Tesla Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2022

There are 13 speakers on the call.

Operator

Good afternoon, everyone, and welcome to Tesla's Q3 2022 Q and A webcast. My name is Martin Viecha, VP of Investor Relations, and I'm joined today by Elon Musk, Zachary Kirchorn and a number of other executives. Our Q3 results were announced at about 3 pm Central Time in the update that we published at the same link as this webcast. During the call, we will discuss our business outlook and make forward looking statements. These comments are based on our predictions and expectations as of today.

Operator

Actual events or results could differ materially into a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the Q and A session portion of today's call, please limit yourself to one question and one follow-up. Please use the raise hand button to join

Speaker 1

the question queue. But before we

Operator

jump into Q and A, Elon has some opening remarks. Elon?

Speaker 1

Thank you, Martin. So just to do a Q3 recap. Q3 was another record quarter on timing levels. Our we had our industry leading operating margin reach 17%, and our free cash flow Past $3,000,000,000 in Q3 and approached $9,000,000,000 in the past 12 months. As our factories ramp, we're looking forward to a record breaking Q4.

Speaker 1

So it's really knock on wood, it looks like we'll have an epic end of year. So Q4 is looking extremely good. On the production ramp, Giga Berlin achieved another milestone of 2,000 calls made in a week With very good quality and, it's ramping rapidly. Bigger Austin Okay. Good.

Speaker 1

Thank you, Texas. Should reach this milestone very soon. And in fact, just yesterday, we extrapolated yesterday's Hold rate, it would be 2,000. Our production of 4,680 cells has tripled in Q3 compared to the previous quarter. We are finally gaining rapid traction on the 4,680 cell, and its output is growing Rapidly, we expect to start incorporating cars and having it be, a significant portion of our production here in Texas in the coming months.

Speaker 1

We also have our 2nd generation of manufacturing equipment for 4,680 cells in Texas, which continues to share great progress on our original pallet line in Fremont. The Fremont factory team once again reached record production in Q3. I intend to keep, raising production in Fremont. Regarding autopilot, at the end of At the end of September, we hosted our 2nd AI Day, entered the first prototype of our Oculus robot. The latest updates on our Dojo train computer and a wide range of improvements of full self driving software.

Speaker 1

Our vehicles have now driven nearly 60 miles in full self driving beta mode, and the server continues to grow exponentially. Our goal with that AI Day was to was recruiting, and we've seen a massive influx of World Class Artificial Intelligence Engineering and Scientist Resume. So, it generated a tremendous amount of interest from some of the the best AI researchers in the world. I can't emphasize the importance of this enough, Because I think it finally has become clear to the smartest AI technologists in the world that Tesla He is among the very best. So, and this quarter, We expect to go to a wide release of full self driving beta in North America.

Speaker 1

So Anyone who has ordered full self driving beta full self driving will have access to the FSD beta program This year, probably about a month from now. So and then obviously any new car new anyone who buys a car And purchase purchase of a full site driving option, we'll immediately have that available to them. So the the safety that we're seeing When the car is in FSD mode, it's actually significantly greater than the safety we're seeing than when it is not, Which is a key threshold for going to a wide beta. Let's see. With respect to demand, We've got a lot of questions about demand in recent weeks.

Speaker 1

I can't emphasize enough. We have excellent demand for q4, and we expect to sell, every car that we make for as far into the future as we can see. So the factories are running at full speed, and we're delivering every car we make and keeping operating margins strong. So we're still a very small percentage of of the total vehicles on the road of the 2,000,000,000 Tons of trucks on the road, but we only have about 3.5000000. So we've got a long way to go to even reach 1% of the global fleet.

Speaker 1

Let's see. Based on my What people are based on many things, but certainly, questions I get on Twitter about buybacks. And I think every one of our Board members has gotten questions about buybacks. The we've debated the buyback idea Successfully at Board level. The Board generally thinks that it makes sense to do a buyback, but we want to Worked through the right process to do a buyback, but it is certainly possible for us to do A buyback on the order of $5,000,000,000 to $10,000,000,000 even in the downside scenario of next year, even if next year is This is a very difficult year.

Speaker 1

We still have the ability to do a $5,000,000,000 to $10,000,000,000 buyback. This is obviously pending board review and approval. So It's likely that we'll do some meaningful buyback. So in conclusion, While the market themes revolve around the short term, it's very important to focus on the long term. I can't emphasize this enough with investors and I think long long time investors obviously recognize us with with Taslo.

Speaker 1

We have your sort of local ups and downs, but long term trend has been extremely good. And several years ago, I said, I think on our earnings call that I thought it was possible for Tesla worth more than Apple, which was then the highest market cap company, I think, in the market. At the end, Apple at the time, I think, was around $700,000,000,000 And I said it required incredible executions and at least some luck. And we didn't even indeed achieve that Tesla went. In fact, our past Apple's market kept the time.

