
Jeffrey B. Straubel: Exactly.
Elon Musk: Japan localization or China localization, U.K.
Jeffrey B. Straubel: Right.
Elon Musk: I think Hong Honk that kind of thing.
Jeffrey B. Straubel: Right, it’s more driven by those expenses rather than just headcount increases and so these are the…the technical expenses that you typically see before the launch of new products.
Elon Musk: Yes, I should said that aaa…so…yeah…some of that is also that’s we wanted to do ongoing improvement to the Model S. Amm, that…as times go by we’ve made hundreds of small improvements to the car amm…and like all of these people wouldn’t necessarily notice, but I think collectively they add up to an improved experience with the car. Amm, so we’ve made some improvements in the seat comfort for example amm…and aaa…you know here and there in fit and finish, aaa…we’re modifying the rear door. So it can open wider so rear…rear ingress-egress is improved. Amm, there is a whole bunch of things.
Jeffrey B. Straubel: Software improvements could be continually made…
Elon Musk: (unclear) very exciting software updates that are going to come…aaa…come out in the next few months that…amm…will improve the experience of the whole suite of customers out there. Amm, and amm…if anyone ever ask me about that I’m looking to say what they are, so just…just broader information as it is, but…amm…I mean customers…customers can certainly look forward to some…some really awesome functionality improvements…aaa…in their exiting car.
Jeffrey B. Straubel: We are doing lot more country testing before launching in new markets to make sure it’s an outstanding customer experience, we’ve had in China and doing it in other countries too.
Elon Musk: Yes, exactly. It’s aaa…I was mentioning it earlier, but there…there was a bit of unhappiness in China about some of the mid-size cities, delay in customers deliveries, but where we found is that it’s more important that aaa…we can service the cars really well, that charging is sorted out amm…and to make sure that when customer do get their car, they have an excellent experience. Amm, and I think…yeah, we didn’t do as good of job as we should have done in…in some of our prime market launches and wanna make sure we recognize that mistake and correct it going forward.
Jeffrey B. Straubel: And I want to make sure I mentioned Model X cars are also obviously driving the increased R and D expenses as we are looking at Model X.
Elon Musk: Model X is like the biggest driver for R and D expense honestly. Amm, with the X aaa…we’re really trying to make an amazing car and very importantly to have a car that yet…that where the production version is better than the prototype, better than the show car. The one thing that drives me crazy about the car industry is like you will see up in these great show cars. And then when you actually get the production car it’s some, you know bizarre dumbed-down facsimile of…of the exciting prototype that was displayed, aaa…that’s terrible.
Amm, so the base line expectation of Tesla is that whenever we have a prototype, the production car is better amm…in everyway, aaa…so that’s amm…that’s…that’s quite…quite difficult to do, aaa…and requires some creative problem solving amm…and with Model X the biggest challenges is the buckling door making sure that there is truly amm…a step change in utility for the car and not a gimmick. Amm, so it’s got to work perfectly aaa…and…and the details have to be just right, amm….and that’s…it’s amazing how… like amm…sitting at little things become quite significant engineering challenges.
Such as for example getting the seals on the buckling door to aaa….work properly amm…and not be too prominent. Aaa, so that you got seal against rain, winds knot and…and against road noise, aaa…and…but you’ve got aaa…something that’s articulating across multiple hinges. You’ve got amm…aaa key…key junction joints and that kind of thing. So it’s quite a difficult ceiling problem to…to really get it right and be consistent and remain good over many years. So…so a lot of time on seal, you know engineering.
Andrea Susan James – Dougherty & Co. LLC: Thank you for the thorough response. And one more and then I’m done. Amm, why haven’t your gigafactory partner or partners, amm…why haven’t they signed on the dotted line yet?
Elon Musk: Aaa…aaa…that’s actually that’s great to be asked that question. So we actually do have aaa…aaa…a letter of intent signed with…with Panasonic. Amm, so we’re happy to announce that…that – yeah, we have a letter of intent signed. Amm, I mean, for us that’s actually not that big of a deal, because our expectation has always been that Panasonic would be the partner with the gigafactory. Amm, I believe that’s been Panasonic’s intent. Amm, and in fact just…just make sure we’re both on the same page. Aaa, J.B. aaa…aaa…spoke with Panasonic yesterday just to make sure we’re on exactly the same page. So J. B. do you want to us to elaborate on that?
