Ladies and gentlemen, thank you for standing by, and welcome to Tesla's Q4 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 of Investor Relations. Please go ahead, sir.

Thank you, Sherry, and good afternoon everyone. Welcome to Tesla's fourth quarter 2020 Q&A webcast. I'm joined today by Elon Musk, Zachary Kirkhorn, and a number of other executives. Our Q4 results were announced at about 1 PM 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. But before we jump into the Q&A, Elon has some opening remarks. Elon?

Thank you. So, just to recap the year, 2020 was a defining year for us on many levels. Despite a challenging environment, we reached an important milestone of producing and delivering 0.5 million cars. I'd just like to, once again, thank the people at Tesla for an incredible effort. We delivered almost as many cars last year as we produced in our entire history. So, really an incredible growth rate despite a very challenging 2020. So, my hat is off to such hard work with such great people at Tesla. So, for the full year, we achieved free cash flow of nearly $2.8 billion after spending more than $3 billion on building new factories and other expenditures. We reached industry-leading GAAP operating margins in addition to positive net income and record cash flow. Regarding capacity expansion, while we focus on execution, we continue to build a lot of new capacity. We started producing the Model Y out of Fremont and have almost reached full production speed. We ramped the Model 3 in Shanghai to more than 5,000 cars a week sustainably, and Shanghai continues to grow rapidly. We introduced the heat pump to all of our vehicles. We ramped the single piece castings for Model Y. This is where, for the first time in history, the entire rear third skeleton of the car is being cast as a single piece in the largest and most advanced casting machine ever made. We built a Model Y factory in China from start to finish in one year. We're also building Giga Berlin and Giga Texas, which we expect to start production later this year. And lastly, we built a battery cell factory in the Bay Area. Even though it is a pilot plant, its capacity is large enough that it would be in the top 10 battery cell factories on earth despite being a pilot plant. Regarding the new Model S and X, we're super excited to announce that the new Model S and Model X are in production now and will be delivered in February. The Model S Plaid, and we're actually in production now, and we'll be delivering next month. This tri-motor Model S has a completely new interior and a lot of great improvements over the prior version. The Model S Plaid will be the first production car ever to go 0 to 60 miles an hour in under 2 seconds, and will have the ability to seat up to seven people with third row seats. It's faster than any production car ever made for road use. We'll start delivering it in a matter of weeks. Regarding Full Self-Driving, we've made significant progress. I recommend watching the videos of our public beta, where we have almost 1,000 people in the beta now. With each successful release of the beta software, it's really improving rapidly. It's not uncommon for me to have no interventions on drives, including places I've never been to. I’m highly confident the car will drive itself with the reliability of a human this year, which is a very big deal. To justify the value of the company, if Tesla ships $50 billion or $60 billion worth of vehicles, and those vehicles can become Full-Self Driving and serve as robotaxis, that utility increases from 12 hours a week to potentially 60 hours a week, a 5x increase. Even if we assume the car is merely twice as useful, that would double our revenue, which is almost entirely gross margin. We think 2021 will be even more exciting. We have many great new products coming out, advanced factories set up for production, and I believe this will fundamentally boost the efficiency of the company. I'm very excited about the future and look forward to making it happen. Thank you.

Thank you very much. I think our CFO, Zach Kirkhorn, has some opening remarks as well.

Yes. Thanks, Martin. 2020 has been an extremely successful year while managing through many unforeseen challenges. On cash, we continue to generate strong free cash flows, reaching a record $1.9 billion in Q4 alongside growth and investment for future programs. Additionally, we've reduced our debt use and settled $2 billion of convertible debt in Q4, which will continue into Q1. We achieved our first calendar year and six sequential quarters of profitability. Automotive gross margin excluding credits improved from 2019 to 2020 despite the reductions in ASP and inefficiencies from new product launches. Q4 specifically was impacted by stock-based compensation due to the increase in stock price and logistics costs due to supply chain instability. Adjusting for these items shows an improvement in automotive gross margin. We also saw a growth in service capacity. Moving forward, we expect 2021 to be meaningful as we see the benefits of long-standing investments in capacity and technology. Global demand continues to outpace production, and we are investing heavily in supercharging and service capacity while reducing costs, including OpEx as a percentage of revenue. I look forward to providing updates on progress throughout the year.

Thank you very much. Let’s jump straight into questions from institutional investors. The first question is, what is currently holding Tesla back from being the market share leader in solar?

Yeah. We're seeing tremendous growth in solar quarter-over-quarter last year, and we expect to become the market leader in solar. Unfortunately, there were a few years when we had to devote the whole company to Model 3 production. Now we have more bandwidth, and we're putting a lot of attention on solar, and it's growing rapidly. It won't be long before Tesla is by far the market leader in solar.

Another really important part of the solar strategy is achieving an industry-leading cost structure, which will allow us to offer industry-leading pricing. We've accomplished a lot over the last year in achieving this cost structure.

An essential aspect is achieving better integration between the Tesla Powerwall, Tesla Retrofit Solar, and Tesla Roof. We're confident about having excellent integration with the Powerwall and Tesla Solar, and we're making great progress in that area.

