Tesla Q1 2020 Earnings Call

ladies and gentlemen thank you for standing by and welcome to Tesla's q1 2020 financial results and Q&A webcast at this time all participants are in a listen-only mode after the speaker presentation there will be a question and answer session to ask a question during the session you will need to press star 1 on your telephone please be advised that today's conference is being recorded if you require any further assistance please press star 0 I would now like to turn the conference over to your speaker mr.

Martin beocca senior director for investor relations please go ahead sir Thank You Sheri and good afternoon everyone welcome to the first class first quarter 2020 Q&A webcast I'm going today by Elon Musk Zachary Kirk Horne and a number of other executives our human results were announced at about 1:00 p. m.

Pacific time in the update deck we publish at the same link as this webcast during this call we'll 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 during the question and answer portion of today's call please limit yourself to one question and one follow-up please press star 1 now if you would like to join the question queue before we jump into Q&A Yvonne has some opening remarks come on thank you so t1 ended up being a strong quarter despite mellichamp many challenges in the final few weeks this was the first

time we have achieved positive gap net net income in a seasonally weak first quarter even with all the challenges we achieved a 20% automotive gross margin excluding regulatory credits while ramping to major products what we've learned from this is that we watched LED light here after all after the military ramp from 3 years ago a new products different faster and become profitable sooner the q1 reduce more model wise in the first quarter the model 3 is in Fremont in the first two quarters thus one model y ramp has been even faster than the giga shine high rampant more surprisingly in other words we're ahead of the schedule that we were ahead of already most surprisingly model wire was profitable already in this book first quarter of production something

we haven't achieved for any product in the past regarding autopilot we released a new software update for traffic lights and stop signs to early access users in March and to all US customers with most of the pulsar driving package just last week icons will now automatically stop at each stop sign or traffic lights until the driver gets a confirmation to proceed patience and patience for the car electric vehicle with much more than this but we are your only exposing functionality that we feel quite good about where we feel that it is probably safety improvement we are we are collecting data from over a million intersections every month at this point this one will grow exponentially as more people get the update and as more people start driving again sooner

we'll be collecting data from over billion intersections per month all of those right all of those confirmations are training our neural net essentially the the driver when driving and taking action is effectively labeling with labeling reality as they drive and making your life better and better I think this was an advantage that no one else has with and we're quite literally orders of magnitude more and everyone else combined maybe this was difficult to to fully appreciate you know it's the reason I'd say it's very difficult to have a search engine that competes with Google because everyone is training Google all the time with this with what their searches so when you search on something and you click on a link your training giggle every time you do

that it's pretty difficult funny any new search engine to compete on that faces so but what so all those confirmations like hey and roll net 10 cars will be able to drive through an intersection without a confirmation as well as to make turns and it and we really feel where I've worked really hard work if you're confident that were possible to do a drive from your home to your office inverse the time with more interventions by the end of the year so the business with his we can almost do this already with the leading-edge alphabet I'm driving in the car so see on another technology front the front we increased the range of Model S and X yeah gain was time to 291 miles for Model S and 251 miles from our legs attorney said that actually the model but for

the the real model is range and is is 400 miles but when we did the last EPA test unfortunately APA I left the car door open and the keys in the car so the car and ended this overnight and so the car actually what went into waiting for driver mode and lost 2% of its range and as a result it had at 391 a test as soon as the EPA reopens for testing will redo the test and we're not really confident what we will achieve a 400 mile or greater range with the Model S which we cleared for the lemonis that for the past two months the true range of the Model S composite to two months and has been 400 miles and of course we're not stopping our looking for is continue pushing for improve range over time and improving improving handling acceleration and all the little

details that make a Tesla special for model why with we introduced a revolutionary two-piece we're underwater testing that we're going to be making a single piece casting later this year meaning like essentially the rear third of the body is cast into a single piece which is got no casting of the size of complexity as I haven't been done before in fact there isn't it even anything that was on the pond par with the two-piece casting for the motorway so we're really pushing the envelope on the vehicle structural engineering and manufacturing I'm very excited about this approach allows us to reduce both of the weight the cost and improve NVH it's better in every way essentially we also model I also introduced a revolutionary new heat pump which allows the