Jeffrey B. Straubel: Amm, sure. Well, you know…aaa…aaa…as Elon said we do have a signed letter of intent, and under that letter of intent, aaa…we’ve also, you know, created a joint working team aaa…between Panasonic and Tesla. You know that’s…that’s working, you know almost daily, certainly weekly exploring aaa…you know, all the mutual topics and…and answering questions and making progress. Amm, you know we’re…we’re actually quite comfortable that we’re heading, you know, toward aaa…final agreements aaa…in the later part of this year. And it’s aaa…it’s something where, you know, as we said, it doesn’t seem like a big step change. It’s something that’s been, you know, aaa…progressing, you know, smoothly for the…the last months and…and we feel confident in it.
Elon Musk: Yeah. Aaa…yeah…aaa…I think we’re…aaa…I think we’re…I think quite confident, highly confident at this point of achieving the thirty percent aaa…reduction in costs per kilowatt hour. And maybe moving towards – I would say course of the optimistic about exceeding that number. Amm, I don’t want to make commitments, but I think we’ve got a decent chance of exceeding that number. Amm, as…as we explore the cost structure aaa…aaa…on the supply chain with Panasonic and with a number of other companies aaa…that… that make the pre-cost materials.
Amm, we’ve found that there’s really a lot of opportunity for innovation and for cost reduction, amm…and in…in fact, we’ve had a number of conversations that are really interesting with aaa…mining companies amm…talking about some of the key aaa…constituents that go into the…the sale, such as the nickel and cobalt, the aaa…lithium, although lith…lithium is sometimes thought of as a bigger thing than it really is for lithium ion cell.
It’s like using maybe a couple percent of the…the cell mass, aaa…but the biggest aaa…cost constituent is…is nickel amm…and amm…and we are…so we are in conversations with some of the…the nick…nickel mines in aaa…in…in Canada in particularly. Aaa, and we’ve been aaa…really I would say positively surprised, by the potential for aaa…cost reduction on the producing the pre-customer trails. Amm, and…and it’s kind of funny it’s like the – in talking to like the mining companies is like…like nobody ever calls them. We call them up and like hey we never get calls from companies like Tesla. It’s in other words like telling to them on the metal exchange or you know, some big aaa…stainless steel companies, because nickel is a common alloy and constituent of steel aaa…and like cutlery for example, using involves quite a bit of nickel so your knife and fork is usually amm…yeah, electroplated nickel silver. It’s usually what they do.
So aaa…it’s aaa…the…the…the mining guys were just like super happy to hear from us amm…and have, you know, quite…quite good ideas for how to optimize the…the cost of the materials or minimizing logistics and processing, and just doing a fairly…fairly sensible things. A lot of it’s actually quite obvious aaa…to create aaa…a…aaa…a supply chain that can deliver a large volume of factory products aaa…with incrementally reduced cost and actually we are also, you know, trying to do our best to ensure that in the supply of the components or the sell that aaa…our suppliers, you know, are going to…to the mine level are companies that operate in a good and fair way, aaa…and it’s like do they take reasonable care from an environmental standpoint, do they take care if people work in the mind that of kind of thing. As much as we can we want to make sure that…that…that our suppliers are…are good suppliers, you know, that’s…that’s the – yeah.
Andrea Susan James – Dougherty & Co: Fantastic. Thank you so much.
Operator: Our next question comes from Adam Jonas with Morgan Stanley. Your line is open.
Adam Jonas – Morgan Stanley & Co: First question is to follow-up on…on the gigafactory, aaa…is…is the formal announcements aaa…formal announcements are kind of more…more than a letter of intent a pre request for breaking ground on the factory?
Elon Musk: Aaa…aaa…no we actually expect to break ground on the first gigafactory location, amm…or we want to…to [unclear] precise about this because I…I don’t want any of the states with which we are talking to…to sort of have the wrong impression. Amm, we gonna move forward with breaking grounds on multiple sites aaa…in order to minimize the risk of completion of…of the gigafactory. Amm, and aaa…we expect to break ground on the amm…on the first of those probably next month. Amm, so it should be quite soon amm…and then shortly thereafter maybe a month or two after that we’ll break ground on the second one.
Amm, and aaa…sure to say that California is potentially back in the running amm…so that’s – I…I mean it’s…it’s still…still in these sort of improbable, aaa…you know, you know a kind of a being improbable…but it is…it is back in running aaa…and the governor and his staff have…have really, I think, tried to do everything they can to aaa…make California a significant candidate for the gigafactory. Amm, the…the main thing with…with California is is [unclear] do it in centers or anything like that is…is the time to completion of the gigafactory.
Amm, I don’t think we did a good a job of explaining why California wasn’t on the list of four states aaa…to begin with and it’s…it’s just because this is a large aaa…Greenfield aaa…construction project. California has quite a complex aaa…and lengthy aaa…process for approval of Greenfield sights. And aaa…you know…so…so what we couldn’t afford was waiting like a year or more for kind of to…to proceed, amm…which would I think also make sure, you know, no environmental impact of any significance, aaa…but aaa…it would just take a long time for the California Regulatory Agencies to process information that they would need to aaa…for their obligations on the California Law. Whereas in other states it’s much more streamlined approach.
