Tesla, Inc., Q1 2020 Earnings Call, Apr 29, 2020 - NasdaqGS:TSLA

NasdaqGS:TSLA

Martin Viecha, Vice President of Investor Relations at Tesla, made the following statements during the Q1 2020 Earnings Call:

1. Opening Remarks:

   • Thanked the operator and welcomed everyone to Tesla's First Quarter 2020 Q&A Webcast.
   • Mentioned that he was joined by Elon Musk, Zachary Kirkhorn, and other executives.
   • Noted that Q1 results were announced at about 1:00 p.m. Pacific Time in the update deck published at the same link as the webcast.
   • Reminded participants that the call would include forward-looking statements and discussed the risks and uncertainties associated with such statements.

2. After Elon Musk's Remarks:

   • Thanked Elon and invited Zachary Kirkhorn to give his opening remarks.

3. Questions from Institutional Investors:

   • Asked about levers Tesla could pull to accelerate adoption of Full Self-Driving (FSD) and deepen its data advantage.
   • Inquired about the room for Tesla to lower manufacturing costs in China and pass those savings to buyers to qualify for subsidies.
   • Asked how Tesla has improved or is expected to improve coming out of the COVID-19 crisis.
   • Requested a brief preview of Battery Day, focusing on steps Tesla is taking to improve cell energy density and the timeline for introduction.
   • Inquired about the progress towards the development and commercialization of Full Self-Driving and the revenue recognized so far.

4. Questions from Retail Investors:

   • Asked about the 50% compound annual growth target for Tesla over the next 5 to 10 years.
   • Inquired when Tesla would announce the next Gigafactory and how many Gigafactories are planned for the next 5 years.
   • Asked for an update on the Solar Roof ramp, including current installation rates and targets for the end of 2021.
   • Inquired about Tesla's plans to enter the residential and/or commercial HVAC market and provided details on how the system would work.
   • Asked when Tesla would start acquiring utilities like the Hornsdale Power Reserve and Moss Landing instead of selling them battery storage.

5. Transition to Analyst Questions:

   • Thanked everyone and moved the call to analyst questions.

6. Closing Remarks:

   • Thanked everyone for their great questions.

   • Noted that the call had concluded and said they would speak again in three months.

   • Ended the call by thanking everyone and wishing them a good day.

Elon R. Musk made several statements during the Q1 2020 Earnings Call. Here’s a detailed summary:

Opening Remarks:

• Q1 Performance: Despite challenges, Q1 2020 was strong, with positive GAAP net income in a seasonally weak quarter.
• Automotive Gross Margin: Achieved a 20% automotive gross margin, excluding regulatory credits, while ramping two major products.
• Model Y Ramp: Model Y production ramp was faster than Model 3's Fremont ramp in the first two quarters.
• Autopilot Update: Released a new software update for traffic lights and stop signs to early access users in March and to all U.S. customers with the Full Self-Driving package.
• Autopilot Capabilities: Cars automatically stop at stop signs and traffic lights until the driver confirms to proceed. Confirms that the car is capable of much more but only exposes functionality that is considered safe.
• Data Collection: Collecting data from over 1 million intersections every month, with the number expected to grow exponentially as more people get the update and start driving again.
• Autopilot Progress: Confident that by the end of the year, it will be possible to drive from home to office with no interventions, based on leading-edge alpha builds.

Other Technology Fronts:

• Model S and X Range: Increased the range of Model S and X to 391 miles and 351 miles, respectively. Clarified that the actual Model S range is 400 miles, and the EPA test resulted in a 2% range loss due to the car being left unlocked overnight.
• Model Y Manufacturing Innovations:
  • Introduced a revolutionary 2-piece rear underbody casting and plans to introduce a single-piece casting later in the year.
  • Introduced a new heat pump that improves range, particularly at low temperatures.
  • Positive customer feedback on the Model Y, expecting it to be the best-selling product ever.

Closing Remarks:

• Capacity Expansion: Continuing Model Y capacity expansion at full speed in Giga Berlin, Giga Shanghai, and Fremont (pending local regulations).
• Global Manufacturing: Looking forward to becoming a truly global manufacturer with major factories in North America, China, and Europe, with a capacity of well over 1 million units per year.

Questions and Answers:

• Full Self-Driving (FSD):
  • Plans to offer FSD as a subscription service by the end of the year.
  • Buying FSD is an investment in the future, and Tesla is confident that it will pay off for consumers.
• China Subsidies:
  • Rapid progress on lowering production costs in China, and plans to reduce the price of the standard range Model 3 below the subsidy limit while maintaining good gross margins.
• COVID-19 Impact:
  • Caused Tesla to look closely at its cost structure and become more efficient.
  • Decided to continue expanding rapidly and investing in the future and new technologies.
• Battery Day:
  • Tentatively scheduled for the third week of May.
  • Expected to be one of the most exciting days in Tesla's history, with announcements about improvements in self-energy density and timeline for introduction.
• Autopilot and Full Self-Driving (FSD):
  • Tremendous untapped potential in the fleet for upgrades to Autopilot and Full Self-Driving.
  • Plans to enable upgrades via in-app purchases or subscriptions.
• Growth Targets:
  • Maintains a 50% compound annual growth target for the next 5 to 10 years, aiming for 4 million vehicles in 2025 and over 20 million vehicles in 2030.
• Next Gigafactory:
  • Possible announcement as soon as next month, and it will be in the U.S.
• Solar Roof:
  • Gained momentum before COVID-19 but was affected by shutdowns and permit offices being closed.
  • Confident that by the end of the year, Tesla should be installing at a rate of 1,000 Solar Roofs per week, accounting for seasonality.
• HVAC System:
  • Excited about developing a high-quality HVAC system with hospital-grade particle filtration.
  • Mentioned the possibility of using the HVAC system for water heating as well.
• Infrastructure Investment:
  • Advocated for investing in infrastructure in the U.S., noting that China and Europe have better infrastructure.
  • Criticized the shelter-in-place orders, calling them an infringement on personal freedoms.
• Model Y Gross Margin:
  • Model Y was profitable in its first quarter of production.
  • Expected marginal cost of the 5-seater Model Y to be comparable to the Model 3 once production reaches around 10,000 to 20,000 units.
• Autonomy Rollout Strategy:
  • Full autonomy by the end of the year, with a gradual rollout of functionality.
  • Described the rigorous testing process, including simulations and real-world testing.
  • Expects to have Full Self-Driving functionality by the end of the year, followed by improving reliability and obtaining regulatory approval.
• Robotaxi Timeline:
  • Believes robotaxis could be in operation with the network fleet next year, not in all markets but in some.
• Energy Storage Demand:

