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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Martin Viecha, Senior Director for Investor Relations. Please go ahead, sir. Thank you, Sherry, and good afternoon, everyone. Welcome to Tesla's First Quarter 2020 Q&A Webcast. I'm joined today by Elon Musk, Zachary Kirkhorn, and a number of other executives. Our Q1 results were announced at about 1:00 p.m. Pacific Time in the update deck we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question-and-answer portion of today's call, please limit yourself to one question and one follow-up.

Thank you. So, Q1 ended up being a strong quarter despite many challenges in the final few weeks. This is the first time we have achieved positive GAAP 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 two major products. What we've learned from this is that we've obviously learned a lot here. After the Model 3 ramp from three years ago, our new products get run faster and become profitable sooner. In Q1, we produced more Model Ys in the first quarter than Model 3s in Fremont in the first two quarters. Thus far, the Model Y ramp has been even faster than the Giga Shanghai ramp in Q1. Most surprisingly, Model Y was profitable already in its first quarter of production, something we haven't achieved with 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 U.S. customers with Full Self-Driving package just last week. Our cars will not automatically stop at each stop sign or traffic light until the driver gets a confirmation to proceed. I should say that the car is actually capable of much more than this, but we are only exposing functionality that we feel quite good about and where we feel it is probably a safety improvement. We are collecting data from over 1 million intersections every month at this point. This number will grow exponentially as more people get the update and as more people start driving again. Soon, we will be collecting data from over 1 billion intersections per month. All of those confirmations are training under old methods. Essentially, the driver went driving, and taking action is effectively labeling the labeling reality as they drive and making them better and better. I think this is an advantage that no one else has, and we're quite literally orders of magnitude more than everyone else combined. I think this is difficult to fully appreciate. It’s the reason I say it's very difficult to have a search engine that competes with Google because everyone is training Google all the time with their searches. So, when you're searching something and you click on a link, you're training Google every time you do that. It's very difficult for any new search engine to compete on that basis. On other technology fronts, we increased the range of Model S and X yet again, this time to 391 miles for Model S and 351 miles for Model X. Actually, we said that, actually, the real Model S range is 400 miles, but when we did the last EPA test, unfortunately, the test left the car door open and the keys in the car overnight, and so the car actually went into waiting for the driver mode and lost 2% of its range. As a result, it had a 391 test. As soon as the EPA reopens for testing, we will redo the test, and we're actually confident that we will achieve a 400-mile or greater range with the Model S. But to be clear, the true range of the Model S for the past two months has been 400 miles. And of course, we're not stopping there. We're looking forward to continuing pushing for improved range over time and improving handling, acceleration, and all those details that make Tesla special. For Model Y, we introduced a revolutionary two-piece casting that we are going to be making a single-piece casting later this year, meaning essentially the rear third of the body is cast as a single piece, which is a casting of a size or complexity that has never been done before. In fact, there isn't even anything that is on par with the two-piece casting for the Model Y. So, we're really pushing the envelope on vehicle structural engineering and manufacturing. I'm very excited about this approach as it allows us to reduce the weight of the cast and improve NVH. It's better in every way essentially. For Model Y, we also introduced a revolutionary new heat pump, which allows the car to have a higher range. So Model Y has remarkable range on par with, in fact 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. It is especially excellent at low-temperature driving. And the feedback we're getting from customers who have received the Model Y thus far has been universally positive. We're confident this product will be our best-selling product ever. In conclusion, looking forward, this is a forward-looking statement: we are absolutely continuing our Model Y capacity expansion at full speed at both Giga Berlin and Giga Shanghai and here in Fremont when they will let us continue. Localized production in China and in Europe will bring the cost down, making our products even more competitive over time. While many other companies are cutting back on investments, we are doing the opposite. We're absolutely pedal to the metal on new products and expanding the company. And we're really looking forward to being, sometime next year, a truly global manufacturer with major factories in North America, China, and Europe and a capacity of well over 1 million units a year. So there's a tremendous amount to look forward to, and we can't wait to tell you what's going to happen. Thank you.

Thank you. And now to Zach's opening remarks.