car to have a higher range so what the mud why has remarkable range you know on par with the impacts the fun is slightly better than I guess the model 3 and just despite being a bigger car that weighs more and the heat pump is a key contributor to that and it is especially excellent at low temperature driving so and the feedback we're getting from customers who have received the model line thus far has been universally positive and then we're confident this product will be a best selling product ever so a conclusion and just to look at looking at open yes this is a looking statement we we are absolutely continuing our model wide capacity expansion at full speed at both giggle Berlin and Giga Shanghai and and and Stern Fremont when they will let us continue

localized production in China and in Europe will bring the cost down they can't cut our parts even more competitive over time well many other companies are cutting back on investment we are doing the opposite we're absolutely pedal to the metal on new products and expanding the and we were looking forward to being in some time next year a truly global manufacturer with major factories in North America China and Europe and a capacity of well over a million units a year so there's a transplant to look forward to and we can't wait to tell you what's gonna happen thank you thank you and now to Zacks opening remarks yes thanks Martin thanks Elon I'm very proud of the accomplishments of the Tesla team this past quarter a few things to highlight and add to what

Elon just mentioned we successfully launched ramp and demonstrated profitability at the model Y as the I mentioned significantly ahead of schedule this is our second large-scale product launch since model 3 and 2017 and it's evidence to the progress we've made on cost control and ramp efficiency it's hard to understate the significance of demonstrating profitability of this program in its first quarter of production our shanghai model 3 margins improved dramatically since q4 of last year nearing equivalence of model threes built in Fremont this is despite not yet running at full capacity while also managing through the production shutdown in early February we also announced a long range and performance variant of the model 3 for our roadmap which will

positively impact a SPS in China on order rates we did not experience much of an impact related to the expiration of government incentives at the end of q4 in fact we exited the quarter with our highest ever backlog yet again aided by these accomplishments we're able to achieve our first ever q on profit automotive gross margin excluding the impact of regulatory credits remain strong for all products despite charges taken in q1 associated with production downtime we continue to make progress on effects efficiency as well as our service and other margins our energy business was impacted as well by shut down activities in q1 limiting deployments we also experienced expected launch inefficiencies associated with our third version of the solar roof which

impacted overall profitability as I've noted before we expect regulatory credit sales which are credits we sell to other carmakers to generally increase with time this can be seen by the increase from q1 relativity q4 and note that most of the credit revenue did not contribute to cash in q1 and it's reflected when the accounts receivable on the balance sheet our free cash flows were impacted by the temporary by the temporary increase in end of quarter inventory for all our products resulting from the abrupt suspension of production and delivery operations have these up interruptions not occurred we were pacing towards a record quarter of deliveries in strong free cash flows hadiyyah-lah I mentioned it is extremely important that we remain on track to

achieve our long term plans on technology roadmap you're taking the near term actions required to continue those investments model why in Shanghai and Berlin are proceeding as planned and we're making progress on improving capacity from auto line Freemont in model 3 in Shanghai in the near term our Shanghai Factory remains operational contributing an increasing level of cash flows and profitability to the company in Fremont were working towards restarting production as soon as that's possible they're also continuing to deliver cars that we were unable to deliver at the end of the first quarter while vehicle inventory balance increased by fourteen thousand units at the end of q1 which was a headwind to free cash flows in q1 but it's helpful in q2 note

that one of the most important aspects of model line Fremont and model 3 in Shanghai is the dramatically improved cash conversion cycle by locally producing and delivering vehicles while sales and delivery operations have paused in many areas of the world we are still receiving many online orders despite inability for our customers to experience the product prior to ordering however unavoidably the extended shutdown in Fremont will have an impact on our near-term financial performance and we will need to work through how quickly we'll be able to rent production to higher levels more broadly we remain focused on ensuring our cash flows are managed appropriately working capital management in particular raw material inventory is the single most important

