Tesla, Inc., Q3 2020 Earnings Call, Oct 21, 2020 - NasdaqGS:TSLA

NasdaqGS:TSLA

Martin Viecha, Vice President of Investor Relations at Tesla, Inc., made the following statements during the Q3 2020 Earnings Call:

1. Opening Remarks

   • "Thank you, Sherry, and good afternoon, everyone, and welcome to Tesla's Third Quarter 2020 Q&A Webcast. I'm joined today by Elon Musk, Zachary Kirkhorn and a number of other executives. Our Q3 results were announced at about 1 p.m. Pacific Time in the update deck we published at the same link as this webcast."

2. Forward-Looking Statements Disclaimer

   • "During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and 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 filings with the SEC."

3. Introduction for Elon Musk

   • "But before we jump into the Q&A, Elon has some opening remarks. Elon?"

4. Transition to CFO, Zachary Kirkhorn

   • "Thank you, Elon. I think our CFO, Zachary Kirkhorn, has some opening remarks as well."

5. Transition to Questions from Retail Shareholders

   • "Thank you very much, everyone. And let's begin with questions from say.com. The first question from retail shareholders is..."

6. Responses to Questions

   • After each question, Martin Viecha thanked the responder and transitioned to the next question.

7. Transition to Institutional Investor Questions

   • "Thank you. And the second question from institutionals is..."

8. Transition to Analysts' Questions

   • "Thank you very much. And now we can go to questions from analysts online. Sherry?"

9. Closing Remarks

   • "Thank you very much. Unfortunately, this is all the time we have for the Q&A today. I appreciate all your great questions, and we'll speak to you again in about 3 months. Thank you. Goodbye."

   • "Thank you."

Elon Musk made several comments and provided insights during the Q3 2020 Earnings Call. Here is a detailed summary of his statements:

Opening Remarks

• Q3 Highlights:

  • Best quarter in history with record production and deliveries.
  • Record revenue, net income, and free cash flow ($1.4 billion).
  • Achievements attributed to the amazing execution by the Tesla team.

• Battery Day:

  • Showcased plans for expanding and improving core battery technology.
  • Emphasized the importance of manufacturing technology.
  • Long-term competitive strength will be primarily in manufacturing.

• Battery Technology:

  • Reimagined batteries from scratch using first principles thinking.
  • Aimed to develop a battery that approaches the physical limits of cell technology.
  • Covered every important aspect of battery design and production.

• Future Battery Outcomes:

  • Batteries that cost half as much with reduced capital expenditures.
  • Expectation of seeing the first battery cell production line at Giga Berlin.

• Full Self-Driving Beta Release:

  • Praised the Autopilot team for their hard work.
  • Gradual rollout of the FSD beta to ensure safety and robustness.
  • Aims for a wide release by the end of the year.
  • System improves with more data collection and feedback loops.

• Autonomy Approach:

  • Generalized neural net-based approach without reliance on high-definition maps or a cellphone connection.
  • System designed to drive like a person, even in unfamiliar places.

• Capacity Build Out:

  • Expansion in Shanghai, Berlin, and Austin.
  • Expectation to start delivering cars from Berlin and Austin next year.
  • Manufacturing follows an S-curve, with capacity typically reached in 12-24 months.

• Manufacturing Challenges:

  • Described the difficulty in ramping up production and reaching full capacity.
  • Manufacturing capacity is often underestimated initially and then overestimated due to its S-curve nature.

• Closing Remarks:

  • Thanked employees, suppliers, and investors for their contributions.
  • Remained optimistic about Tesla’s future, emphasizing the importance of making great products at affordable prices.

Financial Health

• Profitability:

  • Achieved the fifth consecutive quarter of profitability.
  • Net income nearly doubled with nearly double-digit operating margins.
  • Excluded regulatory credits and CEO grant vesting expenses for a clearer view of core business health.

• Automotive Gross Margin:

  • Increased materially from 18.7% to 23.7%.
  • Some programs achieved greater than 25% gross margin.
  • Continued reduction in manufacturing and operational costs.

• Cash Flows:

  • Cash balance increased to $14.5 billion, including $1.4 billion in free cash flow.
  • Operating cash flows were $2.4 billion, with a $600 million benefit from working capital improvements.
  • Capital expenditures grew to $1 billion, driven by Model Y investments in Shanghai, Berlin, and Austin.

• Future Investments:

  • Revised expectations for capital spending in 2021 and 2022 to $2-2.5 billion.
  • Adequate liquidity and expected cash flows to fund these investments.
  • Additional scope and location-specific costs may extend the payback period.

