Good afternoon, everyone, and welcome to Tesla's Fourth Quarter 2021 Q&A Webcast. My name is Martin Viecha, Senior Director of Investor Relations, and I'm joined today by Elon Musk, Zachary Kirkhorn and a number of other executives. Our Q4 results were announced at about 3:00 p.m. Central 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. Please use the Raise Hand button to join the question queue. But before we jump into Q&A, Elon has some opening remarks. Elon?

Thanks, Martin. So, just to recap 2021, it was a breakthrough year for Tesla and for electric vehicles in general. And while we battled, and everyone did, with supply chain challenges through the year, we managed to grow our volumes by nearly 90% last year. This level of growth didn't happen by coincidence. It was a result of ingenuity and hard work across multiple teams throughout the company. Additionally, we reached the highest operating margin in the industry in the last widely reported quarter at over 14% GAAP operating margin. Lastly, thanks to $5.5 billion of GAAP net income in 2021, our accumulated profitability since the inception of the Company became positive, which I think makes us a real company at this point. This is a critical milestone for the Company. So, after an exceptional year, we shift our focus to the future, Texas and Berlin. We've begun production in Austin and Berlin, starting last quarter. But what's most important is when we get to volume production and can deliver cars to customers. It is worth noting that, as the internet has observed, we've been making quite a few cars in Austin and Berlin. In Texas, we're building the Model Ys with the structural battery pack and the 4680 cells, and we’ll start delivering after final certification of the vehicle, which should be fairly soon. Capacity expansion will continue through maximizing output of each factory and building new factories and new locations in the future. Although we're not ready to announce any new locations on this call, we will, through 2022, look at new locations and probably be able to announce new locations towards the end of this year, I expect. In 2022, supply chain will continue to be the fundamental limiter of output across all factories. The chip shortage, while better than last year, is still an issue. There are multiple supply chain challenges. Last year was difficult to predict and hopefully this year will be smoother, but I'm not sure what you'd do for an encore to 2021 and 2020. Nonetheless, we do expect significant growth in 2022 over 2021, comfortably above 50% growth in 2022. Full Self-Driving. Over time, we think Full Self-Driving will become the most important source of profitability for Tesla. If you run the numbers on robotaxis, it's kind of nutty good from a financial standpoint. I think we are completely confident at this point that it will be achieved. My personal guess is that we'll achieve Full Self-Driving this year, with safety significantly greater than present. The cars in the fleet essentially becoming self-driving by a software update might end up being the biggest increase in asset value of any asset class in history. We shall see. It would also have a profound impact on improving safety and on accelerating the world towards sustainable energy through vastly better asset utilization. On the product roadmap front, there's quite a lot to talk about. I'm not going to go through every single thing we're working on because many of them deserve product launches of their own rather than a few minutes on an earnings call. The fundamental focus of Tesla this year is scaling output. Both last year and this year, if we were to introduce new vehicles, our total vehicle output would decrease. This is a very important point that many people do not understand. Last year, we spent a lot of engineering and management resources solving supply chain issues: rewriting code, changing our chips, reducing the number of chips we need—chip drama central. That was not the only supply chain issue; there are hundreds of things. As a result, we were able to grow almost 90% while many other manufacturers contracted last year. If we had introduced a new car last year, our total vehicle output would have been the same because of the constraints, particularly chips. Introducing an additional product would require attention and resources on the increased complexity, resulting in fewer vehicles actually being delivered. The same is true this year. So, we will not be introducing new vehicle models this year. It would not make sense because we'll still be part constrained. We will, however, do a lot of engineering and tooling to create those vehicles—Cybertruck, Semi, Roadster, Optimus—and be ready to bring those to production, hopefully next year. That is most likely but dependent on whether we can produce more cars. In terms of priority of products, I think the most important product development we're doing this year is the Optimus humanoid robot. I think this has the potential to be more significant than the vehicle business over time. If you think about the economy, labor is the foundation. Capital equipment is distilled labor. What happens if you don't have a labor shortage? I'm not sure what an economy even means at that point. That's what Optimus is about. Drew, you want to talk about the 4680 program, or is this a good time?