Speaker 1

And I now have the opinion that We can far exceed Apple's current market cap. In fact, I see a potential path Which has it to be worth more than Apple and Saudi Aramco combined. So No, that doesn't mean it will happen, or that will be easy. In fact, I think it will be very difficult, it will require a lot of work, Some very creative new products, tremendous expansion, and always somewhat. But for the first time, I am seeing I see a way for Tesla to be Let's say roughly twice the value of Saudi Aramco.

Speaker 1

I think that's I haven't quite seen that yet. I mean, I haven't this is the first time I'm seeing that potential. So we have an incredible product portfolio. I think we've got The most exciting product portfolio of any company on earth, some of which you've heard about, some of which you haven't. We're in the the final, lap for Cybertruck.

Speaker 1

We're building the Sabtruck line here at, Giga Texas sourcing and Making a lot of progress in the robotaxi platform design. And And with, with respect to batteries. We're moving as fast as possible to have to to achieve 1,000 Big watt hours a year of production capacity in the United States, vertically integrated. So Anode Cathode, Lithium Refining, we're moving at a top speed to to do that. So I think it's an incredibly exciting future, and really an unprecedented future.

Speaker 1

But none of this would be possible without the incredible team that we have here at Tesla. So I'd like to give a huge shout out to all of our factory employees, Insurers, executives and the whole Tesla team. You guys rock. You're the ones making it happen. Thank you.

Speaker 1

Thank you, everyone. Thank you very much.

Operator

And Zack has now for any remarks as well.

Speaker 2

Yeah. Thanks, Martin. Just to continue on Elon's theme, I just want to thank and congratulate the Tesla team for achieving record vehicle deliveries, production and storage deployments in the Q3. On automotive profitability, our GAAP operating margin was 17.2% with automotive gross margin at 27.9%. Operating margin is one of our best yet with improvements in operating leverage.

Speaker 2

However, Austin and Berlin ramp costs weighed on our margins, particularly if you compare it to Q1. Removing regulatory credits and Austin and Berlin, our operating margins would have been our strongest yet and auto gross margin would have been nearly 30%. Note that while small and growing, each car we build in Austin and Berlin is contributing positively to profitability. We also continue to experience margin headwinds associated with macroeconomic conditions as we've discussed at length on prior calls, in particular, raw materials logistics and foreign exchange was a big part of this past quarter. On energy profitability, we achieved Our strongest gross profit yet for this business, driven primarily by record volumes of our MegaPack and firewall products.

Speaker 2

Our free cash flows were also a record despite an increase in cars in transit at the end of the quarter, which has a negative impact on working capital. Specifically on cars and transit, as noted in our press release on October 2nd, we have started to experience limits on outbound logistics capacity, which we didn't anticipate. This issue is State. This issue is particularly present for ships from Shanghai to Europe and local trucking within certain parts of the U. S.

Speaker 2

And Europe. Our historical operating pattern of batch building by delivery region leads to extreme concentrations of outbound logistics needs in the final weeks of each quarter. Just to put this in perspective, roughly 2 thirds of our Q3 deliveries occurred in September and 1 third in the final 2 weeks. As a result, we've begun to smooth the regional builds throughout the quarter to reduce our peak needs for outbound logistics. We expect this to simplify our operations, reduce costs and improve the experience of our customers.

Speaker 2

As we look ahead, our plans show that we're on track for the 50% annual growth in production this year, although we are tracking supply chain risks which are beyond our control. On the delivery side, we do expect to be just under 50% growth due to an increase in the cars in transit at the end of the year as noted just above. This means that again, you should expect a gap between production and deliveries in Q4 And those cars in transit will be delivered shortly to their customers upon arrival to their destination in Q1. Austin and Berlin ramp costs will continue to weigh on margins, although we expect the impact to be less than what we saw in Q3. And as Elon mentioned, We are continuing to build as many cars as possible, while also maintaining strong operating margins.

Speaker 2

Thank you. Thank you very much. And let's go first through the shareholder questions.

Operator

The first shareholder question is, given the stringent battery content and assembly requirements for consumer tax credit eligibility under the Inflation Reduction Act, Can you speak to Tesla's ability to meet those thresholds in each of 2023, 2024 and 2025 with your existing and planned supply chain?

Speaker 1

Well, yeah, I mean, I think just at a high level, I'd say, we do expect to fully meet the, IRAs requirements.

Speaker 2

Yes. We view the passing

Speaker 3

of the Inflation Reduction Act as a significant boost towards accelerating our mission, We're also scaling the battery supply chain at large in the United States. We expect Treasury to publish detailed guidance by the end of the year. Until such time, it's difficult to fully determine the eligibility criteria, but we believe Tesla is very well positioned to capture a significant share of that for solar storage and also electric vehicles.

