Tesla Q2 2018 earnings thread

[suwaneedad]

What absolutely shocked me is the modest amount of free cash burn, when you back out the cash burn attributable to inventory growth (all those Model 3s in suspense so as not to trip the 200000th US sale within Q2). That inventory figure will swing around (normalize) in Q3, and the increased production/delivery levels in Q3 will generate a ton of free cash in Q3, and Deepak has succeeded in further reducing capex in Q3. I would not be caught dead in a short position at this juncture. Things are going to get exceptionally rosy financially-speaking, at least until the next product launch gets moving in earnest, or until Elon grows weary of Deepak shackling him and throws fiscal caution to the wind again while launching multiple products simultaneously. Very fun days ahead during Q3/4 for Tesla and those who are long TSLA. "Short burn of the century" began this afternoon, imo.

 

[jkirkwood001]

If you want to see the actual SEC submission, it's online here. Elon and Deepak's typically rosy quarterly summary begins on page 4.

extract:

 

[neroden]

"The potential for our existing lines to be able to produce far more cars is much greater than expected.... our capex going from 5000 cars a week to 10000 cars a week... is a tiny fraction of the capex needed to go from 0 to 5 Model 3s".

This is good news. He's probably too optimistic, but he's indicating he thinks they can do 10K without *any* full line duplications.

 

[MXWing]

That guy who spoke later who felt it necessary to comment on “all the love” was a real jerk IMO.

And asked the stupidest fuqqin questions to boot. Neither bull nor bear would be happy.

 

[neroden]

OK, so I liked the Autopilot info. First, they're focusing on on-ramp to off-ramp in the near term (which is *much* more viable than full level 5 everywhere). Second, they've developed an optimized matrix multiplication (tensor processing) chip which is 10 times as fast as other people's. This design is informed by the *structure* of the neural network which they got from their first/second generation Autopilot, so that was useful. It's also a drop-in replacement in the existing computers, so everyone with an older Autopilot version will get a hardware upgrade...

(But frankly, I bet Tesla could sell that tensor processing unit as a product. It's useful for many purposes, particularly if other problems end up with neural networks with similar structures to the Autopilot structure, which is likely. This is making me think of the way Google and Amazon got their fingers into everything.)

OK, so we're into questions. First question, from the guy Musk blew off last time. Musk apologizes. But the first question is dumb -- he's asking how the gross margin will go up. It gets the completely obvious answer about fixing production bottlenecks improving the GM, spelled out in great detail with details about having to use expensive quick-to-produce tooling when something has to be retooled on short notice.

But then Musk added that more than half of all customers are choosing AWD, which is useful because it confirms something I suspected but didn't have proof of.

Then they used the silly question as a riff to say totally different things...
The top 5 non-Tesla trade-ins to Model 3s...
Toyota Prius
BMW 3 series
Honda Accord
Honda Civic
Nissan Leaf

...OK, to me this makes sense. I think Prius sales will collapse; it was "green" but it's not "green" any more. Leaf will probably survive but have to cut their price. And someone was suggesting that the Toyota Camry sales would suffer, but it looks like it's *Honda* who's going to get slaughtered instead.

Second apology to second guy, and at least the second guy asked a reasonable question: how much will the China gigafactory cost? Guessing closer to $2 billion for 250K vehicles/year. He says that number doesn't include cell production and it hasn't been figured out yet. (Includes everything from pack to final assembly.)

JB explains that some of the most capex-expensive areas have been sped up by 20% by figuring out what matters and what doesn't

 

[neroden]

Lots of color about how the GA4 line was built. No time to order tooling, so used tooling discarded from previous S/X/3 attempts. (As it wears out they will probably use new tooling!) Used the ripped-out conveyor belts (intended for parts delivery), but they weren't powerful enough to move a car, so they're on a 1% grade so the cars move with gravity. Straight so that it's easy to access for parts delivery and so forth. And, bizarrely, fewer labor hours per car than GA3. (But right now it's lower capacity...)

GA3 has 220 people moving things from supplier boxes to the boxes used for GA3. GA4 is designed to have parts dumped in directly from trucks.

(Sounds to me like the reduction in number of stations from a normal car GA line to the Model 3 line is critical here -- I read some time back they had a third as many stations as a normal production line, which is a huge savings. GA4 would be much messier if they had three times as many stations.)

---
OK, another dumb question, asking about raising equity and asking about the FUD rumor that regulators were prohibiting them from raising equity. China Gigafactory will be raised with local debt. Tesla can raise capital if they want to. They do not want to, and do not intend to. Tesla intends to pay off their debts. ("I don't mean refiing them, I mean paying them off.") He specifies that the $900 million convertible will be paid off. There is no such notice from a regulator.