Amm, and if this was just the vehicles we build aaa…in Fremont, California, if we don’t…if we don’t have the gigafactory online when we have the aaa…vehicle capacity online, we will actually be in deep trouble, because we’ll have all the equipment and tooling, and people for making cars, but not…not be able to produce the battery packs. So aaa…that…that was the reason why California wasn’t originally on the list. The…the Governor and Legislature are gonna try to do something about that, but I think the question of timing is…is still a big one. Amm, and aaa…and then we also need to make sure that the ongoing operational costs of the gigafactory are not significant worse than other states. So I…I think like I said, I think California’s still in the sort of improbable, but…but not of impossible category at this point.
Adam Jonas – Morgan Stanley & Co.: Okay, thanks. Thanks Elon. Let me just add a follow-up. When you’re thinking about the gigafactory, is the idea to have just one dedicated full-cell supplier like a Panasonic, or is it possible that it could be Panasonic and…and a kinda some co-opetition with another battery component or cell supplier, kind of making another part of the…of the sub-cell, the cathode, or anode. Or it’s just kind of…is there mutual or pure exclusivity for a Panasonic, for example? And than finally, on China, do you have – or the expansion of other manufacturing in China or Europe, is that within the scope of your current capitalization and financial resources, or is that something – or that of your expectation of your ca…cash-flow generation, or is that another item on the list that might require aaa…new capital at some point? Thank you.
Elon Musk: Yes, so…so the way the Giga factory is set up right now is we aaa…Panasonic would be the only company producing cells in the gigafactory. Amm, and aaa…I want it…one other thing in gigafactory is like sort of like an industrial park under…under one roof. Amm, Tesla’s producing the modules – Te…Tesla is sort of the overall I guess landlord. We’re producing the modules and the battery pack. Then the aaa…the cells are…are pro…produced by Panasonic and then we would actually have a number of other companies producing the [unclear] to the…the anode catheter, separators, electrolytes and so forth that have been feeding into Panasonic.
However, if…amm…referring back to our [unclear] of short presentation on the…on the gigafactory, you’ll see that the cell capacity target is around thirty five gigawatt-hours, but the…the pack capacity is fifty. That’s…so we expect to bring in cells from aaa…other cell factories in the world to make up for others who are roughly fifteen gigawatt-hours, amm…and those would be – I would expect a lot of those would be Panasonic cells, but amm…to a degree that Panasonic isn’t able to meet that demand, there would be aaa…other suppliers as well.
Adam Jonas – Morgan Stanley & Co.: Okay.
Operator: Thank you. Thank you. Our next question comes from Patrick Archambault with Goldman Sachs. Your line is open.
Patrick K. Archambault – Goldman Sachs: Good evening. I aaa…just a couple ones here. Amm, you know, just aaa…amm…you know, in terms of the cadence of aaa…of some of the OpEx items, I mean, maybe just like R and D specifically, amm…you know, Deepak aaa…and you know, you described how there’s a sequential increase amm…of thirty percent. Amm, you know, can you – I guess the first part of my question is, you know, how do we think about it aaa…you know, trending in the back half? And then, you know, sort of longer term, amm…you know, how do we see that as an expense as we sort of model out over the next couple of years? You know, I…I…I think best-in-class, you know, vehicle producers probably have that in the mid-single digits as a percentage of sales, but you know, just given your growth profile would probably be higher. Can you help us just dimensioning to…to…to just dimension that just as we think about our forward modeling?
Deepak Ahuja: Yeah, amm…as time aaa…in future quarters as we go towards the end of the year and aaa…potentially next year early as Model X aaa…development is behind us, amm…I would expect some aaa…reduction in R and D spending, and then of course Gen three will pick up and other products that we start working, but you know, broader point of percentage of revenue, we clearly see that as aaa…revenue is going to pick up significantly, the percentage of revenue of R and D expenses is gonna be aaa…I expect aaa…in the single-digits aaa…with a high-single-digits clearly. So, I think we won’t to be too far away in that sense from amm…some of the other, I would say more growth oriented companies, don’t want to just bet it against automotive, because we will be doing more R and D in general.
Elon Musk: Absolutely.
Patrick K. Archambault – Goldman Sachs: Aaa…Okay, great.
Elon Musk: In fact I…I think R and D is maybe more limited by the phase, which we can cre…cre…create in general how to integrate to the companies rather than, you know, sometimes budget. Yeah.