Yes. Thanks, Martin and 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, ramped, and demonstrated profitability of the Model Y, as Elon mentioned, significantly ahead of schedule. This is our second large-scale product launch since Model 3 in 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 equivalents of Model 3s 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 Model 3 for our road map, which will positively impact ASPs 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 are able to achieve our first-ever Q1 profit. Automotive gross margin, excluding the impact of regulatory credits, remained strong for all products despite charges taken in Q1 associated with production downtime. We continue to make progress on OpEx efficiency, as well as our service and other margins. Our energy business was impacted as well by shutdown activities in Q1 limiting deployments. We also experienced expected launch efficiencies 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 relative to Q4. And note that most of the credit revenue did not contribute to cash in Q1, and it's reflected in the accounts receivable on the balance sheet. Our free cash flows were impacted by the temporary increase in end-of-quarter inventory for all our products resulting from the abrupt suspension of production and delivery operations. Had these interruptions not occurred, we were pacing towards a record quarter of deliveries and strong free cash flows. As Elon mentioned, it is extremely important that we remain on track to achieve our long-term plans and technology road map. We are taking the near-term actions required to continue those investments. Model Y in Shanghai and Berlin are proceeding as planned, and we're making progress on improving capacity for Model Y in Fremont and 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, we're working towards restarting production as soon as that's possible. We are also continuing to deliver cars that we were unable to deliver at the end of the first quarter. Our vehicle inventory balance increased by 14,000 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 Y in 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 the 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 ramp production to prior 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 in managing our cash flows during this time. The Tesla team has done a great job here. 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 is 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 to the Tesla team for success in Q1, and we will turn to questions.

Thank you very much. So we'll take the first questions from institutional investors compiled by Safe Technologies. The first question from an institutional investor is, most Tesla owners have yet to purchase or experience FSD, despite most vehicles having all the necessary hardware. What levers could you pull to accelerate adoption and deepen your data advantage? For example, could you consider offering FSD as a premium subscription?

I think we will offer Full Self-Driving as a subscription service, but it will probably be towards the end of this year. I should say, it will still make sense to buy FSD as an option, as in our view, buying FSD is an investment in the future. And we are confident that it is an investment that will pay off to the consumer. In my opinion, buying the FSD option is something people will not regret doing.

Agree. Financially, rolling the upfront purchase of your FSD option into a loan in the vehicle or a lease will be the least expensive plan on a monthly basis to own, plus you preserve the option value of increased value of time. So we do understand that some customers who have ownership or have leased their vehicles did not purchase that option upfront. And so this will enable those customers to spread out the cost of ownership of FSD or subscription over time.

Yes, absolutely. 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's the kind of thing that all companies should try to do. And it's what results in long-term value creation and loyalty – customer loyalty. So, our goal is always really to do the best thing for the customers, and we're confident that if we behave like that, the customers in turn will behave the same way to us.

Thank you. The second question from investors is, China recently announced changes to its NEV subsidy program that disqualifies Tesla vehicles from benefiting from the subsidies. To what extent is there room for Tesla to lower manufacturing costs in China and pass those savings to buyers so they can qualify for the subsidy?

Yes. So we are making rapid progress on lowering the production costs in China. And we're actually excited to announce on this call that we will 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 there will be a price below the subsidy limit. We feel confident that this will still be a vehicle that delivers a good gross margin.

Yes. Regarding the manufacturing costs, the expense of vehicles manufactured in Shanghai during the first quarter is already lower than that of the Model 3 produced in Fremont, and there remains significant potential to reduce costs further. The fixed cost absorption from increased production volumes in the second quarter and throughout the rest of the year has not yet fully benefited from a localized supply chain. While much of the supply chain is localized, it is not entirely complete, meaning there are still additional opportunities to explore. We will keep working on lowering costs and increasing margins, even with the price reduction that Elon mentioned for the standard range version of the vehicle.

Thank you. The next question is about how Tesla has improved or is expected to improve in response to the challenges posed by COVID-19.

Well, it has caused us to look closely at our cost structure and to be more efficient as a company. That's one always has to do that in a crisis, and just thinking about our core beliefs and what do we want to do. We came to the conclusion that the right move was actually to continue to expand rapidly, continue to invest in the future and in new technologies, even though it is risky. We've talked to some of our key investors, and they support that approach as well. There's clearly an uncertain future ahead. It's a bit of a bumpy road. But I think the long-term prospects are extremely good. Anything you guys want to add?

Yeah, I agree with Elon. The prioritization on the key projects will enable us to execute more efficiently and faster on them, which I think is great. The other one that I would add is, it's always been our vision at Tesla to improve the customer experience and make that as digital as possible.

Yes. Touchless delivery.

Yes, so touchless delivery, mobile service, touchless sales has been something that we've been very focused on and made a lot of progress on.