Speaker 1

Yeah. Like I said, we're Like I said like I said earlier, we're we're gonna go basically pedal to the metal, as fast as humanly possible to get to a 1,000 gigawatt hours a year of production in the US, vertically integrated.

Operator

Thank you. Let's Let's go to the next question. The next question is, what updates can you offer on the backlog and recent order intake trends, especially outside of the U. S. And especially in China?

Speaker 1

Well, it's There's definitely China is experiencing of a recession of sorts, which is property market simply from a property market mostly. And Europe has a recession, so it's driven by energy. The U. S. Actually is Pretty good.

Speaker 1

North America is a pretty good help. Although the Fed is raising interest rates more than they should, but I think they'll eventually realize that and bring it back down again. So demand is a little harder than it would otherwise be. But as I said earlier, we are extremely confident of the great Q4 And we anticipate continuing to grow Our vehicle production sales deliveries by, on average 50% a year as far into the future as we can see. Thank you.

Speaker 1

Actually, one caveat, I should say, growing production by 30% every year because deliveries, We're trying to smooth out the deliveries and not have this crazy delivery wave at the end of every quarter. So, and in fact, we were just Fundamentally running out of, there weren't enough boats. There weren't enough trains. There weren't enough car carriers to actually support the wave Because they got too big. So whether we like it or not, we actually have to smooth out the delivery of cars intra quarter because there were just odd enough Transportation objects to move them around.

Operator

Thank you. The next question is, do you still expect 50% annualized growth for the foreseeable future? Is this also true specifically for the Chinese domestic market? Do you expect to meet to cut vehicle prices or offer incentives in any market to Sustainable Demand or Has Demand Remain Stable or Is It Even Rising? We've got a few questions there.

Speaker 1

Well, like I said, we want to sort of focus on a high level on what we think is possible here. To the best of our knowledge, we believe that Tesla will continue to grow deliveries in revenue production At a 50% or greater compound annual growth rate. It might occasionally be a year that is a little less, and then Some years will be maybe a little more or a lot more. Some of our out year planning, we see potential I know growth rates that are in excess of 50%.

Operator

Thank you. The next question is, can you tell us more about the product feature roadmap beyond new models and FSG and especially for interior and powertrain of existing vehicle models? Yeah.

Speaker 1

We we could, but we won't. Sorry, guys. We we can't we we can't like jumping on on future product

Speaker 4

announcement. Committed to continuous improvement. Yeah.

Speaker 1

We obviously are continuing. Yes. Not yet. We will also be committed to continuous improvement. Yeah.

Speaker 1

At Tesla, we've always been committed to continuous improvement. So This friend might have asked me, like, when should I buy a car? I'm like, now because we just keep improving the cars. It's always the latest Tesla. Yeah.

Speaker 1

Best of the latest Tesla. So, I don't really, yeah, the new, you know, every every every now and again, we do have some, Big technology upgrade like Plaid. And by the way, I think the Plaid Model S and X, so it's the best cars on earth. That's there's nothing even close, in my opinion. Just try one.

Speaker 1

Yeah. Perfect.

Operator

Thank you. The next question is, we keep hearing of dire energy crisis in Germany this winter. What are Tesla's plans to combat power cuts? And will there be any delays in ramp up in production for Giga Berlin because of this?

Speaker 2

Yeah, I can take it. I think two points on this question. The first is that Based upon everything that we know, we don't see this as a large risk to the company. Even if production did go down for a period of time, this is all near It doesn't have any impact on the long term of the company.

Speaker 1

But we don't, we're not, we have no indication whatsoever that we will have to cut our production at general. No.

Speaker 2

And we put in place backup plans and we're working through the supply chain as well. Nearly all of our suppliers are prepared as well. So We'll see how this plays out, but it's not something that we're terribly worried about.

Operator

Thank you. And the next question is, how is production planning going for the cyber truck? What is the initial Phase 1 production target? And can we expect an update on pricing and final design?

Speaker 5

As Elon said earlier, we'd be on product facilities preparations here in Giga Texas for Cybertruck. We're still on track to enter early production in the middle of next year. We started our beta builds of Oh, battery battery in existing March, when

Speaker 1

can I drop my beta? That was the question. In a few weeks. In a few weeks. Okay, great.

Speaker 1

Thank you.

Speaker 5

And that's going well. And we continue ramping up through the end of next year and into 2023. Great.

Speaker 6

The card

Speaker 1

is going to be sick. Let's go to the Wall of Famer next level. Sorry, it took it longer than expected, but there were a few things that got in the way like Insane global supply chain shortages and pandemics. Yeah. For sure, force majeurs if ever 1.

Speaker 1

Right? Thank you. Of course, Tesla Semi, of course. So we'll be handing over our first production Tesla semis To Pepsi on September 1st, I'll be there in person. And there will be begin ramping up production of the Tesla Semi, which is a, max load heavy, heavy heavy truck.

Speaker 1

Yeah. That's a class a truck,

Speaker 4

Class 8 truck. No sacrifice to cargo capacity.