  • Confirmed that demand for energy storage outstrips supply.

  • Focused on reducing the cost of investments in new cell capacity to scale the energy storage business.

Zachary John Planell Kirkhorn, referred to as the Former Master of Coin & CFO, made several statements during the Q1 2020 Earnings Call:

1. Opening Remarks:

   • Praised the accomplishments of the Tesla team in the past quarter.
   • Highlighted the successful launch, ramp, and demonstration of profitability of the Model Y significantly ahead of schedule.
   • Noted the progress made on cost control and ramp efficiency, describing the achievement of profitability in the first quarter of production as significant.
   • Mentioned the dramatic improvement in Shanghai Model 3 margins, nearing those of Model 3s built in Fremont, despite not yet running at full capacity and managing through the production shutdown in early February.
   • Announced a long-range and performance variant of Model 3 for the roadmap, which will positively impact ASPs in China.

2. Order Rates:

   • Stated that Tesla did not experience much impact related to the expiration of government incentives at the end of Q4.
   • Exited the quarter with the highest-ever backlog.

3. Financial Performance:

   • Achieved the first-ever Q1 profit, with strong automotive gross margins despite charges associated with production downtime.
   • Progress on OpEx efficiency and service and other margins.
   • Energy business impacted by shutdown activities in Q1, limiting deployments, and experiencing expected launch inefficiencies associated with the third version of the Solar Roof.

4. Regulatory Credit Sales:

   • Expected regulatory credit sales to generally increase over time.
   • Noted that most of the credit revenue did not contribute to cash in Q1 and is reflected in the accounts receivable on the balance sheet.

5. Free Cash Flows:

   • Impacted by the temporary increase in end-of-quarter inventory for all products resulting from the abrupt suspension of production and delivery operations.
   • Mentioned that without these interruptions, Tesla was pacing towards a record quarter of deliveries and strong free cash flows.

6. Manufacturing and Delivery Operations:

   • Shanghai factory remains operational, contributing an increasing level of cash flows and profitability to the company.
   • Working towards restarting production in Fremont as soon as possible.
   • Continued to deliver cars that could not be delivered at the end of the first quarter.
   • Vehicle inventory balance increased by 14,000 units at the end of Q1, impacting free cash flows but helpful in Q2.
   • Noted the importance of locally producing and delivering vehicles in Fremont and Shanghai for improved cash conversion cycles.

7. Impact of Sales and Delivery Operations:

   • Despite the pause in many areas of the world, Tesla is still receiving many online orders.
   • Extended shutdown in Fremont will impact near-term financial performance, and Tesla will need to work through how quickly production can be ramped back to previous levels.

8. Cash Flow Management:

   • Stressed the importance of working capital management, particularly raw material inventory, in managing cash flows during this time.
   • Actions taken to eliminate or reduce noncritical expenses and optional investments while continuing to drive efficiencies throughout the business.

9. Liquidity:

   • Modeled many scenarios into 2021 and remains comfortable with sufficient liquidity to proceed fully with the most important long-term investments.
   • Tesla remains an agile and dynamic company, with the ability to quickly adjust spending and planning as required.

10. Full Self-Driving (FSD):

    • Agreed with the idea of offering FSD as a subscription service, noting that rolling the upfront purchase of the FSD option into a loan or lease would be the least expensive plan on a monthly basis to own.
    • Acknowledged that some customers who owned or leased their vehicles did not purchase the FSD option upfront, and a subscription model would enable those customers to spread out the cost of ownership over time.

11. China Manufacturing Costs:

    • Cost of vehicles produced in Shanghai in Q1 is already lower than the cost to produce the Model 3 in Fremont, with significant opportunities to further reduce costs.
    • Fixed cost absorption from higher production volumes will occur through the rest of the year.
    • Not yet fully localized on the supply chain, with additional opportunities to reduce costs and expand margins even with the reduction in price of the standard range version of the vehicle.

12. Battery Day:

    • Noted that Tesla has been focused on reducing the cost of investments in new cell capacity, which is crucial for growing the energy storage business.

13. Liquidity Update:

    • Provided no additional color on liquidity at the end of April, mentioning the $8.1 billion in cash and cash equivalents at the end of Q1.
    • Noted that Tesla is managing liquidity very closely, with progress being made in delivering vehicles that could not be delivered at the end of Q1.
    • Discussed the ups and downs of liquidity, particularly in relation to production and payables.

14. Cell Strategy:

    • For sales with all historical partners, Tesla is looking for competitive technology and competitive pricing.
    • Noted that Tesla will talk more about its approach at Battery Investor Day.

15. Energy Storage:

    • Focused on reducing the fundamental cost of investments in new cell capacity to grow the energy storage business, which will be addressed further at Battery Investor Day.