Thank you. The second question is, could current owners get the ability to transfer their FSD to their next vehicle?

Unfortunately, we're not considering that at this time. We do offer a higher price for a car with FSD than one without FSD, and I think the market undervalues the capabilities of FSD. But we are not currently planning on allowing FSD to be transferred.

Thank you. The third question is, can you give us a progress update on dry coating of the battery electrode?

The in-house cell manufacturing system we revealed at Battery Day contains new processes and equipment. We expected some unknown challenges during the production ramp. The Kato team has solved manufacturing problems and continues to improve yield and rate week-over-week. Our material supply chain is established, and the team is on track for full production ramp this year.

Thank you very much. The next question is, why are you confident Tesla will achieve Level 5 autonomy in 2021?

I'm confident based on the technical roadmap and our progress with each beta iteration. It's now about improving corner case reliability and achieving better than human reliability. The software is improving dramatically with the vast training data we have from our cars in the field. We believe we have a clear path towards a vehicle that will drive much safer than a person.

Thank you. The next question is, what is Tesla's current gigawatt-hour run rate of the 4680 cell production?

We're aiming for a total of 100 gigawatt-hours of Tesla cells produced in 2022. It's essential to focus on that number rather than the ramp-up, which tends to improve exponentially. We are installing capacity for 200 gigawatt-hours a year and expect to achieve 30% of targeted design capacity in 2022.

We are progressing up the production S curve as quickly as possible.

Thank you very much. One more question from retail investors: What is Tesla doing to improve the service experience?

To improve service, we’re focusing on the quality and reliability of our cars. In the last two years, the frequency of service visits has reduced by one-third. We've increased mobile service, which now accounts for over 40% of all visits. We're also expanding our service centers significantly this year.

Thank you very much. Let's go to institutional investor questions. What are the key milestones we need to achieve to evolve current FSD to a commercial Level 4, Level 5 ridesharing solution?

We need to transition the neural nets to video. The entire system must be adjusted accordingly. We're gathering more data with the cars in the field, and the beta testing provides clear evidence of progress.

Thank you. Does Tesla plan to license any of its software applications, FSD and Autobidder, to third-party OEMs?

We are open to licensing our software to third parties. We’ve had preliminary discussions about licensing autopilot and will consider it once we prove its full self-driving capabilities. Our philosophy is not to create walled gardens.

Thank you. Are there key differences in product, customer preferences, and FSD strategy between China and the rest of the world?

We are currently the leader in the Chinese EV market, which shows we're doing something right. However, only about 1% or 2% of our customers in China have selected the FSD option. Once we can make it work well in China, it will likely lead to higher adoption rates.

Thank you. Where are you in Cybertruck development? What are your expectations for Cybertruck deliveries in 2021?

We've finished almost all of the Cybertruck engineering. We're getting the equipment necessary to make it work. If all goes well, we will deliver some towards the end of this year, but expect volume production in 2022.

Thank you. Our first question will come from Colin Rusch with Oppenheimer. Please go ahead.

Can you talk about the regulatory environment for FSD and how you're seeing that play out?

The U.S. regulatory space is dynamic but not particularly limiting, whereas Europe is slower in reaching past Level 3. China is showing interest in Level 4 or 5, so we expect a very dynamic environment in 2021.

Can you talk about the supply chain and how you're migrating exposure around raw material costs?

Our priority is to deal with COVID-related disruptions. We're also entering long-term agreements with preferred suppliers to ensure adequate quantities and pricing.

What should we see on regulatory credit sales moving forward?

2020 regulatory credit sales were higher than we expected, and it's difficult to forecast future sales. Our focus is on long-term goals rather than planning around credits.

What will you use the capital you raised in 2020 for?

Debt reduction is a priority, and we can focus on building capacity efficiently. We're investing in service expansion and the supercharging network to meet future demand.

Does increasing purchases from suppliers require them to build structural 4680 cells?

No, it's not a requirement, and we will continue to use the 18650 form factor for some time. We'll transition to a consistent form factor over time, but it's better to deal with complexities today.

Are you facing challenges with hiring qualified individuals that could limit growth?

That limits our growth rate because onboarding great people takes time. We can maintain a growth rate in excess of 50% per year for years to come.

Can you provide an update on the electric van market?

Tesla will definitely make an electric van at some point. However, we face constraints on battery cell output, which limits our ability to scale production for new products.

How is your in-house cell manufacturing trending towards achieving your cost and range goals?

We are very confident about achieving our cost and range targets over a three-year time frame.

Do you plan to step down as CEO?

I expect to be CEO of Tesla for several years. I want to ensure our projects are successfully realized before considering any major transitions in my role.

Will Tesla Semi be the first to achieve full autonomy?

That's quite likely. The Tesla Semi will utilize the same hardware as our cars, with specific software adjustments to accommodate the semi-truck's characteristics.

Thank you very much. Unfortunately, that's all the time we have today. Thanks for all your great questions, and we will speak to you again in about three months.