Patrick K. Archambault – Goldman Sachs: Yeah. Sure. Okay, that’s helpful. And then amm…you know, just as we think about the cadence of amm…of…of deliveries, you know, which is obviously very back-half loaded, amm…but you know, you’re…you’re…you’re obviously, you know, confident in the thirty five. Amm, can we just get like a little bit more clarity as to sort of what’s driving amm…you know, sort of the…the back-half inflection? Is that, you know, cell capacity, is it that second, excuse me that second production line coming on? Amm, is it just…you know, it seems like it’s more supply-driven than demand-driven, but just wanted to, you know, get a little more clarity on…on…on what’s driving that sequential progression?
Elon Musk: Aaa, yeah. The…the main thing in the first half of the of the year and that’s something actually I mentioned I think aaa…la…last…last year is that the…for the first of this year we’re constrained by cell supply. Amm, we expect that to I mean, it is in the process of alleviating and we expect that to really amm…really start alleviating in…in the third quarter basically. Amm, and…and there’s obviously a bit of a late because the cells coming from Japan. They’ve got it produced and port on the water and port over here and that kind of thing. Amm, thu…thu…thus far from what we see that you have things on track to aaa…have cells [unclear]…you know, be able to at…at least meet the…but probably exceed by little bit the thirty five thousand aaa…in targeted deliveries. And our production number absolutely higher than that aaa…aaa…aaa you know company’s growing quite a bit of nickel that will be aaa…only to best countries.
Amm, so…and then, the benefit of other constrainers, which is [unclear]…which is the amm…vehicle production line. Aaa, so it actually will actually be taking the…the factory – the Fremont factory down for aaa…roughly days or so in July to convert inline, which enables a substantial increase and aaa…our production capacity on the vehicle side, aaa…as well as a aaa…labor house reduction. So…so it’s just fundamentally more…more efficient process. Amm, yeah, the…the…if it is worth highlighting the point. Very often, aaa…in the media, it seems like there’s confusion between aaa…Tesla production and Tesla demand [unclear]. But amm… you know for example, like although…like we’re sold of Q two production, already. Amm, the aaa…it…it’s a….but…but…but…but…but…but the…but the term sales usually means demand, but in our case sales means deliveries. Aaa, it’s our measure of demand, it’s a measure of how many cars we’re actually able to get to customers. If we had been better at production and delivery would have little bit more cost.
Operator: Thank you.
Patrick K. Archambault – Goldman Sachs: Okay, thanks.
Elon Musk: Okay.
Patrick K. Archambault – Goldman Sachs: Thank you guys.
Operator: Our next question comes from Colin Rusch with Northland Capital Markets. Your line is open.
Colin Rusch – Northland Capital Markets: You know, with the Model X, you know previously you talked about going into production before the end of twenty fourteen. Can I just understand exactly, you know, what you’re saying with the…the prototypes being done amm…by the end of the year versus production, and…and how we should think about that relative to the previous comments?
Elon Musk: Amm, yeah, there’s no question we’re delayed on the Model X, although that’s I wouldn’t say particularly new information. Amm, so the…aaa…relative to our earlier forecast, aaa…we…we had to spend a lot more time making sure we got the Model S right, amm…and amm…it took longer to get to some of the international markets and aaa…in [unclear]. Amm, we…it just didn’t make sense for us to be focusing on Model X if we didn’t have model…our Model S house in order. Amm, the aaa…no…I think we’re in…in pretty good shape on the S front, so our focus is very heavily on the X, amm…and just making sure it’s a phenomenal product. Aaa, and aaa…we…we expect to be varying production cars roughly Q two next year.
We’ll have…we’ll have aaa…the production design articles, I guess beta articles or you know aaaa…production-release candidates at…at…around the end of this year. Amm, but we want to make sure we’ve got a decent period of validation with the… with those release-candidate vehicles, aaa…because the…the production ramp for Model X will be much greater than for S, so much deeper. Amm, so with S we have quite a shallow production ramp, start off real slow and as we encountered issues we were able to correct them without having a large number of cars in production on the roads.
With X it’s gonna be sharp ramp, which means we really need to make sure that we’ve properly validated issues and aaa…and…and…and…and made sure in all temperatures and climates, and aaa…road types that…that the car is really solid before ramping up production. Otherwise, you know, we would risk having a recall or a bad customer experience.
Colin Rusch – Northland Capital Markets: Okay. And then just one quick technical question. You know, as…as you look at the…the components and the amm…and the materials inside of your…your cells, the…the quality of lithium, how much leverage do you think you can get as…as you start to see higher-quality lithium aaa…from the supply chain?
Elon Musk: The quality of lithium [unclear] you mean by purity or…
Colin Rusch – Northland Capital Markets: Just in terms of higher…higher purity, I should say.