lever and managing our cash flows during this time the tesla team has done a great job human we've also taken actions to eliminate or reduce non-critical expenses and optional investments while continuing to drive efficiencies throughout the business overall we've modeled many scenarios into 2021 and remain comfortable that we have sufficient liquidity to proceed fully with our most important long-term investments it's important to note that Tesla remains an extremely agile and dynamic company and this is aided by the substantial work we've done over the last year to improve our cost efficiency and productivity and we have the ability to quickly adjust our spending and planning as required so thank you again for to the Tesla team for success in q1 and

we will turn to question thank you very much so we'll take the first questions from institutional investors compiled by safe technologies with the first question from institutional investor is most desolate owners have yet to purchase or experience FSD and despite most vehicles having all the necessary hardware what levers could you pull to accelerate adoption and deepen your data advantage for example if you consider offering FSB as a premium subscription I think we will offer also driving as a subscription service better will be towards the end of this year now if I should say if it will still make sense as as to buy FSB as an option as you know in our view it by FST is is an investment in the future and we're confident that it is investment that will

pay off to the consumer into a better for the consumer and in my opinion - the option is something people will not regret doing I agree and financially rolling the upfront purchase of your DFS the option into a loan in the vehicle or lease is will be the least expensive way on a monthly basis to own plus you preserve the option value is increased value with time yeah but we do understand that some customers who have ownership or at least their vehicles did not purchase that option upfront so this will enable those customers to spread out the cost of ownership of SD or subscription of the tool absolutely if you later like at a high level our overall goal is to maximize the area under the curve of customer happiness that is our goal and we think that you

know that that's the kind of thing that all companies should try to do and it's it's what results in long term value creation and look at media and loyalty bagasse loyalty so our goal is always wait to do the best thing for other customers and and we're confident that but if we're behave like that that they've been customers in turn will pool they have its own way to us thank you the second question from investors is Chandler recently announced changes to its nav subsidy program that disqualifies Tesla vehicles from benefiting from the subsidies what extent is there room for Tesla to lower manufacturing cost in China and pass those savings to buyer so they can qualify for the subsidy yeah so we're making rapid progress on lowering the production cost

in China and we're actually excited to announce on this call that we'll be reducing the price of the standard range model 3 basically tomorrow China time so the day after tomorrow California time but tomorrow China time and in that net be a price below of the subsidy limit we feel confident that that will still be a vehicle that delivers good core emotion yep and and on the manufacturing cost portion of the question the cost of vehicles produced in Shanghai in p1 is already lower than the cost to produce the model 3 in Freemont and there's still significant opportunity left take cost out so a fixed cost absorption from higher production volumes which are occurring in q2 and will occur through the rest of the year we're not fully localized on the supply

chain yet and so well a lot of the supply chain is localized it's not complete and there's additional opportunities there and so we'll continue to bring the price down and expand margin cost down and expand margin even with this reduction in price but Elon mentioned on the standard range version of the vehicle thank you the next question is and they grow once said that great companies are improved by crises in which way has best not improved or or is expected to improve coming out of code 19 well as close to look closely at our cost structure and to be more efficient as a company that one always has to do that in crisis and you know to think about our core beliefs and what do we want to do and we you know care conclusion that that the right the right

wave is actually to continue to expand rapidly continue to invest in the future in your technologies will know it is risky and we've talked to it some like investors and they support that approach as well so you know I think this was fully an uncertain you know if your head is a bit of a bumpy road but I think the the long-term prospects are extremely good guys wanna put ideal on on the prioritization on the key projects well enable us to execute more efficiently and faster on them which i think is great that the other one that I would add is it's always been our vision at Tesla to improve the customer experience and and make that as digital as possible yeah please deliver a touchless delivery mobile service the part of the sales has been something that

we've been very focused on and made a lot of progress on yeah house was the only car that you can really order in in less than five minutes on your phone you can order a car and have it delivered to your doorstep with all the paperwork and everything done that's it effortless and many customers do that and they're doing it yes in fact a big part of it is just trying to communicate to people at this is something you can do because normally buying a car isn't quite a painted for most people they would rather go to the dentist than buy a new car yeah actually my dentist is right with me but it's really like quite an arduous thing you know when the typical retail experience for buying your car it is more painful to people than then having a root canal then