• Delivery Guidance:

  • Aiming to achieve the original 2020 guidance of 500,000 deliveries despite earlier operational interruptions.
  • Tight execution needed to meet this goal.

Other Business Units

• Energy Business:
  • Strong quarter for the Energy business.
  • Megapack deployment will continue to expand rapidly.
  • Order book rapidly filling up through 2023.
  • Cost-effective solar plus storage displacing fossil fuel generation.
  • Powerwall demand remains strong.
  • Lowered residential solar retrofit price to $1.49 per watt after tax incentives.
  • Solar Roof installation time reduced significantly.

Conglomerate of Start-Ups

• Business Units:
  • Tesla comprises over a dozen start-ups, each major product line and new plant being a start-up.
  • Internal applications team develops the core technology that runs the company.
  • Insurance could represent 30-40% of the car business value.
  • Autonomous driving, computer chip design, cell manufacturing, power electronics, motor design, charger networks, and Supercharger networks are all start-ups within Tesla.

Future Plans

• Robotaxi Network:

  • Focus on enabling the robotaxi system with elements of Uber, Lyft, and Airbnb.
  • Potential for customers to manage fleets of autonomous vehicles.

• Home Systems:

  • Conceptualized an integrated home system combining power generation/storage, heating/cooling, air filtration, and water purification.

• Affordability and Margins:

  • Importance of lowering prices to improve affordability.
  • Continual improvement in cost of production.
  • Margins will look small compared to the value of autonomy.

• Battery Capacity:

  • Stationary storage deployments are expected to double next year.
  • Battery production capacity will not be a bottleneck for Model Y production in Berlin and Texas.

• Long-Term Volume Targets:

  • Commitment to pushing volume as much as reasonably possible.
  • Continual improvement in cost structure and value of vehicles.

• Cell Production:

  • Pilot cell production facility in Fremont to rapidly iterate on manufacturing scale-up challenges.
  • Internal cell production will help ramp in 2022 but is not essential for 2021.

• Midterm Targets:

  • Difficulty predicting exact numbers due to the exponential nature of growth.
  • Goal of replacing 1% of the global fleet per year, targeting 20 million vehicles by 2030.

• LIDAR:

  • Even if LIDAR were free, Tesla likely would not use it, focusing on passive optical systems.

• Cybertruck:

  • Improvements to the Cybertruck since unveiling, aiming to make the delivered product better.
  • Production dependent on completing the Austin factory.
  • Expected to start deliveries towards the end of 2021, with significant deliveries in 2022.

• European Strategy:

  • Prioritizing production to meet demand and generate volume.
  • Need to increase production to eliminate the need for prioritization.

• Semi Truck:

  • Development of Megachargers for the Semi, aiming for charging during breaks.
  • Standard infrastructure for all customers.
  • Cell production limitations are the main constraint for ramping up Semi production.

• Stationary Storage Business Model:

  • Opportunities to share in savings achieved through grid stabilization.
  • Behind-the-meter aggregation providing grid services and reducing prices for customers and grid operators.

• Cell Vehicle Integration:

  • Structural pack design will eventually make traditional skateboard designs obsolete.
  • Transition will occur over several years.
  • Integrated design will contribute structural value, reducing weight and cost.

These statements provide insights into various aspects of Tesla's operations, including its financial performance, product developments, and strategic direction.

RJ Johnson, the Former Global Head of Commercial Energy at Tesla, provided updates on the Energy business during the Q3 2020 Earnings Call. Here’s a detailed summary of his statements:

1. Energy Business Growth:

   • Q3 was a strong quarter for the Energy business, and it is poised for continued strong growth in energy storage and solar.
   • Megapack is expected to be a large growth segment for the business, with deployments rapidly expanding as the product reaches full capacity.
   • Demand for Megapack exceeds supply through 2021, and efforts are underway to ramp up production to match unprecedented global demand through 2023 and beyond.
   • The order book is rapidly filling up through 2023, with orders in the multiple gigawatt-hour scale.

2. Cost-Effectiveness of Solar Plus Storage:

   • Large-scale solar plus storage is now more cost-effective than traditional fossil fuel generation in many locations worldwide.
   • This trend will continue as Tesla removes costs, displacing existing and new fossil fuel generation, including standalone storage.

3. Autobidder and Market Performance:

   • Many customers are utilizing Autobidder to maximize returns.
   • Tesla optimizes its hardware and software with advanced real-time bidding strategies that continue to outperform the market where deployed.

4. Powerwall Demand and Capacity:

   • There is continued strong demand for residential storage as customers seek increased reliability and backup home generation.
   • Tesla has a large backlog of Powerwall orders and continues to invest in increasing capacity to fulfill customer orders.
   • Customers in some jurisdictions are providing services back to the grid when they do not need to consume energy or require backup power, which has massive potential to reduce system cost and make the grid more efficient globally.