Yes. The Tesla is the only car that you can literally order in less than five minutes on your phone, you can order a car and have it delivered to your doorstep with all the paper and everything done. That's it. Effortless.

And many customers do that.

They're making significant progress in conveying that this process can be straightforward, unlike the often frustrating experience of buying a car. For many, purchasing a new vehicle can feel more daunting than visiting the dentist. In contrast, for Tesla customers, ordering a car is as simple as making a purchase from the Apple App Store or Amazon. It's truly that easy.

The next question is from an institutional investor: can you give us a brief preview of the Battery Day by generally highlighting steps Tesla is taking to improve cell energy density and timeline for introduction?

Yes. We don’t want to overshadow Battery Day since we have exciting news planned for that occasion. We believe it will be a landmark day in Tesla's history, and we are working on finding the right timing for the announcements. We anticipate that the optimal timing will likely be around the third week of May. While we are not providing a specific date, we feel that this timeframe is appropriate. Depending on what we can disclose, the event will take place in either California or Texas.

Okay. And the last question from institutional investors: could you please update on the progress stores development and commercialization of Full Self-Driving? How much revenue have you recognized so far?

So there are a couple of things on the financials for Full Self-Driving. Currently, in North America, it's sold for $7,000 as an option. We take roughly half of that as revenue, and the other half goes into deferred revenue. That's associated with features that will be released with time. Our deferred revenue balance is continuing to grow. It's a little bit over $600 million. 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. Cars going forward, once the feature is released, we can recognize that revenue. This is one of what we think will be one of the most powerful gross margin levers with time as the features suite is rolled out.

There's a significant amount of untapped potential in the fleet that could upgrade to enable Autopilot, whether it's basic Autopilot or Full Self-Driving. We will facilitate this either through our purchase process or, as mentioned earlier, as a subscription towards the end of the year. There is a lot of untapped potential not reflected in the deferred revenue, but we believe it represents a substantial opportunity that is likely to materialize.

Thank you. And now let's go through the questions from 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 4 million vehicles in 2025 and more than 20 million vehicles in 2030. Is 40% or more realistic target?

Well, it's always difficult to predict what the macro situation is going to be. I think people – actually people would have predicted the unexpected roundhouse that COVID came up with it sort of came out of nowhere. In the absence of something, some massive force majeure events, but quite massive, I think, 40% is the likely number. It's possible that is 40%. I would be very shocked, if it's less than 40%, even with force majeure.

Okay. The next question from retail investors. When will you announce the next Giga? How many Gigas do you have planned for the next five years?

I think we will announce the next Giga possibly as soon as a month. We may not – as soon as next month. This is not a prediction, just saying. That could happen. It will certainly be within three 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 don't know right now what that number would be. I guess several more than there are today. But I'm not sure what exactly it would be in five years, but some number more than today.

I'll also add that our Gigas have gotten bigger.

Yes. Larger; they start being called Tera.

Yes, with multiple products as well. The absolute number of Giga factories we may ultimately build might be less, but each one is larger. That's under our belief that just significant efficiencies can be achieved 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.

Thank you. The next question is, can you give us an update on Solar Roof ramp? How many are you currently able to install per week? What is your installations per week target for the end of 2021?

We were actually gaining interest momentum with the Solar Roof before COVID, but COVID essentially shut us down, both from the ability to install and the ability to get permits. The permit offices were closed. We were sheltering in place in multiple places. So we obviously cannot install and if you can't get permits, then you can't physically do it. It's basically impossible. But I think the long-term trend for Solar Roof is extremely good, and I'm confident that, let's say, within the next, I don't know, year or maybe even by the end of the year, we should be installing at a rate of 1,000 a week. That's not in the middle of winter or something; taking seasonality into account, where it's hard to install on roofs that are covered in snow and ice. But like, say spring, I think we should be installing at that rate, which is the hard part. We actually have demonstrated the ability to hit a 1,000 a week plus build rate for the Solar Glass Roof already. So that's not a problem. It's building out the install teams, building up the third-party channel installers, the roofing industry installers. Internally, we want to have at least 1,000 Solar Roof install teams with – and taking a week or perhaps a little less than a week to do an install, which gets you to 1,000 a week roof installations. We see demand is good. Production is good. So it's really all about the install, and then also building out the training, the very diverse group of companies in the roofing industry to also install Solar Roof that, I think will allow us to scale far beyond 1,000 a week. We're also seeing a lot of interest outside of North America. We're expecting this to be a product that is international, and we're actually seeing a tremendous amount of interest from China on the Solar Roof. So we're confident this will be a very significant product for the company 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 you consider the heat pump water heater market as well?