Elon Musk: Aaa, that’s really not been an issue. And that…that’s not…not a big trade-off or driver of performance. Amm, you know, it…it’s something that we’re constantly looking at with the different the different suppliers and you know trading off different processing mechanisms and different feed stocks that can affect the pricing; the…amm…yeah…the ultimate purity doesn’t really drive performance of the final cell.
Colin Rusch – Northland Capital Markets: Yeah.
Elon Musk: I mean…I mean there are some things that are…are sort of a tricky or…or that matter, like for example like the anode, the…the structure of the…the carbon in the anode is important. I mean we…we use a very high percentage of synthetic aaa…graphite, amm…you know, because that gets sort of a more precise microstructure. Amm, and, yes, so there is some…some potential trade-offs there as to how much aaa…work effort you put into creating the synthetic graphite. Amm, you know, and I…I think generally we wanna probably aim for highly precise aaa…mic…aaa…you know microstructures. So aaa…[unclear] which is a little trickier to do. You don’t want to just have random microstructures, stuff that came out of the ground.
Colin Rusch – Northland Capital Markets: Great, thanks a lot guys.
Operator: Our next question comes from John Lovallo with Merrill Lynch. Your line is open.
John D. Lovallo – Merrill Lynch: Hey guys. Thank you very much for taking my call. Aaa, first question is aaa…we’ve recently had conversations with several of your customers in China and Hong Kong who have placed aaa…firm orders, pretty high trim levels, amm…and now are actually seeking refunds because what they’ve discovered is that the electric wiring at the residential level is so poor that charging equipment is not being permitted in their high-rise buildings. So I guess the question is, I mean are these kind of one-off exceptions, or…or are you guys seeing aaa…you know kind of a trend in this?
Elon Musk: Amm, no, we’re not really seeing a lot of cancellation since…since I have heard. Amm, I mean one…one of the things we have required of customers who place the deposit is that we want to before they take delivery of their car, we want to make sure that they have a wall connector installed, amm…aaa…but you…you don’t really like the…the wire configuration is like what aaa…max amperage aaa…the outlet can be. So some places aaa…may be able to handle amm…an eighty amp outlet some maybe only twenty amps, but aaa…it’s…it’s pretty unusual aaa…to…to…yeah…see this. Amm, something we are doing aaa…aaa…in…in China, another possibility is we’re…we’re putting Superchargers in cities, not just between cities. Amm, this is obviously important in places like, aaa…you know, Beijing, Shanghai, London, San Francisco, aaa…New York, aaa…where at times people may have a challenge with aaa…having a…a…a fixed parking space. I mean…so…so that’s maybe the wiring thing, it’s more like some of those people don’t have a definitive parking space. Amm, they might have street parking or something, you know. Lo…London is particularly tricky one; where there’s – it’s got lot of high-end neighborhoods just have street parking. Amm…
Deepak Ahuja: Yeah, if…if I might add, you know, there…there’s been a lot of amm…questions about, you know, the…the supposed poor quality of the grid in China, but from what we’ve seen, you know, installing aaa…hard-wired charging equipment and Superchargers, it’s actually been, you know, somewhat the opposite, and…and been quite a robust, you know, very new actually – new equipment, new grid. So we…we have not seen very many problems.
Elon Musk: Yeah, no exactly. In fact it’s…it’s exactly as J. B. said. We…we’ve actually found – it’s…it’s been a positive surprise for us in China, not a negative one.
John D. Lovallo – Merrill Lynch: Okay. And then aaa…for my second question, aaa…I think in…in the release you mentioned that North American deliveries were up I think ten percent. Aaa…so this would still…it could be sequent choice… so this would [unclear] imply that they were lower for the first quarter and the second quarter of thirteen, and about in line with the third quarter. Is that a fair characterization?
Elon Musk: Jeff do you want to answer this one?
Jeffrey B. Straubel: Yes, John, just to clarify, we said the orders in North America were up ten percent, not deliveries.
John D. Lovallo – Merrill Lynch: Okay, so how…how were the deliveries in the quarter in North America?
Jeffrey B. Straubel: Aaa, the…the deliveries were down. We were trying to reduce the lead time in Europe. We had a long lead time there, and we were shipping a lot of cars into Europe, so that we come to a more even lead time between North America and Europe.
Elon Musk: Yeah, and I think this is getting back to that what is still not early, this –it…it…it…it…it…it’s a confuse deliveries with demand, deliveries and demand are not the same thing for Tesla. They are for other car companies but not…not for Tesla.
John D. Lovallo – Merrill Lynch: Okay. Thanks very much guys.
Elon Musk: I mean as…as… I…I would…we’ve…so we’ve…so particularly we are seeing a steadily increasing demand in North America and…and so, yeah.