5. Residential Solar Retrofit Pricing:

   • Tesla lowered its residential solar retrofit price to $1.49 per watt after tax incentives, the lowest in the industry.
   • This was achieved by leveraging its online vehicle ordering infrastructure, substantially reducing the soft costs associated with sales and marketing.
   • Fixed costs remained relatively flat as volume and efficiency increased, leading to increased profitability in the retrofit business.

6. Technology Backbone and Efficiency:

   • The same methodology is used across the entire Energy business, including service, to capitalize on the technology backbone of the company.

7. Solar Roof Progress:

   • Significant experience has been gained over the last year in the installation process, a key enabler to scale the business.
   • Tesla recently demonstrated the ability to complete Solar Roof installation in just one day, with caveats regarding the removal of the existing roof and preparation.
   • Reduced installation time provides a better customer experience and enables the business to grow exponentially as scale effects allow for increased efficiency.

8. Future Outlook:

   • The Energy segment is poised for strong growth as Tesla continues to focus on increasing scale while reducing costs to maximize profitability.

Zachary John Planell Kirkhorn, referred to as the "Former Master of Coin & CFO," made several comments during the Tesla, Inc. Q3 2020 Earnings Call. Here is a detailed summary of his statements:

1. Financial Health and Net Income:

   • He noted that the company's financial health continues to rapidly improve.
   • Q3 was another great quarter on nearly all dimensions, with the best net income and nearly double-digit operating margins.
   • Two important points to consider for Q3 profitability:
     • Regulatory credits business was stronger than expected, and the company is tracking to more than double this year compared to the last.
     • Due to the rise in the market cap of the company, the second and third tranche of the CEO grant vested during the quarter, and the company started expensing one more tranche, resulting in roughly $300 million of combined period expense.
   • He suggested viewing the quarter excluding both these items to get a true sense of the health of the core business.

2. Automotive Gross Margin:

   • Automotive gross margin, including regulatory credits, increased materially from 18.7% to 23.7%, with some programs achieving greater than 25% gross margin.
   • Inefficiencies related to factory shutdowns affected margins in Q2.
   • The company continues to reduce its manufacturing and operational costs.
   • The company is seeing benefits from the ongoing upward trend of locally built and delivered cars, which has increased from under 50% at the beginning of last year to over 70% most recently, a core component of the cost reduction strategy.
   • Improved vehicle reliability across the fleet is also contributing to financial benefits.

3. Services and Other Margins:

   • Services and other margins improved yet again, driven by the used vehicle business and efficiencies in service operations.

4. Energy Business:

   • The Energy business achieved record storage deployments, aided by the positive reception of the Megapack and Powerwall products as production and deployments grow.
   • Solar deployments doubled, and the company is continuing to make progress on that front.

5. Cash Flows:

   • Cash balance increased to $14.5 billion, which includes free cash flows of $1.4 billion, the highest yet.
   • Operating cash flows were $2.4 billion, including a $600 million benefit from working capital as the company has made progress on days of receivables and inventory despite a reduction in days of payables.
   • Capital expenses grew to $1 billion, driven by Model Y investments in Shanghai, Berlin, and Austin.
   • Investments in Model 3 Shanghai and Model Y in Fremont are expected to have already fully paid for their respective investments by the end of the year.

6. Future Capital Spending:

   • Expectations for capital spending have been revised up by $2 billion to $2.5 billion for 2021 and 2022.
   • This increase is driven by an increase in in-source scope for certain factories, including battery cell manufacturing, as well as investments to enable greater capacity expansion in the future.
   • While the return on investments is expected to remain very strong, the payback of these investments may be slightly longer than what was seen in Model 3 in Shanghai and Model Y in Fremont.

7. Financing Cash Flows:

   • Financing cash flows were $4.5 billion as the company reduced the use of its working capital lines, offset by a $5 billion equity raise in September.
   • The company expects over $1 billion in early convert paydowns in Q4, primarily associated with the 2021 conversions, but also 2022 and 2024.

8. Future Focus:

   • The company remains focused on strengthening the core fundamentals of the business.

   • It is increasing production to meet demand, reducing costs, including localization, driving higher efficiency across the business, and tightening its cash conversion cycle.

   • Tremendous progress has been made on this front over the last 1.5 years.

   • The company is aiming to achieve its original 2020 guidance of 500,000 deliveries despite the operational interruptions earlier in the year.

   • While this goal remains a genuine challenge, it believes it's possible with tight execution across the company.