you have to say well and for Tesla it is completely as easy as ordering something on that Apple App Store or touring something on Amazon and just lipstick are yeah I'm at five minutes if you're really went fast I think you could order a car probably in 90 seconds thank you and the next question from institutional investor is can you give us a brief preview of the battery day by generally highlighting steps test life stating to improve self energy density and time life or introduction yeah so we're just we don't have preempt about today we're when we've been exciting news for for that day there will be a lot of exciting news to tell and I think it's going to be one of the most exciting days in Intel's history and we're just try to forget the right timing

for that we think probably the right timing will be the your properly the third week of May that's not giving a fun date but we think that probably that's right timing and depending upon what we are allowed to do it will either be in California or Texas [Music] okay well your last question from a traditional investors could you please update on progress towards development and comers that commercially commercialization of full self-driving how much revenue have you recognized so far um so there's a couple things on the financials for full saw strategy and so currently in North America it sold for $7,000 as an option we take roughly half of that as revenue and the other half of it goes into deferred revenue that's associated with features that will be

released with time a deferred revenue balance is continuing to grow it's a little bit over six hundred million dollars and so as we release features with time at the end of every quarter we take a look at what features have been released associated value and then we can release that from the deferred revenue into our financials for that quarter and then cars going forward once the features release we can recognize that revenue so we reduce the amount of deferral and we can recognize that revenue within period so this is one of what we think will be one of the most powerful gross margin levers with time it has a feature sweetest robot absolutely there's also a current of untapped potential in but the bit out there that could upgrade to turn on autopilot

basically palatable for self-driving and that's something that will enable your just important approaches or as we talked about earlier just you know towards the end of the year as a subscription so but that's that's just a lot of untapped potential there and that's not in the deferred revenue line obviously it is certainly a great deal of deferred potential that we think is a large portion which is like too likely to reach coercion thank you and now let's go to questions from the retail investors question number one Elon has mentioned a 50% compound annual growth target for Tesla in the past is this still in line with Tesla's ambitions for the next five to ten years this would be four million vehicles in 2025 and more than 20 million vehicles in 2030

he's forty percent of more realistic target well it's always difficult to predict what the macro situation is going to be you can a few people would have predicted the other you know but unexpected yeah roundhouse that that covered and came up with it sort of came an hour so I think in the absence of something is some some massive force majeure event but quite massive I think 50 percent it is this the likely number it's possible that is 40% I would be very shocked if it's less than 40% not even with force-majeure short World War 3 ok the next question from retail investors when will you announce next Giga how many gig us the UF client for the next 5 years I think we will announce the next gig app possibly as soon as a month what we made remain outs as

soon as next month with low friction is just saying it but what could happen for most what maybe within 3 months and possibly one month and that would be in the u.

s.

so as for how many will be in five years I'm not I I don't know right now what that number would be I guess so more than there are today but I'm not sure what would exactly be in five years but so number more than today our gigas have gotten bigger yes and larger vehicles for being cold terror yet with multiple products as well and so you know the absolute number of kata factories we may ultimately build might be less but each one is larger and that's under a belief that just significant efficiencies by having as much as possible and similar product lines under the same roof and as much vertical integration as possible all in one facility yes thank you the next question is can you give us an update on solar roof ram how many are you currently able to

install per week what is your installations four weeks target for the end of 2021 we're actually getting at rasma mentum with the solar roof before covered and that covered essentially shut us down both from devoted to install antibody to get permits the department offices requires and do you know a shelter-in-place 11 places so rusty cannot hit though and if you can't get permits and you can't physically do it it's perfectly impossible so but I think the long-term trend for solar roof is extremely good and I'm confident that it would say within the next you know I know you're there maybe even by end of year we should be installing at a rate of a thousand a week that's not in the in the middle of winter or something that's with like taking seasonality