Speaker 1

Yeah. No exactly. No very important. No sacrifice to cargo capacity, 500 mile range. I'm just being clear.

Speaker 1

500 miles with the cargo. Yeah. 500 miles with the cargo on level ground. Yes. So not up, you know, echo.

Speaker 1

But the point is, it's a long range truck And even with heavy cargo. And the number of times people told me, no, you can't. It's impossible to make a long range, Heavy duty Class A truck. And then I asked, well, what are your assumptions about 1 hour kilogram And what else do you want? And they would look at me with a blank stare and then say hydrogen.

Speaker 1

I'm like, no, that's That's not an answer, but I was looking for numbers. Literally. That's not a number. There's an element on the PR table. You obviously don't need hydrogen for heavy trucking.

Speaker 1

That's what we're trying to make here. And we'll be ramping up semi production through next year. As as, you know, like everyone knows at this point, It takes about a year to ramp up production, so we expect to see significant we're tentatively aiming for 50,000 units in 2024 for, Zaza Semi in in North America, and and, obviously works very well beyond North America. And these would sell I don't know what to say with sacrifices, but they're much more than a passenger vehicle. So The 50,000 heavy trucks of this nature would be worth several, lot of lives.

Operator

Thank you. The next question is, what is the progress of the 4,680 cell ramp? And what factors determine whether vehicles get 2170s versus 4,680 cells and how will that change in the next year?

Speaker 4

Yeah, ramp is going well as Elon said. Total output is up 3x quarter over quarter, and production is tracking to exceed 1,000 car sets per week this quarter, as we said, last quarter. Our focus is now shifting from 100% ramp to cost and further expanding production capacity in North America,

Speaker 3

As you know, also mentioned,

Speaker 4

on the 2,170 versus 4,680 in our factories, we really attempt to minimize factory complexity and product changeover, while still making sure we get enough new product into the field to learn how it is performing. And that sort of mix is going to shift as for 680 scales here and the overall factory ramp

Speaker 5

that proceeds in Texas. Right.

Speaker 1

Basically, in a nutshell, 4680 ramp is growing exponentially, and, yeah, It's going well. We're just looking good. This this this Yeah. Just gonna be a very major factor in the future. Our tax objective.

Speaker 1

Yes. Like I said, we're our goal is to strive towards 1,000 gigawatt hours a year of annualized production in the United States alone at Tesla, including suppliers.

Speaker 4

We need to get 300 to 400 tower an hour to accomplish our goal.

Speaker 1

Yes. There's roughly to transition Earth to sustainable energy, our Product calculation, for both, stationary and vehicles It's 300 to 400000 gigawatt hours or 3 to 400 terawatt hours.

Speaker 4

So when you're like, 1 terawatt sounds like a lot. Well, it's a

Speaker 1

lot of terawatt hours to go. Yeah. That should say on the on the cathode side, The main chapter we think would probably be iron and Mostly iron, because iron can scale to very, very high tonnage. And And then some some nickel. The exact percentages are hard to figure out, but it's it's probably probably be twice as much iron cathode as as nickel, maybe more.

Speaker 1

And, and then there's the manganese wildcard as well.

Speaker 4

And on that note, we're pursuing aggressively North American iron cathode supplies.

Speaker 1

And I have, yeah, we can talk

Speaker 4

more about that on a future date. Yeah.

Operator

Thank you. The next question was on the semi truck, which we already addressed. So I'm going to skip to the next one. Can you talk about, how Tesla could adjust If we were to enter a prolonged recession, including new product prioritization, investment flexibility, new factory versus factory expansion, service support Structure, Productivity Cost Measures and Demand Stimulation Alternatives.

Speaker 1

Well, to be frank, we're we're going pedal to the metal Come rain or shine. So, we are not reducing our production in a meaningful way, Recession or not recession? So,

Speaker 4

It's the 1% point you made.

Speaker 1

Yeah. Exactly. So so Well, I think the public at large realizes that the world is moving towards electric vehicles and that it's foolish to actually buy a new gasoline car at this point Because the residual value of that casting card is going to be very low. So so So I think we're we're we're going to be in a very good spot. That I would say it's recession proof, but it's certainly recession resilient Because basically, the the Earth has the people both have, in large part, made the decision to move away from gasoline cars to electric cars.

Speaker 1

And then we're in transitioning, legacy generation to, sustainable, You need solar and wind with the stationary battery pack to buffer the the the power. So you have 247 power because the wind doesn't blow the time and the So under the Chinese oil tech. So that also is we actually See the energy storage business, stationary storage, growing more like, I don't know, 1 150% to 200% a year. But faster than cars. Highlight.