Well, as I said on Twitter, I'm personally extremely excited to build HVAC – gas, HVAC system that also has sort of hospital-grade particle filtration, basically to have a filtration system that filters out viruses, bacteria, pollen, fungi and also neutralizes specific alkaline gases that is quiet and efficient. These are all things we've achieved in our cars. In fact, I don't know if a lot of people realize, but the Model S are the only cars in the world that have hospital operating room-grade heavy filters built-in. They're very big. However, you can get to a particle count that is insanely low with our cars.

And 3 and Y have like MERV 16 or 15 capable filters

Yeah. It’s not like Model 3 and Y; Model 3 and Y also – they're way better than any other cars to the best of my knowledge. They're not quite as good as possible operating room filters, but they are extremely good, way better than any other normal car. We're continuing to improve the filters on 3 and Y. These actually have a big effect on health even in normal just day-to-day living. It's reducing particle count, and it has a vector on allergies and all sorts of things. Air quality is incredibly important even in non-COVID situations going forward. So we’re taking all those things that we've replenished and applying to how HVAC systems would be and commercial HVAC would be. It's just very exciting. And then if you're condensing water, like why not also have a few water source, if you have water, you possibly could then heat the water and have a water heater as well.

Yeah. And use it as a heat source if needed instead of the outdoors, when the outdoor is really cold or the other way around. So lots of options.

It could be a great product. We just have to – Tesla has a potential to deliver, whether we continue on the product front. We're going to make sure we have a lot of ice in the fire here for new products with the Cybertruck, Semi, new Roadster, the Gigafactories in various parts of the world, and Model Y, Autopilot and the Solar Roof and new technologies.

Yeah, exactly. Powerwall, Powerpack, Megapack. We are seeing tremendous demand for stationary storage, more than we can supply, at least for 2020.

Thank you. And the last question from the retail investors is: when will Tesla start acquiring utilities like Hornsdale Power Reserve and most lending instead of selling them battery storage? Does it make sense for Tesla to buy bigger plants and convert them?

Well, we haven't really thought about that yet. It's not out of the question, but our brand is full. Excuse me, sir; our brand is full. That's not out of the question. Our overarching goal is to help accelerate the advent of sustainable energy. The three elements of that are sustainable power generation, then you've got to store the power, stationary storage, and then you've got to have electric transportation. We don't have like specific market share goals or anything like that. It's just to the degree that we can accelerate the advent of sustainable energy, we think that's a fundamental good for the world, and we want to do that as fast as possible. But it's not, like you said, market share growth is a goal in and of itself. It's just that the faster this happens, the better the world will do.

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'd point out, I've had a root canal before, and I would agree, Elon. It was less painful than buying a car.

I mean, really, it's exactly.

It's a big problem, actually. It's a big problem. Different conversations. Zach, first for you, any real-time update on company liquidity at the end of April? Some companies have given the circumstances, gone out of their way to give a little color on that. I just want to give you a shot at that, and I got a follow-up.

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. We're making progress delivering those through April, which is helpful for liquidity. 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 liquidity. Currently now, as we're not producing, we still have payables from Q1 that we're paying off. 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 in looking at the long-term horizon, which is how we're managing it right now, we feel pretty comfortable with the liquidity position of the company.

Yeah. I should say we are a bit worried about not being able to resume production in the Bay Area, and that should be identified as a serious risk. We only have two car factories right now, one in Shanghai and one in the Bay Area, and the Bay Area produces the vast majority of our cars, all of S, X, most of the 3, and all of the Y. So the extension of the shelter in place, or frankly, I would call it, forcibly imprisoning people in their homes against all their constitutional rights, that in my opinion, is an outrage. There’s a risk of great harm, not just to Tesla, but to many companies. While Tesla will weather the storm, there are many small companies that will not. All people’s – everything people have worked for their whole life is being destroyed in real time.