(While I'm sure Tesla can pay off the $900 million... if the stock price is super high, like $700, I'm not so sure they can pay it all off in cash then!)

Now, really wacky questions from Adam Jonas, complete lunatic, about whether cars are Terminators and whether that will mean that it isn't allowed to be operated in *foreign countries*?!? Oh my god.

Musk answers that autonomous cars will be easy to bully (which is correct!) They'll be easy to cut off.

Now, Jonas is asking whether BMW or Amazon will be a more formidable competitor, because Jonas is a lunatic. Musk says, of course, he'd be surprised if Amazon got into the car business, and he hopes BMW will make more electric cars (said in a rather condescending fashion).

--
Now, an overly long and complicated question about whether it is appropriate to think of each car sold as increasing working capital by $20K. Deepak says that is one benefit and is roughly correct, but then starts focusing on higher volumes, and says he's stating the obvious. (See, he understands economies of scale!)

--
Finally, Romit Shah asking Autopilot questions.

 

[neroden]

Next question: is GA4 permanent? Is it a new model for capacity additions?

They already sort of answered this. They think it's a good model for *early production* of any product, because it provides high flexibility. Then once the product design is nailed down, they could make a different more rigid line. (Basically, this is "don't automate too early"; go through your design changes before you automate.)

Musk said he would probably use steel frame buildings most of the time, though.

He says they know how to make the paint shop a lot simpler (and will do this in Shanghai). And how to make general assembly a lot simpler.

And that after the call, Musk is going back to the body shop (he was working there this morning) because "We can really simplify the body shop. Man. Wow."

He mentioned designing for manufacturing and changing joining methods. JB and Musk specify that this isn't a walkback from automation.

---
Asks whether the future 25% gross margin is built around ASPs in the $40Ks. Answer: yes. Musk expects to hit that margin in Q2.

---
Next question: ends up leading to "Most manufacturing is software", and "Outsourcing was usually a bad idea". So I guess EVEN MORE vertical integration.

Musk talks about rapid iteration between design and production (i.e. no subcontractors!).

He also explained that they've redesigned the battery module production and the "lighter better cheaper" higher-rate design will be active in about six months! So things should start being spectacular in January.

The design teams were sent onto the production line, and Musk says (and he's right) that this makes them redesign the machines to make them stop "torturing people".

Random comment that Douglas Adams is one of Musk's favorite authors.
---
"Do you still plan to make a million vehicles in calendar year 2000?" Yes. They will aim for a million, but if not, then 750,000. "Where will you get the capacity?" Shanghai. They believe they can do about 600,000 with current Giga and Fremont.

 

[RFernatt]

Now, really wacky questions from Adam Jonas, complete lunatic, about whether cars are Terminators and whether that will mean that it isn't allowed to be operated in *foreign countries*?!? Oh my god.

Yeah, this was stated extremely poorly and with the Terminator BS, but I think his intent was to ask does Tesla have any insight whether the US government might intervene with export regulations and prevent Tesla from delivering AP technology in foreign countries because it might have military applications. If so, that could limit Tesla's ability to provide an advanced AP feature set to a certain large Asian country. If that's what he meant, it wouldn't have been a completely stupid question although it would have been speculating about future technology and how the feds would view it at that time.

 

[neroden]

Next question is Zach Shahan from CleanTechnica!!! Asks about "conquest sales" -- how much are they pulling from other segments. They haven't got the data for anything but the top five.

Musk ends up saying that the determinant of Tesla's growth will be cell production and the cell supply chain. (An interesting answer. Is he going to buy his own mines?)

Powerwalls/Powerpack are currently limited by cell production (not module production). They're rapidly solving and expecting to ramp up "later this year and early next".

Solar Roof is going through validation stuff (fire testing, etc.).

"Will Model Y use the same reservation process?" No decision.

"Can Musk talk about the technical bottlenecks right now -- can we picture ourselves in the factory?" Musk says he loves Zach's detailed articles but wants to make sure he doesn't generate a bad sound bite. Zach agrees. Biggest constraint right now -- which will be solved in a week or two -- is in body production. Musk says you can tell what the bottleneck is by what *Musk* is personally working on. They've produced 800 bodies in 24 hours recently.

"Don't let the trolls get you down". Elon thanks Zach for his coverage of cleantech.

Galileo: Will you manufacture trucks in Nevada? Musk says location of manufacturing gets so much attention that he cannot answer *any* such questions.

Galileo: Any synergies between Model 3 and Semi? Lots, but we can't be specific.