Speaker 2

Yes, sorry, just to add, before you jump in, Martin. Just to echo Elon's point, I think, You know, where our cash balance is, what our forecasted cash generation is, where our margins are as a company, I mean, we can withstand Quite a lot of downside before we would have to dig into our capital plans, supercharger expansion, product lineup. So, you know, the business has done quite well over the last handful of quarters. And this is a real opportunity, I think, for the company to press forward In the most aggressive way, as Elon has mentioned. Yeah.

Speaker 2

We we try to model out,

Speaker 1

like, let's say, 2023 is a is a brutal recession year. Even then, we generate meaningful cash.

Operator

Great. Thank you very much. And let's go to the last, investor question, which is the progression from Tesla's first platform with SNX to the 2nd platform with 3 and Y, led to 50% reduction in cost of goods sold. What do you see Tesla's 3rd platform being released? And what level of cost of goods sold reduction could you achieve?

Speaker 1

Well, we don't talk exact dates, but this is, a, I mean, the primary focus of our new vehicle development team, obviously. But, yeah, We've we've we've at this point, we've done the engineering for Cybertruck and for semi. And, so, well, Obviously, you can guess what we're working on, which is the next generation vehicle, which will be probably about Yeah, the cost of the 3 y platform. It will be smaller, to be fair. But, it will, I think, shortly become like, certainly exceed the production of all our other vehicles combined.

Speaker 5

I mean, obviously, we're going to take everything you learned from SX, 3Y, Cybertruck and semi import into that platform. But we, As you've said to us many times, we're on a 2 for 1 target. So, yeah, you

Speaker 1

know, that implies that that that trying to get

Speaker 5

to that 50% number again That's that's exactly it's

Speaker 1

it's like order take to if that's exactly what what what strikes is what we're trying to How how how what does it how do we make 2 cars for the amount of effort that it would take us to make 1 Model 3?

Speaker 4

Effort costs, performance, all those things. At the loss, at the past, at the factory floor space.

Speaker 1

We're twice the output. And we do believe this can be done. Yes. By the way, I should mention that when I said that Probably that I see a path being extreme, very difficult path, incredible execution required, massive amount of hard work and some luck To get to where Tesla is worth as much as, Apple and Sataranko combined, I wasn't including optimists.

Operator

Thank you. Let's go to analyst questions next. The first question comes from Adam Jonas from Morgan Stanley. Adam, go ahead and unmute. Great.

Operator

Can you hear me?

Speaker 7

Yes. So, Elon, would you consider vertically integrating into mining? That's my first question.

Speaker 1

We'll do whatever we have to do. Whatever limiting factor is, we'll do. We do not, unquestionably constrain ourselves. We don't politically innovate just for the hell of vertically integrating. Like, if there's a great supplier who's better than us or we can if he's very good, Or even where the economics of comparative advantage suggests that we should use that supplier, even if we could beat them, but we could use our resources to do something else that would be more productive, Then then then we then we want, insults in that case.

Speaker 1

But but if if we have if we have to go mine,

Speaker 7

Okay. Thanks, Elon. My follow-up is 1 terawatt hour Of manufacturing in the United States, vertically integrated. I guess my question is what would need to change with U. S.

Speaker 7

Permitting laws To allow that, kind of what would be your message to this administration or next? And do you think you could do a terawatt hour? What's the going price of that? Can you do that for under $100,000,000,000 In the States.

Speaker 1

Thanks. Well, I think that the message to the government would be that there should be, I should say we've actually had conversations with a number of the senior government leaders, White House, Congress and whatnot. And the suggestion that we have is that there should be an expedited permitting process for anything which is Critical to a sustainable energy future. So it doesn't make sense to put like a coal mine and A sustainable energy battery like lithium mine in the same category. You know, the coal does not have a future, lithium does.

Speaker 1

And by the way, you can extract lithium with almost no disturbance to the local environment. So it's not like some ugly, nasty buying situation. So I would recommend expedited permitting would really be helpful. Basically, yeah. Fast track environmentally, This has fast track things that are important for the environment and humanities for sure.

Speaker 1

That seems logical. And the reception has been positive, so we'll see if something happens with that. I think probably on this earnings call, we're not ready to go into financial details of the what it would take to get there. But What we are seeing is, radical improvements as we redesign The whole supply chain and all of the elements that go into battery cell We're figuring out dramatic efficiencies. And I think we'll, the net result of which would be, the Capital required to achieve that level of output will be much less what we will take.

Operator

Thank you very much. Let's go to the next question from Colin Langan from Wells Fargo. Colin, go ahead and unmute. Collin, can you click unmute?

Speaker 1

Oh, can

Operator

you hear me now? Yeah, we can hear you.

Speaker 6

Okay. Sorry

Speaker 8

about that.

Speaker 6

Any update on full self driving? I think you had said a couple of quarters ago would be Available by the end of the year. Is that still possible? Is it would it still be like a level 4 or level 5 that you're talking about? And are there any sort of regulatory hurdles you'd have to think about?