Elon, on that point, you mentioned people that gave their lives to build the country. My fault for you on this. There have been a lot of comparisons drawn to the state of the U.S. economy in the early 1930s when Roosevelt began a series of new deals and infrastructure projects or post-World War 2 when Eisenhower launched the U.S. Highway Act and JFK launched the Apollo Program, which you could say was influenced by the Cold War, clearly, and you benefited from and our space program benefited from. What would be your message to U.S. lawmakers on this call as we – in addition to your opinion on shelter in place, but thinking the longer term, your message to U.S. lawmakers coming out of the crisis, specifically around EV infrastructure and a chance to work with taxpayers to support sustainable transport and renewable energy? I'm wondering if you see this as a chance to 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. Frankly, when I visit China, I see their infrastructure as being much better than ours. It's great. Europe has better infrastructure. It's really quite sad that U.S. infrastructure, especially its roads and highways, is where it is today. Our airports, in a lot of cases, are an embarrassment. It's not just a question of money; it's a question of will. Sometimes, we spend a lot of money on these things, but what are we gaining for it? We need to be thinking about what is the transportation of the future, not the transportation of the past. If this was 1920, do you want to be investing in steam engines or in commercial engines? Obviously not steam engines. This is the time to think about the future and also to ask, is it right to infringe upon people's rights, as what is happening right now? I think people are going to be very angry about this.

Okay. 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. I was hoping you can elaborate a little bit more on the drivers of how the gross margin is already positive at such low volume. How much of it is a function of the commonality with the Model 3, what other factors should we think about? And what does that mean for the app flow for the eventual gross margin on Model Y?

Zach?

Sure. A couple of thoughts there for Y. The first is, it does carry a higher ASP. So on the revenue side, it carries a higher ASP than Model 3. The deliveries that we started with were of the higher ASP versions of the cars. We started with deliveries of performance initially, and that helps create some of the margin. 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 trends that we had with Model 3 when we launched that product in Fremont two years ago. On the cost side, I think you hit on a couple of the buckets. The commonality is huge. It's very important. In addition to that, manufacturing processes are very similar to Model 3 as well, and so we have experience with that both with Model 3 in Fremont and then as well in Shanghai. It helps to have an existing factory with an existing workforce and knowledge here as well. The ecosystem to support and launch the product is there. There remain a lot of opportunities to continue to take costs out of the car. The number of vehicles that we built in the first quarter is quite limited relative to our goal.

It's good. We take costs out of the car and make it better. So it's tax. It's not make the product worse. If we can take costs out of a car and make it worse, we want to take costs out of the car, figure out how we can make it lighter and simpler. We want the car to just incrementally improve as well as incrementally lowering costs. For a five-seater Model Y, we expect marginal costs of that car to be comparable to the Model 3 once we have reached say, 10,000 or 20,000 units or something like that.

Ladies and gentlemen, please stand by; your conference will resume momentarily. Thank you. Speakers, you're back online.

All right. Sorry, we got disconnected for some reason. What was the question again? Okay. Let's go to the next question, please.

The next question comes from Ben Kallo with Baird. Please go ahead.

Hey, thank you very much. Just wondering about the cell strategy. In Reno, you have, obviously, integrated there. But you're buying cells I think, in Shanghai and then what we think in Germany. And so, how are you looking at that going forward? And then could you just talk about Mr. Mizuho and that Board addition and kind of the process with adding him to the Board? Thank you.

Sure. From a sales perspective, 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 on Battery Investor Day like how we're approaching all of it. 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 in the long run. And then the other question about the Board?

Sorry, we couldn't hear the second part of the question.

Yes. I was asking about Mr. Mizuho entering the Board and kind of the process behind that and what he brings to the Board?

I think we all need to go. Obviously, he brings tremendous experience investing at the highest levels in the world and has done great work as the Japan Pension Fund, which is the largest fund of any kind in the world. Generally, the conversations over the years have churned incredible insight into how the global security markets work and what he thinks about historical contexts. He has a strong philosophical understanding about how to make the future better, and he shares our view regarding the environment. He is recognized as a sensible and smart person who brings a lot to the Board.

I guess leaking into the Panasonic relationship, maybe just how is that relationship going? And is there any read-through on bringing him on to the Board? Thank you.

No. I think this is set right through with the Panasonic relationship. I have a great relationship with Panasonic's CEO. We meet regularly one-on-one and talk at the time. That relationship is strong.

Thank you. Let's go to the next question, please.

Our next question will come from Gene Munster with Loup Ventures. Please go ahead.

Congratulations on the progress. Elon, you 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 going to look prior to the robo taxi stage? Are you going to gradually take over human routes with autonomous capable routes over time? Or how do you see that playing out?