John D. Lovallo – Merrill Lynch: Okay. Thanks, guys.
Operator: Our next question comes from Rod Lache with Deutsche Bank. Your line is open.
Rod A. Lache – Deutsche Bank Securities: Hey, everybody. Amm, it…it seems like you’re making a lot of progress amm…in terms of purchased material and efficiency. Just looking at the numbers and amm…wha…what I’m looking at is it looks like your product’s gross profit, you reported like a hundred and ninety million last quarter, but there was a gain in there, so maybe it was a hundred and eighty million in Q four and then this quarter you did a hundred and eighty million including a charge. Amm, so it…it seems like your gross profit didn’t move, even though your revenue was down. Amm, I’m just hoping that you can maybe give us a little bit of an update on where…where your incremental margins stand today, just given some of the progress that you’ve made. And in a steady-state basis, amm…these incremental units, what kind of conversion for incremental volume do you…do you achieve today amm…on the gross profit line?
Jeffrey B. Straubel: Rod I’m not exactly clear what your question is, but I think to broader point aaa…there is aaa…gross margin improvement that’s happening because of the cost improvements that we continue to achieve and this is the internal road map that we have on a variety of actions aaa…to achieve material cost reduction some internally, some at our suppliers, some through design and those actions will continue throughout the year and that’s why we feel comfortable that we will achieve aaa…twenty eight percent gross margin by Q four.
Elon Musk: Yeah, there is I think a couple of important points aaa…I would like to make here which is fir…first of all, amm…aaa…aaa…overall like we…we…we don’t…we don’t do any cost down if it makes the product worse. So that doesn’t really gain us anything which is as quite tempting do that sometime and that drives me crazy when companies and other, you know, elsewhere in the car industry or other industries reduced cost by reducing values. That’s not a good think amm…so we…we…our cost productions are really in that aaa…like figuring out how to get the molecules in the right shape amm…in a smarter way amm…as I appose to trying to sort of strip value out, in fact in number of case we’ve actually added cost to the car, because there is something that needed to be aaa…improved, you know the under-body shield is an example of that.
Amm, and our gross margin in Q one will be – and we have a number of sort of charges against – that…that negatively affected gross margin, would have been a little bit higher if it hadn’t been for things like, for example, the under-body shield activity. Amm, aaa…I think…I think it’s…we feel fairly comfortable of achieving the twenty eight percent gross margin by the end of the year on the Model S front.
Rod A. Lache – Deutsche Bank Securities: Okay, thanks. And amm…you indicated at aaa…again, in your release six hundred and fifty to eight hundred and fifty of CapEx this year. Can you give us some…some high-level thoughts on amm…preliminarily what next year might look like as you’re starting to ramp up the…the gigafactory, and also, I…I know that you made some reference to SG and A and R and D as a percentage of sales, but I guess for your stage of…of development, I’m not sure that that’s really applicable. Can you give us an idea of amm…you know, how that might look on…on an absolute basis?
Jeffrey B. Straubel: Rod, it’s a bit too early for us to give amm…their guidance, our thoughts on twenty fifteen aaa…CapEx, amm…clearly twenty fifteen at a high level will be dominated by spending on the gigafactory aaa…as well as we start to prepare for Gen three. Amm, I think much of Model S and Model X amm…amm…spending will be behind us, there will be some aaa…lagging Model X spending aaa…from a CapEx perspective, just before launch from a tooling and an equipment perspective.
So there will be a small change or there will be a change in the categorization of spending. Aaa, and then beyond that, clearly we will continue to expand rapidly, glo…aaa…globally with our store service centers and Superchargers, so that growth will continue, but I think aaa…we can provide you a bit more clarity on that, perhaps a couple of quarters from now.
Rod A. Lache – Deutsche Bank Securities: Okay. And just last one on…on China. When you do actually expand to domestic production, do…do those requirements amm…you know, for fifty-fifty J…J…JV partners, do…do they apply to you, or are there any exceptions amm…for new energy vehicles, or do you…do you actually have any thoughts on that at this point?
Jeffrey B. Straubel: I think it’s too…too early to make a prediction on that front. Amm, yeah, yeah, so I think we…we can’t say for sure aaa…what…what…how things will look at…at that time. I…I can’t say that we’re…we’re…we’re postponing any serious partnership discussions with…with the big companies in China, because still…we’re still really a two-year stage. Amm, so we are not…we are not…we are not trying to sort of aaa…run this to ground, because we’ve got sort of really basic priorities of getting service and super-charging rolled out in China. And, oh yeah, we just don’t have anything to say on that front yet.
Rod A. Lache – Deutsche Bank Securities: Okay, great, thank you.