Speaker 1

We as said earlier, we're expecting to release the full self driving Software to anyone who orders the package, by the end of this year. It's a separate matter as soon as it will have regulatory approval. It won't have regulatory approval at that time. But But the car will be able to take you from your home to your work, your friend's house, to the grocery store. Without you touching the wheel.

Speaker 1

So it's looking very good.

Speaker 6

And it would mean like level 4, level 5 kind of traditional definition you're talking about?

Speaker 1

Well, there's a debate is like what's the what are the interventions per mile and all those maybe the safety interventions per mile. We're not saying that's quite ready to have no one behind the wheel. It's just that You will almost never have to touch the control the vehicle controls. So like when I came to Giga Texas today from Brent's house, I never touched any of the

Speaker 3

controls all the way here.

Speaker 1

And then there is a longer process of like We've called the launch of 9s, of like how many 9s for liability do you need before you could really be comfortable saying The car could drive with no one in it. And that's Some subjectivity is how many lines you need, but I think we'll be pretty close to Having enough lines that you can have no one in the car by the end of this year. And certainly without question, That's where I'm in my mind, next year. And I think we'll also have enough data next year to be able to I show to regulators that the car is safer, much safer than the average human. And

Speaker 6

just as a follow-up, you mentioned in the prior questions about IRA. I I mean, it sounded like you thought you could get can you get all of it? I mean, because my interpretation is like the production credits, battery component credits for Buyers seems very likely for you guys. Is the sourcing part of it possible? Because that seems like a pretty tough hurdle given how much has to be sourced from the U.

Speaker 6

S.

Speaker 1

Yes. So we have a

Speaker 3

cross functional team that's looking very closely at it. As you mentioned, the Sourcing threshold increases by the year. So we're looking at all options, and also getting some clarification from Treasury. That's it's important to say that's only a fraction of the other credits. We do manufacture ourselves in the U.

Speaker 3

S. We manufacture the modules in the U. S. So that's pretty free and clear. So yes, we feel confident that we'll have a path as these incentives As the threshold sort of increases by the year.

Speaker 1

Yeah. We'll meet those thresholds.

Operator

Thank you. The next question comes from Colin Rusch from Oppenheimer. Colin, please go ahead and unmute yourself.

Speaker 8

Thanks so much guys. The operating leverage has been pretty impressive here. And I'm curious about areas where you could Invest in an incremental way, whether it's on the R and D side or on the sales side to accelerate growth or cost reduction? Or should we be thinking about This level of spend on a go forward basis, and some significant operating leverage as you scale up from here.

Speaker 2

Yes. I mean, our operating leverage has improved quite a bit. It's the lowest this quarter, I think ever by a decent amount. Our OpEx as a percentage of revenue. I mean, our forecast is that it will keep reducing.

Speaker 2

I mean, I think the way to think about it is Our total amount of operating expenses will slowly tick up as the company grows. It's very hard to keep it flat with the rapid growth of the company, but it's growing much slower. So some amount of growth there, but the top line of the business is growing so quickly. So I think there continues to be enormous opportunity to improve the overhead efficiency of the business. And we're seeing it.

Speaker 2

Yeah.

Speaker 8

All right. Great, guys. I'll take the rest of that offline.

Speaker 9

Like,

Speaker 1

We are in the at least for now, quite in a good position of We're investing in everything we can think of to possibly invest in and we're still generating cash. So I guess it's a pretty good place to be.

Speaker 2

I mean, how many R and D programs are we running in parallel right now?

Speaker 1

People don't even know all the R and D stuff for that. They know some of it, but I'm sure they don't. We did.

Speaker 5

I also don't think cash is a good gauge of I'm returning to you. No, it isn't.

Speaker 1

It's not like the engineers are not just they're not generic. So it's just like, if you spend $5,000,000,000 or $10,000,000,000 that will like that your actual R and D Our intent is useful product ship will be proportionate to that. It's just not true. It's just not true. It's just on coming off some assembly line like, You know, like cookies or something.

Speaker 1

So we get optimists going. Yeah, optimists don't change things. What matters is where are the most brilliant people working? And Tesla remains the Tesla and SpaceX are 2 companies where smartest engineers want to work. I mean, like we don't have

Speaker 5

to spend 1,000,000,000 of dollars to invest in the future and invent the future. Engineers are also cost conscious and we don't necessarily just Burn the money out the window when we're trying

Speaker 1

to do R and D side. I would stop looking at like R and D as

Speaker 3

a catch investment for how

Speaker 1

much change it. Like 1 Nikola Tesla is It's frankly worth an infinite number of dollars above inch. Well, you're going to have like It's almost the infinite number of good engineers, and they would not be able to do what one Nikola Tesla could do. You can't make it up in

Operator

volume. Okay. Thank you very much. From George at Canaccord. George?