Galileo: How are you prioritizing batteries between auto and stationary storage? Why isn't storage ramping faster? (This is an *absolutely great* question, BTW.)

Deepak basically says it makes sense to prioritize Model 3, but that they are expanding cell production ASAP.

JB says that they use additional vendors (Samsung and LG) for Powerwall/Powerpack, but not for cars, which does explain why the Gigafactory production is prioritized for cars.

Deepak explains that they're also bottlenecked on installs. Elon says there aren't enough electricians in the US (I can confirm this is true -- I have massive delays on an electrical project because of the electrician shortage), and Tesla is starting their own *electrician training program*. (Now that's interesting!)

Galileo: what didn't we ask about that we should have asked about?
Musk thinks they covered everything.

Galileo: will the new strategy of *no outside capital* slow your growth down?

Musk says that they're now scaling up so fast that spending more money isn't speeding it up any more. (Mythical Man-Month, I guess) but leaves out the option for debt for particular Gigafactory constructions. (GREAT answer.)

----
As a personal note, I really appreciate Zach's and Galileo's questions. I also appreciate when Musk responded to dumb questions by idiot analysts by *meandering off the topic* and telling us something much more interesting. It's a very polite way to give us useful information without bothering the egos of the analysts.

 

[jkirkwood001]

Lots of color about how the GA4 line was built.... Used the ripped-out conveyor belts (intended for parts delivery), but they weren't powerful enough to move a car, so they're on a 1% grade so the cars move with gravity.

Yeah, I loved that info about the 1% grade. I can just imagine the late-night, critical-path brainstorming session with all the smart guys (and gals?) around, and somebody shouts "hey! what if we made the assembly line go downhill!?!" And people looked at him or her and said "huh?? are you nuts?!?". Love this out-of-the-box thinking. Tesla: constant innovation.

...OK, another dumb question, asking about raising equity and asking about the FUD rumor that regulators were prohibiting them from raising equity. China Gigafactory will be raised with local debt. Tesla can raise capital if they want to. They do not want to, and do not intend to. Tesla intends to pay off their debts. ("I don't mean refiing them, I mean paying them off.") He specifies that the $900 million convertible will be paid off. There is no such notice from a regulator...

I thought that was a very worthwhile question. Fact is, most of the bear press were using a need for Tesla to raise capital as the reason for their sell ratings. It's crucial that Tesla demonstrate they can be cash-positive and won't need this. It's the last major issue that could be considered bankwupt-preceding.

 

[jkirkwood001]

..."Do you still plan to make a million vehicles in calendar year 2020?" [typo in your post] Yes. They will aim for a million, but if not, then 750,000. "Where will you get the capacity?" Shanghai. They believe they can do about 600,000 with current Giga and Fremont.

That one didn't jibe for me. The follow-up was "if Fremont can only make 600,000, where do you get the extra capacity?" And Elon said slyly "there's a place called Shanghai..." But they said to save CapEx they won't start building Shanghai until later in 2019, so it's extremely doubtful (another Tesla over-optimistic goal) they could be producing 200,000+ vehicles in Shanghai within a year. Unless they'll build them in a tent?!? Some pieces don't fit there - they can't scale back capital investment to get profitable, and also accelerate production past what existing lines can be optimized for...

 

[SwTslaGrl]

I think the GF3 Shanghai could start production as soon as the body line, paint shop and GA is set up. This would require excess capacity from GF1 and Fremont though (stamping, battery pack etc).

 

[neroden]

Given what they've learned, I do think they could get 150,000 out of Shanghai in 2020.... during the latter part of the year... if they manage to get battery cell supply lined up.

Think of Intel's "exact copy" procedure for new factories. Tesla isn't doing that, but they are trying to clone with only small changes, which should be faster than a from-scratch rampup. However, battery cell supply isn't lined up yet, as Elon noted. It's gotta be lined up.

(So I kind of think they won't get it done on time.)

 

[israndy]

Oh, dear god, no. Did they ask dumb questions again?

I cannot believe how HOLY the press seems to think that these inquisitors on the call are. I was really happy with Elon letting them know that taking time during the call to ask questions that have been answered is not making ANYONE happy. The press jumped ALL OVER Elon for it.

Now sure, he should have and did apologize, as it was not the behavior they were expecting and you don't wanna go around shocking people. But now that it's been 3 months and they have had a chance to think about what they did, I am really surprised they didn't apologize back, either in words or actions, like maybe good questions for the Earnings Call.

-Randy

 

[SPadival]

Good summary. But the answer to the condescending question from Tim Higgins was more nuanced.

"Where will you get the capacity?

Elon: There is this place called Shanghai.