Operator: Our next question comes from Ben Kallo with Robert W. Baird. Your line is open.
Ben J. Kallo – Robert W. Baird: All right. Thanks for taking my question. Amm, back to the…the battery factory, can you talk about aaa…the costs associated with ru…running two…two sites in parallel, maybe three, amm…and…and any optionality you have there? Aaa, and then adding aaa…maybe two more on top of it, aaa…one is, aaa…how much work have you done as far as business development with stationary stores to get comfortable with that…that angle there, and then as far as additional investors, should we wait to see them after Panasonic comes to the table? I’ll stop there. Thanks guys.
Jeffrey B. Straubel: Well, aaa…aaa…there is I mean…your…your first question was amm…aaa…fundamentally are we spending too much money by working on three sites together. And I think as Elon has said a few times, for us, it’s really critical that we have the first gigafactory ready on time aaa…to supply the sales for Gen three. And that delay, every one month delay at that point is far more expensive for us than the incremental costs that we may incur up front to kick off two sites at one-time.
Ben J. Kallo – Robert W. Baird: Absolutelly.
Elon Musk: Yeah. May…maybe, I can speak to the…the stationary business aaa…development part of the question. You know, we…we have done a…a huge amount of effort there, a…a…work there, and we’ve talked to most major utilities and amm…energy service companies at this point. You know, it’s still early days in that…that effort, and I think maybe the thing to focus on is, you know, our long-term optimism, you know, looking at the…the price, amm…versus cost of what we, you know, expect we could do. And, you know, the…the demand for – the long-term demand for stationary energy storage is…is quite extraordinary. Aaa, when you look at the size of the grid and what needs to be done with renewable energy and, you know, buffering the variability of that. So, you know, I think that’s really, you know, where we keep our focus is…is on, you know, the long-term economics that…that could be enabled once the gigafactory is online.
Jeffrey B. Straubel: Yeah. Is that [unclear]? I would not try to build demand for stationary storage, because we have cell constrains, so kind of expense of…of vehicles. Amm, so what we’re doing right now is more on the aaa…engineering side figuring out what would be a really cool stationary storage pack that, you know, that could be produced at volume and that could be combined, aaa…so you could stack the whole bunch of them if you wanted.
Amm, I think particularly for like the…the home solution, I mean sort of thing, we have in mind is, something that looks a bit like the battery pack from the Model S, there’s something really flat aaa…just maybe takes…it’s sort of coming, you know, five inches off the wall, like wall mounted in, you know, a nice, you know in a beautiful cover, amm…integrated bidirectional inverter amm…and just a plug in play. Amm, that’s something we have in mind aaa…for the…the stationary storage pack on the residential front, which could conceivably you could stack a bunch of them and have it looks commercially as well. Amm, you know, but…but play, I mean I want to talk about that in detail end of the year, early next year, or something like that.
Elon Musk: Yeah, and I think the third part of your question was about amm…you know, other…other participants in the gigafactory and, you know, we…we are talking aaa…to various different people in parallel. I…I think that is important to understand, you know, that there’s a lot of aspects of this that the Panasonic [unclear] doesn’t do. So it’s not necessarily a competition, but it’s amm…you know…a…you know, complementary, you know different pieces of the production operation. So, you know, those discussions are underway, but it’s premature to talk about any specific.
Ben J. Kallo – Robert W. Baird: Great, thank you guys very much.
Operator: Next question comes from Craig Irwin with Wedbush Securities. Your line is open.
Craig E. Irwin – Wedbush Securities: Good evening. Thank you for taking my question. So Elon, when…when you look at the Chinese market, everybody knows that this is the…the largest luxury automotive market in the world. Amm, but it’s…it’s not a market that amm…that we have as much visibility as we might like. How do you quantify the total opportunity for sales for Tesla, and what have you seen since you launched in China that surprised you, or maybe that aaa…you didn’t expect? And how is this shaping the…the plans for your store – your store map over there, and the amm…obvious aaa…service centers and…and…and other investments?
Elon Musk: Well, I…I don’t think, I think probably, most of as much as I do about the demand for our cars in…in China. So as far as it’s an incredible crystal ball amm…as you mentioned, China is the biggest market for cars in the world, and actually the biggest market for…for premium sedans aaa…in the world. So to the degree that our sales track that of other manufacturers presumably China would over time become the biggest market for Tesla.
Amm, I mean that’s…that’s probably the best guess that anyone could make at this point, or in…in…in the short-term is that we really don’t have a…a…a demand issue in China like we’ve got a lot of…a lot of demand. Amm, and so our focus then obviously is, just to make sure that demand of service and we’ll try to roll out service centers and superchargers as fast as we can. Amm, and my instructions to the China team are to spend money as…as fast as they can spend it without wasting it. That’s what is happening.