Yes, sure. Throughout 2021, we focused on growing cell supply alongside our in-house 4680 effort to provide us flexibility and insurance as we attempt to grow as fast as possible. As we sit today, sales from suppliers actually exceed our other factory-limiting constraints that Elon mentioned for 2022. To say it differently, 4680 cells are not a constraint to our 2022 volume plans, based on the information we have. We are making meaningful progress on the ramp curve in Kato. We're building 4680 structural packs every day, which are being assembled into vehicles in Texas. I was driving one yesterday and the day before. We believe our first 4680 vehicles will be delivered this quarter. Our focus on the cell, the pack and the vehicles here is driving yield, quality and cost to ensure we're ready for larger volumes this year as we ramp and next year. The 4680 and pack tool installations at Giga Austin are progressing well with some areas producing first parts. I was touring the factory—the cell factory here. I’m super pumped. It’s a really exciting accomplishment for us to bring everything into one Austin factory in Texas.

Absolutely. To repeat Drew's point, we still expect to be part- or primarily chip-limited this year. That's the actual driver. That chip limitation should alleviate next year. Then we probably transition into a cell limitation—battery gigawatt-hour limitation—at which point the 4680 will become very important.

Agreed.

Thank you very much. And now, Zach has some opening remarks as well.

Long opening remarks.

Yes. Thanks, Martin. As Elon mentioned, 2021 was a financially transformative year for the Company. If we look across the full year 2021 and compare that to 2020, our automotive gross margin, excluding credits, rose by over 600 basis points, enabled by work on cost reduction, utilization of our Shanghai factory for exports and accelerating demand. OpEx as a percentage of revenue reduced, despite the impact of one-time and unique items, and operating income more than tripled, with operating margin reaching our guidance of mid-teens, and these margins are trending up. We also saw regulatory credits accounting for a relatively small portion of our 2021 profitability, which we expect to continue to reduce in materiality going forward. For Q4 specifically, automotive gross margin, excluding credits, increased to 29.2%, which is our highest yet. We do continue to see some impact of higher pricing on certain models and trims as was the case in prior quarters. But please keep in mind that due to backlogs, changes in pricing will generally impact our financials in future quarters. Supply chain challenges and port congestion resulted in a significant increase in our expedited costs in Q4. We also took reserves associated with warranty and recall costs. Operating expenses were meaningfully impacted by stock-based compensation from the final two tranches of the CEO stock grant becoming probable and payroll taxes associated with the exercise of the 2012 CEO options. The total impact of these payroll taxes, warranty and recall costs and excess expedites was just over $700 million in the quarter. Our free cash flows have remained strong, reaching record levels in Q4 of $2.8 billion, despite increased CapEx. In addition to using cash to grow the business as quickly as we can, we have been retiring legacy and high-interest debt. Note that we plan to continue to utilize the ABS market for product-specific financing. As we look forward, we expect 2022 to be another significant and exciting year for the Company. We continue to drive for vehicle volume growth at or above 50%, as Elon mentioned, and our plans show that this is achievable with just our Fremont and Shanghai factories. For quite some time now, these factories have been running below capacity due to macro challenges with supply and logistics. As Elon mentioned, the pace of growth in 2022 will again be determined by supply chain and logistics, which is difficult for us to forecast. Despite these constraints, it's important to begin the ramp of Austin and Berlin to ensure that we are prepared once limitations ease, enabling us to increase total output more quickly in the future. This will result in higher fixed and semi-variable costs in the near term, in addition to the usual inefficiencies as we ramp a new factory. We are also seeing inflation and rising commodity prices, which we expect to continue to put pressure on our costs. How this specifically impacts gross margins in the near term is uncertain, given a mix of both tailwinds and headwinds. However, we do expect to continue to see stronger operating margins as we grow our volumes and improve operating leverage. Over a longer-term horizon, we are quite optimistic about the expansion of margins. From the hardware side, we are aggressively driving manufacturing innovations and operational efficiency to reduce cost. And with rapid development of Full Self-Driving, software-based profits will ultimately become a strong addition to the profits generated by selling hardware. So congratulations to the Tesla team for a terrific 2021, and thank you to our suppliers who supported us. Looking forward to another great year.

I'd like to just second the thank you to suppliers. A lot of suppliers worked late nights, weekends and vacations around the world, and we're very grateful for that.

Thank you very much. Let's go to the Q&A from the investor side. The first question was on 4680 cells, which we already answered. So, let's go to the second question. How is the progress of the $25,000 compact car? Can you give an update?