It's going to unfold as expected, with us releasing more functionality incrementally. Before any release, we conduct extensive testing. We have a simulation team that effectively mimics real-world conditions, which is crucial for testing car changes through battery tests and simulations. Additionally, our global QA team, of which I am a member, conducts real-world testing that is quite thorough given the complexities of the real world. We initially release to a small group of private beta testers within the company, then extend to a larger audience that includes individuals outside the organization, followed by Early Access Tesla owners, and finally, a broader release. By the time something is launched in the U.S., it has passed through all of these phases. The early-stage software is more advanced than what is currently visible to users. It goes through a rigorous safety process that focuses on navigating complex intersections, handling intricate turns, and managing busy environments like malls, parking lots, office parks, and events, all of which present unique challenges. I believe we’re making excellent progress, thanks in large part to our skilled water pallets engineering team. I am closely engaged with the team, meeting weekly, although in-person meetings are currently challenging. I'm well-informed about our current status and future direction, and I sense significant momentum, leading us to roll out exciting functionality by the end of the year. Once this functionality is available, we’ll work on improving its reliability while allowing for driver supervision. Our goal is to enhance reliability to the point where human oversight is no longer necessary, providing ample data to regulators to demonstrate this. We hope that regulators will eventually approve fully autonomous vehicles without human occupants. However, predicting the regulatory approval timeline is tricky since it is beyond our control. Overall, I'm optimistic about our progress.

So, to summarize, we're going to give owners full autonomy, some level of that by the end of the year. Then a human is in the loop. The Tesla Network app sometime, is it first half of next year? Would that be the hope?

If described as a hope, I would say that, that's probably a fair description.

Okay. When considering the final stage of robo taxis, any thoughts on the regulatory challenges since it's a significant unknown? If you had to make an estimate, when do you think we might start seeing robo taxis on the roads?

I believe it's quite likely that we'll see organic growth. I could be mistaken, but as you can see, we are making progress in some areas while lagging in others. When I make an estimate, I aim for a midpoint rather than providing an overly optimistic or pessimistic outlook. This estimate might be accurate but could be delayed by weeks or even years. Everything I have said that has eventually come to pass has done so, even if it was late. Timeliness may not be my strength, but I always deliver in the end. I think we could have a robo-taxi fleet operational with the network fleet next year, although it may not be available in all markets.

Thank you. And let’s go last question please.

Our last question will come from Pierre Ferragu with New Street. Please go ahead.

Hey, thanks for taking my question. One on gross margin, first. I know your impressive performance in Q1. So there are three moving parts: the tailwind from credits, of course; the Model Y is ramping. Even if it broke even, it probably took average gross margin down. You had Fremont being closed, shut down the last week of the quarter. It probably was the sort of an extra cost. When I looked at how gross margin evolved sequentially, excluding these three moving parts, I felt like your auto gross margin could have been up like a couple of points sequentially. So I wanted to check with you if that estimate would make sense. And then I will have a follow-up on energy storage. Thank you.

Sequential market improvement – margin improvement.

Yes.

Yes. The three things that you mentioned, I had a little bit of a hard time hearing the full question here because we're having a bit of network difficulty in the room. I'll do my best here. When we look at margin, we just look at credits as you have, so I agree with that. Model Y ramping, bringing down overall gross margin, I agree with that as well. It was lower than the overall average, and that will increase with time. Shutdown and efficiencies in both Shanghai and in Fremont also weighed on margin. The Shanghai margin was below the average as well. Even though it's increasing quickly and approaching Model 3, it still is below the average. I think the sentiment of your question was, if you were to remove those factors, was there a sequential increase in gross margin. I haven't specifically calculated that, but I think your intuition is right. We saw strength in gross margin across the board, as I mentioned. S and X gross margins continue to improve despite slightly lower volumes there and higher fixed cost amortization. There's good progress happening, both on the ASP side and the cost reduction side for our products and production. I think this also lends itself to the power of the gross profit contribution to the company once we get through these inefficiencies, we get them up and running again, we increase capacity so we can spread out fixed costs and continue to execute on cost reductions on our products, we feel very optimistic about that path going forward.

Thanks. And I had a quick follow-up 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 call, you've always mentioned that demand for energy storage is always outstripping supply, and you have more orders than you can make. So I'm kind of thinking 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. 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 both our partners and internally is looking at how to reduce the fundamentally the cost of investments in new sales capacity because when you look at a car – a vehicle product, there's a lot of things in the vehicle besides the cells. When you look at an energy storage product, it's really just the cells. To really grow the energy storage business, it's all about cell investments. That's what we've been focused on. Not to give too much away, but that will be one of the things we address in Battery Investor Day: how we're focused on that. When we have that in the place we want, it will 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.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.