Craig E. Irwin – Wedbush Securities: Amm, yeah. Makes sense.
Jeffrey B. Straubel: Thanks, Craig. [unclear]. Let’s make this the last question, please.
Operator: Our last question comes from Colin Langdon with Colin Langan with UBS. Your line is open.
Rahul Chadha – UBS: Hi this is Rahul Chadha on behalf of Colin. Amm, can you help us understand the difference in the variable cost structure for the Model S, compared to aaa…a comparable luxury sedan like aaa…maybe a BMW 7 Series. And other than battery, which are the key areas where you’ll be able to cut costs as you go ahead and achieve scale?
Elon Musk: Well we don’t really know what the gross margin as of individual product lines in other companies, so it’s difficult for us to make an exact comparison there. Amm, the aaa…I just don’t know how to answer that question exactly. As far as cost reduction, the cost of our vehicle is not just in the battery pack, battery pack is one portion of the car, amm…it’s…but it’s aaa…you know, but it’s…it’s maybe a quarter to the value of the car, it’s not…it’s not like – this is not the overwhelming portion of the car. So amm…you know, cost reductions really come across the board.
Rahul Chadha – UBS: Are there any specific amm…amm…components which amm…you know, you see a bigger opportunity to cost…cut cost and or amm…the process?
Elon Musk: Aaa, I…I…I think a single cost reduction with same Q fout this year would be related to labor and overhead, amm…which, you know, I guess as mentioned earlier in the call we have a much more efficient production line that’s going to come online in July, aaa…which, you know, has more automation aaa…and it’s just set up in a better way and, you know, that’s making the car with greater labor efficiency is the biggest single improvement. Amm, but there…there are really hundreds of improvements across the board aaa…and it…it work when really comes on to this you make aaa…you know, from like a five dollars to, you know, a hundred dollars improvement here, there and everywhere and it adds up to a significant number. I wish there was like one place where…this is where…this was this one incredibly super expensive thing that if we fixed would suddenly make car cheap that…that is preference and not the case.
Rahul Chadha – UBS: Thank you, and then do you have any update on the…the dispute with dealer body?
Elon Musk: Aaa, oh, I think there was something that happened just today, I mean the stuff tends to be reported real time, so we are sort of like just I mean we know that, there is not public information, but amm…I think the…the appeal in Massachusetts aaa…from the dealers was aaa…denied today. So there was…oh, hearing there is a hearing.
Jeffrey B. Straubel: (Indiscernible)
Elon Musk: All right well then so no update on the (indiscernible).
Rahul Chadha – UBS: Okay. Thank you.
Operator: Thank you.
Jeffrey B. Straubel: All right. Hey Patrick I apologize I cut of amm…Craig Irwin there, if he is back in the question, we could take another question from him. Anything in the queue.
Operator: We have Craig Irwin in queue, Wedbush Securities. Your line is open.
Jeffrey B. Straubel: Go ahead Craig, I’m sorry about that.
Craig E. Irwin – Wedbush Securities: Thank Jeff. No, not a problem, not a problem. So I really appreciated the amm…the comment in the shareholder letter about ten percent sequential growth in orders in North America. We understand you’re, you are obviously capacity constrained and you have got great demand, amm…but one of…one of the points of controversy is the potential for amm…declining shipments into North America. Can you maybe give us a commentary about your year-over-year amm…order rates in North America, amm…whether or not you expect to amm…continue selling Model S vehicles, at similar volumes, aaa…once you have started to satisfy amm…some of the European and Asian demand?
Jeffrey B. Straubel: Aaa, and we would rather not make any additional predictions about deliveries. Aaa, I mean I…I see demand in North America, I mean I can tell you aaa…definitely what we see as we see a steadily increasing demand in North America, that’s the information that we have. We don’t have amm…something that’s more predictive than that.
Craig E. Irwin – Wedbush Securities: Okay, that’s…that’s helpful. Thank you.
Jeffrey B. Straubel: Thanks.
Operator: Thank you.
Jeffrey B. Straubel: All right. Thank you Patrick for getting Craig back on the line, I appreciate that. So this concludes our call. Thank you everyone for joining us this afternoon. We look forward to seeing many of you this month in New York. Next Monday, we’ll be at the Deutsche Bank Cleantech Conference and on Tuesday we’ll be at the Wedbush Transformational Technologies Conference and finally at the end of May we are presenting at the Friedman Billings Ramsey Energy Technology Summit. So we hope to see some of you at some of those conferences. Thank you everyone and have a great day. Bye, bye.
Operator: Ladies and gentlemen, thanks for participating today program. This concludes the program. You may all disconnect.