I like for stupor seasonality we it's hard to install on roofs that are covered in snow and ice a bit like you know say spring I think it's installing wood which is the hard part we actually have demonstrated the ability to hit a thousand a week first blood rate for the solar classroom already so that's not that's not a problem but it's building up the install teams building up the third-party channel installers the Richland roofing industry installers and and internally we want to have at least a thousand thousand solar roof and install teams with and taking a week off house no less than a week to do an install which gets you a thousand a week roof installations we see if demand is demand is good production is good especially well about the install and

then Analects it also building up the to the training the right a diverse group of companies in the roofing industry to also install solar if that I think will scale master scale you have my far beyond a thousand a week we're also seeing a lot of interest outside of North America sort of your expect this to be a product that is international and and actually saying that reminds not of interest from China on the sunroof so we talked about this this would be a very significant product would help me over time thank you the next question is can you elaborate on Tesla's plan to enter the residential and/or commercial HVAC market can you provide some basics of how your system will work will be consider the heat pump water heater market as well well as I said

on Twitter I'm personally extremely excited to build a kick-ass HVAC system that also has you know sort of hospital grade particle filtration basically HEPA filtration that filters out viruses bacteria pollen fungi and also neutralizes acidic alkaline gases that is that is quiet and efficient and these are all things we've achieved in in our cars by the way in fact I'm gonna love you realized but the model is next so the only cars in the world that have a hospital operating room braid but HEPA filters bullpen they're very big so we can get to apply a particle camp that is insanely low with our cars and Riaan why I have like Merv 16 or 15 people filters yeah so which is so like model Korean wire burners like there are no slouches multilaterals are ways

they're way better than any other cars the best of my knowledge they're quite as good as possible operating room but they're extremely good way better than any other normal car very continuing to improve the culture is learned through anyway I guess these actually have a big effect on health even in normal just day-to-day living is reducing particle count and and yeah it has effect on allergies and also something so it's really their quality is incredibly important yeah you're in a non coded situation extremely important so they're taking all those things that are glutes and applying to your home HVAC and it would be an epidural HVAC would be just more exciting and and NH if you've got if you're condensing water minor goals to have it be a water source

if you have water you possibly could then heat the water and have a water heater as well yeah neither does eat source if you need it instead of down so when the outdoors is really cold yeah or the other way around so that's options it could be held a product and then so we just have to wait till we have tens to divide up whether we can cheer on the card front so we're going to make sure we get a lot of using the fire here for gear products with the cyber truck semi road near roadster and to get the gigafactory in various parts of the world it's a possibility a model y and photo pilot and the solar roof and I'm gonna technology yeah slightly power will power power pack mega pack we are seeing tremendous demand for stationary storage more than more than

we can supply at least least for 2020 thank you and the last question from the retailers when will that left start acquiring utilities like the horns they'll power reserve and Moss Landing instead of selling them battery storage plus it makes sense for Tesla to buy bigger clients and convert them well we hadn't really thought about that yet but it's not out of the question but our brain is full excuse me sir I don't blame you for the question you know what our overarching goal is to help accelerate the advent of sustainable energy and we deal with and the three elements of that or sustainable power generation then you better store the power station in storage and then you'd better have electric transportation so and we don't have like specific market

share goals or anything like that it's just to agree that we can accelerate their pension sustainable energy we think that's a fundamental good for the world and we want to give a toast fast as possible but it's not you makes it market share growth you know it's gold in and of itself it's just you know fast this happens a bit over the world little did thank you very much and I think now we can move to analyst questions thank you our first question will come from Adam Jonas with Morgan Stanley please go ahead thanks everybody I hope everyone's safe and healthy I got one question one follow-up and I point out I've had a root canal before and I would agree Elan it was less painful than buying a car I mean it really is yeah exactly it's a big problem actually

it's a big decision yes different conversation exact verse for you any real-time update on company liquidity at the end of April some some companies have you know given the circumstances gone out of their way to give a little color on that just want to give you a shot at that I gotta follow yeah it's a fair question I don't have any additional color to provide so 8.