Speaker 10

Hi, good afternoon and thanks for taking my question. I think it was at your annual shareholders event where Elon mentioned that the prices Many of the materials used in your production have started to come off the boil. If that continues, does that give you an opportunity to adjust Prices globally after several increases? Thanks.

Speaker 1

We're looking at the prices of our I'll say anyone can just Google what the price of future price of Copper or steel is going to be just like one of Google such a way. And everyone can see that commodities on a go forward basis Are on a dropping a lot. But in electric vehicles, things like Battery grade lithium are still crazy expensive. So we've got a mixture of things where prices are dropping and things where prices are increasing.

Speaker 2

Yes. I

Operator

would say quarter over quarter steel, aluminum has stopped anywhere between 17% to 40% Same time on the

Speaker 1

on the Ares side.

Speaker 3

The cost of shipping has come down tremendously. Yeah. Like last year, the cost of a container on the spot market from Shanghai Got as high as $20,000 Wow. And now it's $35,000 $3,600 That's a reality. We're seeing deflation on a lot of commodities with the few exceptions as you mentioned on batteries.

Speaker 1

Yes, there's more deflation than inflation. Definitely. And again, this is publicly available information anyone could just go with. And I think Cathy Wood at Ark Invest is trying to make this point over and over again to the Fed and the Fed is not listening. Looking at the rearview mirror instead of looking at the front windshield.

Speaker 2

Yes. Just to add a little bit more context. So commodity increases were the highest in Q3 that we've seen over the last 2 years. And so when indexes change, it does take time before they flow across

Speaker 1

the board. There's latency.

Operator

This is

Speaker 1

why I say it's that. The best decisions make sense if you're looking out through the review mirror, But not if you look at the front windshields. And if you look at the front windshield.

Speaker 2

Yes. And so what at least of what we know so far, the peak On the commodity side in Q3, I say peak, hopefully it stays the peak. Hopefully it starts to come down. There is a small amount of reduction that we're seeing going into our Q4 cost structure from steel and aluminum primarily, But it's less than 10% of the total increases we've seen so far. So, we're optimistic here based upon what we're seeing on the indexes for Some of our cost structure that this will start to come in over time.

Speaker 2

But I just want to set expectations that there's not some windfall of Cost reduction in this space coming in Q4. Maybe some as we go into next year.

Speaker 1

Yes. We'll probably see some

Speaker 10

And just as a follow-up, this is for Elon. With your pending acquisition of Twitter and your stakes in SpaceX and Neuralink and Tesla, How much would the combined companies benefit from operating under a single superstructure if at all? It's not clear

Speaker 1

to me what the overlap is. It's not clear to me what the overlap is. It's not 0, but it's I think we're reaching. I'm not Warren Buffett. I'm not an investor.

Speaker 1

I am an engineer and manufacturing person And I'm a technologist. So I actually work and design and develop products. That's what I do. So It's not a we're not going to have a short portfolio, sort of, investments or whatever. So I don't know.

Speaker 1

I don't see an obvious sort of worked with some that could get combined under an umbrella, at least right now. So I'm excited about the Twitter Situation because I'll say another part incredibly well. And I think it's an asset that has And sort of languished for a long time, but has incredible potential. Although obviously, myself and the other investors are obviously overpaying for Twitter right now, The long term potential for Twitter in my view is order of magnitude greater than its car value.

Operator

Thank you. Let's go to the next question from Pierre Ferragu from New Street Research. Go ahead, please, and unmute.

Speaker 9

Yes. Can you hear me, guys? Sorry. We're here now. Great.

Speaker 9

I'd love to have another update on 4,680, Drew. So Last time we talked about it, there were it was a question about like scaling out with manufacturing and there were still a few things to get right. Is it fair to say that now you are at scale and it's just a question of logistics to get bigger? So that's question number 1. And then question number 2, on the kind of like innovation and cost reduction and efficiency improvements Kind of path that you described at the Battery Day.

Speaker 9

Where that are we Today and how much time is it going to take to deliver all the potential you outlined then?

Speaker 4

Well, I'll take the second question first. At Battery Day, we showed a timeline out to 2026 For all of the ideas we had proposed and had shared with everybody then. And Yes, I'd be surprised.

Speaker 1

I think we'll do better than

Speaker 4

that. Yes. I'm going to but just that's the rough just give you all like It's on that order. It's not like a month. It's not 6 months.

Speaker 4

It's years. And we are executing on All of those different ideas pretty aggressively in parallel with the OpEx that some people think isn't enough, but we're getting it done.

Speaker 1

I mean, I'm not turning down POs. No, yeah. Exactly. Yeah,

Speaker 4

yeah, yeah. Or great talent. Like we find awesome engineers, we bring them into the company. And people shouldn't believe we are turning people away. Yes.

Speaker 1

I mean, it's a hard problem, but we're solving it. And I think We still feel confident that the 3680 will be the most competitive battery cell in the world.