 

[ls7corvete]

That one didn't jibe for me. The follow-up was "if Fremont can only make 600,000, where do you get the extra capacity?" And Elon said slyly "there's a place called Shanghai..." But they said to save CapEx they won't start building Shanghai until later in 2019, so it's extremely doubtful (another Tesla over-optimistic goal) they could be producing 200,000+ vehicles in Shanghai within a year. Unless they'll build them in a tent?!? Some pieces don't fit there - they can't scale back capital investment to get profitable, and also accelerate production past what existing lines can be optimized for...

Perhaps 1mm/year rate is what they are referring to. That does seem achievable to me, and is a metric that has been used commonly.

 

[FlatSix911]

Revenue grew 43% to $4 billion
Adjusted net loss of $520.2 million or $3.06 per share
Operating cash flow remained in the negative territory at $129.6 billion
Total vehicle production rose 55% sequentially to 53,339 units in Q2, while shipments jumped 80% to 40,740 units
Expects to produce 50,000 to 55,000 Model 3 vehicles in Q3, by producing 6,000 Model 3 vehicles per week by late August, and also to increase production over the next few quarters beyond 6,000 per week.

For visualization/Infographic - Tesla Q2 2018 earnings | AlphaStreet

Great Infographic... thanks for sharing

 

[Orbit]

First post, hi there!

Given what they've learned, I do think they could get 150,000 out of Shanghai in 2020.... during the latter part of the year... if they manage to get battery cell supply lined up.

Yet he Q2 letter states:

In July, we announced our plan to build a wholly Tesla-owned Gigafactory 3 in Shanghai – our first Gigafactory outside the US. We are excited about this opportunity, as China is by far the largest EV market in the world and Chinese support for electric vehicles has been exceptionally strong. Initial capacity is expected to be roughly 250,000 vehicles and battery packs per year, and will grow to 500,000, with the first cars expected to roll off the production line in about three years.

The letter seems to contradict how Elon responded to the analyst's question.
According to the letter, Shanghai isn't expected to contribute any cars before "the first cars roll off the production line in about three years."
Yet the analyst asked about 1 million cars in 2020.
So it seems that either Elon disagreed with the letter's timing regarding 2020 production, or Elon did not take into account the "2020" qualifier from the analyst.

 

[oneday]

First post, hi there!



Yet he Q2 letter states:



The letter seems to contradict how Elon responded to the analyst's question.
According to the letter, Shanghai isn't expected to contribute any cars before "the first cars roll off the production line in about three years."
Yet the analyst asked about 1 million cars in 2020.
So it seems that either Elon disagreed with the letter's timing regarding 2020 production, or Elon did not take into account the "2020" qualifier from the analyst.

Or the part in the letter that says “about” 3 years means exactly that. About could be sooner. Could be later. Elon definitely waffled a little on the question. There is definitely some things he can’t talk about, and things he doesn’t want to talk about. He is also an eternal optimist.

 

[Orbit]

Or the part in the letter that says “about” 3 years means exactly that. About could be sooner. Could be later. Elon definitely waffled a little on the question. There is definitely some things he can’t talk about, and things he doesn’t want to talk about. He is also an eternal optimist.

Yeah.... well, even then the letter's "about 3 years" refers to initial production of "first cars".
Which is very different from a full calendar year of ramped production in 2020, which would require production to be fully ramped up in less than 1.5 years. (17 months to be exact).



I thought about this some more.
The analyst asked: "Do you still plan to make a million vehicles in calendar year 2020?"

I can't remember if Tesla ever/recently stated a goal of 1 million production in 2020, or if it was more of a vague aspiration, or refereed to a run rate of 1 million by 2020, or if it was a conditional statement like "if A/B/C happens, then we would aim for X/Y/Z" or if it was actually said at all.

Either way, this question sets up Elon's answer to either;
1) Re calibrate and say this goal won't be met. Which can translate into pessimism and headlines of "more Tesla missed deadlines". He explicitly said he was trying to avoid soundbites hitting the media headlines. So I can imagine him wanting to avoid that.
OR
2) Reaffirm the goal, perpetuating unreasonable expectations and high hopes / momentum.

He seemed to walk a line between the two of them. First reaffirming the goal, and then walking it back.
Perhaps he is walking a necessary tightrope of balancing high optimism with time frames, together with an urgency within which the vision is never quite reachable.
Something like, "if a win feels like a win, then perhaps the expectations were not high enough in the first place, and higher expectations and pressure could have achieved even better measurable results, at the cost of feeling less like a win."


I just think it can be useful to separate out the aspirations, from interpreting them as concrete promises and definite expectations.