1 billion in cash and cash equivalents at the end of q1 we're managing it very closely as I mentioned in my opening remarks we do have an increase in inventory of vehicles that we were unable to deliver at the end of q1 so we're making progress delivering those to April which is helpful for liquidity and you know as we've been looking at liquidity we've been looking at this over the next 18 months and there's ups and downs to the look to the liquidity you know currently now as we're not producing we still have payables from q1 that we're paying off but then in a couple of months we'll quickly be through that and then we'll have a gap in payables since we don't have any parts coming in so it does go up and down a little bit but you know in looking at the

long-term horizon which is how we're managing it right now we feel pretty comfortable with the liability position on the company yeah yeah we are a bit worried about I'm gonna be able to resume production in the Bay Area and that should be identified as a serious risk and you know that we really only have to call factories right now one in Shanghai and one in the area and Borya produced with the vast majority of our cars all of SMX and most of the three and all of the why so the the extension of the shelf replace or likely I'll call it in forcibly imprisoning people in their homes against all their constitutional rights with my opinion with raising people's freedoms in ways that are horrible and wrong and not my people came to America or built this country

what the excuse me people acted out great systems outrage so that it will cause great harm not just the tassel of its many companies and while Tesla will weather the storm there are many small companies that will not and all peoples everything if you will work for the whole life against going to get is being destroyed in real time and you're going to have many suppliers and I'm having many spiders that having super hard times especially at small ones and it's just causing a lot of strife to a lot of people when you're on on that point you mentioned people that gave their lives to build the country my faults for you on this they've been a lot of comparisons you know drawn to the state of the US economy to the early 1930s when Roosevelt began a series of

new deals in infrastructure projects for post-world War two when Eisenhower launched the u.

s.

highway act and when JFK launched the Apollo program which you could say was you know influenced by the Cold War clearly and you've benefited from in our space program benefited from what would be your message to US lawmakers on this call as we in addition to your opinions on shelter in place but you know thinking a longer term your message to US lawmakers coming out of the crisis specifically around the infrastructure and a chance to kind of you know work with taxpayers to support sustainable transport renewable energy I'm wondering to see this you know as a chance to make make the crisis and all the loss and lives lost not be in vain Thanks I think it's high time we invested in infrastructure in this country we have a lot of crumbling highways and bridges

and and frankly you know when I visit China I see their infrastructure as being much better than ours it's great Europe was better infrastructure it's it's it's really quite sad but the u.

s.

infrastructure is especially so voids in highways this is where it is today and our airports in a lot of cases are an embarrassment so and it's not just a question of money it's fish as well and as soon as we spend a lot of money on these things but what do we gain for it for it so you know and yeah we really need to be taking out what is the transportation of the future not the presentation of that for the past year you know if this was in 1928 do you want to be investing in steam engines or Intel commotions edges obviously most lots of engines so yeah those are the time to think about the future um and also to ask you know I did is it right to your infringe upon people's right but as what is what is happening right now I think the bank but people are

going to be very angry about this and are very angry respect somebody should be if somebody wants to stay in a house but that's great they should be allowed to stay in the house initial not be compelled to leave but to say that they cannot leave their house and there will be arrested if they do this was this was fascist this was not democratic this was not freedom give people back their God doing freedom ok let's go to the next question please Thank You our next question comes from Emmanuel Rosner with Deutsche Bank please go ahead hi good evening question on model Y or something you can elaborate a little bit more of the drivers of how the gross margin is already positive at such low volume how much of it is a function of the criminality with the model

3 with other factors should we think about and what does that mean for the ampler for the eventual gross margin of Malwa well sure a couple of thoughts there for why the first is it does carry a higher ASP so on the revenue side it carries a higher ASP than model 3 and the deliveries that we started with were of the higher ASP versions of the cars so we started with deliveries of performance initially and so that helps create some of the margin and that will come down with time as more variants are released and we have more of a steady state mix but it's similar to the ASP trend that we had with model 3 when we launched that product and for two years ago on the cost side and I think you hit on a couple of the book is the commonality is huge it's very

important and in addition to that manufacturing processes are very similar to model three as well until we have experience with that both with monitoring Fremont and then as well in Shanghai and it helps to have an existing factory with existing workforce and knowledge here as well so the ecosystem to support and launch of the product is there there remain a lot of opportunities to take continue to take cost out of the car the number of vehicles that we built in the first quarter is is quite limited relative to where Waldo would take hospital out of the car and to make the park better so it's detachment it's not make the park worse it's any people can take cost out of a car make it worse we want to take cut across all the car you're out how to make it