Speaker 4

And it's the whole system around it, right? It's not necessarily Specific form factor, it's the attention to detail on how to break costs out of the manufacturing process or move processing steps.

Speaker 1

And all the way down from The mine to the south.

Speaker 4

Yeah, exactly. Many steps along the way. Yeah. And for those who watch the YouTube videos like our on-site cathode Facility is coming together, really excited about that, which is a part of the plan that we discussed on Battery Day. Yes.

Speaker 4

But we're Christopher De Luthier Refinery. In Corpus Christi. So we're making Putting our money where our mouths are and all the various efforts that we discussed on Battery Day. On the technical challenges and the ramp Question which is your first question on 4,680. Look, no ramp is ever easy even at the end when you're 80% to the end, like it's still very challenging to get to the end.

Speaker 4

And That's sort of leaning out of yields, the final cycle time to achieve target. You mentioned logistics. It's not something that we're specifically focused on, I guess, but eventually could be a problem as we're Talking about 100 of gigawatt hours at different sites across the United States. But I would never sit here and say we have no challenges Remaining, but we've made a lot of progress reducing technical risk in many areas. Cycle times have dramatically improved.

Speaker 4

Yield has dramatically improved. And just walking the line here in Texas, like Martin was walking it yesterday, made some comments to me. You really see The acceleration around you, and we've made a ton of simplifications moving from, the Fremont factory to Texas and it It's coming to play and speed of ramp here. And of course, that's on one line of many here in Texas. So it's not like Factor to factory, it's a multiplication of both simplicity and scale.

Speaker 4

So, yeah, we're excited about where it's headed.

Speaker 1

Yeah. And I think Once we are fully integrated, I think we still do see a path to Full of roughly $70 kilowatt hour. So $70 per kilowatt hour. So yes, before any incentive. Before incentive.

Speaker 1

Before incentive, yes.

Operator

Thank you. And the next question comes from Tony Sakanagi from Bernstein. Tony, go ahead and unmute yourself, please.

Speaker 11

Yes. Thank you. I just wanted to follow-up on the 4,680 cells and where we are Seeing them deployed today. So are those in the semis that are being delivered on December 1st? Are we seeing them in Model Y's?

Speaker 11

They're being Produced, out of Austin. And is do you anticipate 4680 Being a gating factor for Cybertruck ramp later this year and how do you balance the need for 4,680 across semi, Cybertruck and Potentially Model Y in 2023. And I have a follow-up, please.

Speaker 1

Well, the semi doesn't use 4680s. Yes. Yes. So we are making Model Y's So the Model Y's coming out of Giga Texas are 4680. I think Drew, the car you drive around is 4680.

Speaker 1

Yes. 1,000 miles. 2,000 miles. Yes, it's pretty good. No problems yet.

Speaker 1

Yes. Structural panic. Structural panic. Yes. And yes, I mean, our output at 4,680 is growing exponentially.

Speaker 1

So but it's worth bearing in mind that there are entire highly competitive companies that are very smart That all they do is make battery cells. This is simply one segment of Tesla. Yes. So, yes. So, that's not a total walk in the park.

Speaker 4

No, there's there aren't There are challenges still ahead that we have not yet surpassed, no doubt.

Speaker 1

We don't anticipate this being any limiting tactical cyber truck or Anything else?

Operator

Okay. Thank you. And the last question comes from William Stein from Truist. Go ahead and unmute yourself, please.

Speaker 12

Great. Thanks for taking my question. I guess I'll go at one that I asked last time, Elon, which is, your Expectation for the likelihood of commercial success in each of the 3 major AI endeavors, You know, FSD in, you know, sort of as imagined without a driver, the training computer and, and of course, Optimus.

Speaker 1

We'll achieve full self driving, full autonomy. My quality of that occurring is 100%. And I think we'll we're almost there. And Then of course we got to prove it to regulators and get the regulatory approvals which is outside of our control. But Anyone who's driving full self driving beta in the car can see the rate of improvement.

Speaker 1

You just experienced for yourself that we are in fact getting better in fact we almost are there. And so probably achieving that 100%. The Optimist, probably of that being a successful product, I think also extremely high. You have given enough time 100%. Dojo, just maybe more of a question mark on Dojo, like can we be competitive with NVIDIA GPUs even as NVIDIA continues to rapidly evolve their GPUs?

Speaker 1

So the jury is out on Dojo. Dojo team thinks they can I'll perform NVIDIA for neural net training. If the jury is out, we'll probably I don't know, next year if that's true or not. But we think we're probably we think it's Let's say the architecture of Dojo has is the right architecture to win. Yes.

Speaker 1

It depends on how well we execute within that architecture.

Operator

Thank you very much. I think unfortunately is all the time that we have today. So thank you so much for your great questions and look forward to talking to you in about 3 months from now. Thank you and have a good day. Thanks, everyone.

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Earnings Conference Call
Tesla Q3 2022
00:00 / 00:00