lighter and simpler and and so it's once the car just just incrementally improve as well as incrementally lower in cost but you know for four or five seater model why we briefly we expect you know marginal cost back car to be comparable to the model three once we have reached a path to ten or twenty thousand units or something like that you know ladies and gentlemen please stand by your conference will resume momentarily thank you because you're back online hi sorry we got disconnected for some reason um what was the question again okay now let's go to the next question please the next question comes from Van Keller was there please go ahead hey thank you very much just wondering about the Z cell strategy you know in in Reno you have obviously integrated

there but you're buying cells I think in Shanghai and what we think is in Germany and so how are you looking at at that going forward and then so they just talk about mr.

Lazaro and that border dish is kind of the process with with adding into the board thank you sure from a sales perspective you know with all the partners we've had historically and in the future we're just looking for competitive technology and competitive pricing I think we'll talk a little bit more about this and battery investor day like how we're approaching all of it but but yeah I mean we don't have like one model we're restricting ourselves to pursue we're just trying to find what's best for the products and they can and in the long run and then there's a question about the board so I couldn't we could on here the second part of the question yeah that's give up mr.

with you know better entering the board and kind of the process behind that what he brings to the fore oh I think we all need a hero and obviously liberation a lot of experience investing at the highest levels in the world and some co-workers at birth and a pension fund which is for the largest funder of any kind in the world and you know generally the conversations of the years just Charlie I think I was fighting to how the disagrees with all three markets work and what he thinks is whether errors for reform just it's like children just trying to force off for anything about how to make the future better and Meshech shares my view about an environment and very sensible smart person who brings a lot to the board and I think is generally recognized as

such I find by many people I guess I guess waking in to the Panasonic relationship but maybe just you know how is that relationship going here is there any greed through on pretty big neurology board thank you um I think this is that nicer with the past night lationship I mean I had a great relationship with past nights here we we meet regularly one-on-one and talk whole time and you know so what that relationship is strong and bring more of a broader global strategic view to the board thank you let's go to the next question please our next question will come from Jean monster with loop ventures please go ahead congratulations on the progress and you only talked about full autonomy by the end of the year I would love for you to walk through the rollout

strategy of the Tesla Network app and how that's gonna look prior to the Robo taxi stage are you going to gradually take over a human routes with autonomous capable routes over time or how do you see that playing out well it's pretty much play out as as it has played out which is will we release more more functionality you know before we release any functionality it goes through extensive testing and of course we run it we have a simulations team that has a very good simulation of the real world so we run any code changes through a battery testing simulation when we have a global rating brush I'm on actually I'm one of on the global create you a team and we test the releases in the real world the real world bad differences cooler world in the simulation

which is which are very many because the world was very complex aware and then we release it to a small group of Congress beta testers within the company and to a larger audience including people outside the company and to early access Tesla owners and then finally a broader release and so those are the many stages that these things work for so the by the time something is we're going to wide release into the US there's went to all the first stages and the software that's at the at the very early stage there's much more advanced than what people are saying so there's just going to go through a rigorous lengthy process so essentially we need to figure out you could get very good the complex intersections get very good at like turns in intersections and

looks like it will be malls in a parking lot or office park or special events and it's working events that kind of thing when those eventually come back we have these doubles opposed or after high places but it will try for a while I feel like the autopilots engineering team is finished a few a talented group and I'm deeply involved with the team really so we talk every week and meet every week run your cash or present a physical meeting it's awful so I have a good fight understanding where we are overhead and I feel like we have transmeta momentum and we'll have the functionality that's right cool for some time anybody out of the year now after that functionality is released this pistol another strap which is to improve the reliability of it once was

released to make a pull stop driving with looking into the fish whip it supervised by the driver and then we keep improving a lot reliability to the point where it no longer needs to be supervised by the driver and we provide a vast body of data to regulators to show them about what was the case and then presumably the regulator's which jurisdiction it is working approval for fully autonomous cars that can drive with no humans on board it obviously the regulatory approval process that's before us fear accuracy because it's out of our hands but the progress would I forget about program summarize we want forget owners full autonomy some level that by the end of the year and then a human in a loop tessai network app sometime is it first half of next year

would that be the whole mm-hmm doing like wait turn the car drives with no first one with a person initially a person observe would that be with the Tesla Network at but that the early part of the year 2021 is at the whole it's just I just hope I would say that that's probably a fair description ok and then you know kind of take it to its end stage the Robo taxi stage any high-level thoughts understand the regulatory is a massive unknown but if you're gonna put a guess on it where would we start moving with certain Robo taxi well I think I think it's quite likely in my view Gannicus it could be wrong on as you suppose with our heads if in some errors and we're behind in others because when I did when I when I get when I give a guest I give the guest but

I think this be the likely midpoint not be the point with lots of margin if this is not a distribution I give you the 50th percentile and not be a few Sigma you know optimistic or pessimistic and so then that naturally means at least have no predictions will be wrong and have the right what might be bright but or set by yeah but if a few weeks to a few months in some cases a few years um but because everything I'd rather said would come true did come true it may come too late but it did come true so punctuality is not my strong suit and I always come through in the end so I mean I think we could see rubber taxis in operation with Network feet next year none nor mark is going to thank you let's go the last question please the last question will come from

Pierre from room with new Street please go ahead hey thanks for taking my question one on gross margin first and your impressive performance in q1 so there are three moving parts that they win from creditors of course the mode ly ramping even if it broke even it party took average cost margin down and of course you had like frenum being closed shut down the last week of the quarter I probably was this office an extra person so when I looked at how gross margin evolves sequentially excluding this removing part I said like you're Auto gross margin it has been up like a couple of points sequentially so I wanted to check with you is that estimate would make sense and then I would have a follow-up on energy storage thank you yeah I think the three things that

you mentioned it's been a little bit of a hard time hearing the full question here because I'm having a bit of Network difficulty in the room well I'll do my best here so when we look at margin we do a salute credit as you have so I agree with that model by ramping bringing down overall gross margin I agree with that as well so it was lower than the overall average and that will increase with time and shutdown and efficiencies in both Shanghai and in Fremont also laid on margin but and the shanghai margin was below the average as well even though it's increasing quickly in approaching model 3 it still is below the average and so I think the sentiment of your question was if you were to remove those factors with the sequential increase in gross margin

I haven't specifically calculated that but I think your intuition is right we saw strength and gross margin across the board as I mentioned and in particular FNX worst margins continue to improve but it despite slightly lower volumes there and higher a fixed cost limitations there's good progress happening both on the ASP sign-in Macross reduction side for our products in production and I think this also lends itself to as the power of the gross profit contribution to the company once we get through these rampant efficiencies we get them on up and running again the increased capacity so we can spread out fixed costs and continue to execute on cost reductions on our products we're very optimistic about that personally thanks and I had a coupon on energy

storage if you can hear me well I think like I can't remember I think from the very first days I heard you on the course you've always mentioned that demand for energy storage is always out straighting supply and you have more orders and you can make and so I'm kind of thinking there will be there should be an inflection point in that business at some point and it's going to be driven by your ability to add much more manufacturing capacity like battery manufacturing capacity and at a high level how are you thinking about that inflection point in terms of timeline in terms of timeline I think what we've been doing with with both our partners and internally and looking at how to reduce the fundamentally the cost of of investments in new cell capacity because

when you look at a car a vehicle product you know there's a lot of things in the vehicle besides the cells when you look at an energy storage project product it's really just the cells and so it really grow the energy storage business it's all about selling business and so that's that's what we've been focused on and and I think yeah not to give too much away but we'll put that'll be one of those things you address in battery and investor day is is how we're focused on that and when we only have that in the place we want it'll be a lot easier to scale that business thank you very much for all your great questions unfortunately this is all the time we have today and we'll speak to you again in three months time thank you very much and have a good day well

ladies and gentlemen this concludes today's conference call thank you for your participation you may now disconnect