Well, we're not currently working on a $25,000 car. At some point, we will, but we have enough on our plate right now—too much on our plate, frankly. So, at some point, there will be. I think that's the wrong question. The thing that overwhelmingly matters is when the car is autonomous. At the point in which it is autonomous, the cost of transport drops by a factor of four or five, roughly.

Thank you. The next question from investors is, since we're talking product roadmaps today, how do you view domestic cooling and heating in the context of accelerating the sustainable energy transition? And how might Tesla's HVAC and heat pump advances fit in?

You want to talk about that, Drew?

I think from a mission perspective, it's very aligned. If you imagine replacing natural gas water and space heaters with electric heat pumps, it offsets something equivalent to about 80% of what a solar plus Powerwall system would offset, so it's very impactful. We have learned a lot about how to make capable and reliable heat pumps that work in all environmental conditions and are excited about the idea of working on that problem one day. It's definitely aligned with our mission to accelerate the transition to sustainable energy.

I think it becomes quite a compelling solution to the consumer where you integrate vehicle charging, solar, energy storage, hot water and HVAC in a very tight compact package that also looks good. It just doesn't exist today.

The integration of those systems in a house is no different than the integration of those systems in a vehicle. The only difference is we do it all in the vehicle.

And then it's constrained on mass and volume and energy in a vehicle, so the house is actually an easier problem. But those systems are disparate today. What we've been doing with Powerwall, charging and solar is integrating them more and more. The next logical step is HVAC and water heating. We will do that and integrate it probably better than anyone has. But we have a lot of projects on our plate, so we are not committing to a time frame at this point.

When the cat moves, or when you come home, the house can just heat and cool appropriately. Sensible things like that would be a game changer down the road.

Yes. System integration with phone and everything, so the car can signal that the house should heat or cool because you're coming home. It would be a game changer. We've got a lot of things on the stove, but it is something we will do.

And people should do it.

Yes, if somebody else wants to do it, that's fine too.

It's super beneficial for achieving the goal here.

The next question is, would you consider splitting FSD packages into perpetual and term licenses with a higher tier for both options for commercial use? A perpetual license that could be attached to an individual or business and not the vehicle itself.

That sounds complicated. We're going to focus on what sells for the lowest cost per mile or kilometer of driving. What matters is how to maximize the efficiency of getting people from one place to another and then charge them in a sensible way.

Including charging infrastructure as part of the equation is a big part of it.

Yes. So charging for money and charging for energy are both considerations.

Thank you. The next question is, is Dojo on track for summer 2022? And what challenges, if any, are you working through? Is Dojo necessary for FSD to operate better in cities like New York City? On a separate note, where should we expect the first implementation of Tesla Bots? In your factories?

There are a few questions here. Dojo appears to be on track for doing something useful in the summer this year. The threshold that really matters is when it becomes more competitive than a GPU cluster for training. The GPU cluster is also improving, so it's a moving target. The goal I've set for the team is that the FSD team running our GPU supercluster should tell me they want to use Dojo instead. That's the obvious threshold. I wouldn't say success is 100% certain; we generally want to under-promise and over-deliver. It does seem we might pass that threshold next year with Dojo if we execute well. Dojo is not required for Full Self-Driving but it is a cost optimization for creating vast amounts of video data and a way to improve the rate of model iteration. Training models faster with a shorter iteration interval allows faster progress. Not everything can be distributed across GPUs; some elements require serialization. If Dojo is competitive, we would offer it to other companies that want to do neural net training. It's a neural net training-optimized system; in theory it should be better than a general computing platform like GPUs, which were not intended for pixel-heavy video training. Dojo is like a giant ASIC optimized for neural net training, especially video-like things. But we are not saying Dojo will definitely succeed; we think it will and would encourage those interested to join Tesla. Regarding the first use of the Tesla Bots—Optimus—if we can't find a use for it ourselves, then others likely won't either. The first use of Optimus would be at Tesla, for tasks like moving parts around the factory.

Okay. Thank you very much. And the next question on insurance. When do you plan on having your insurance service rolled out in all the states? International rollout timing? In markets that have Tesla insurance, what kind of uptake rates are you seeing?

We currently offer Tesla Insurance in five states in the U.S. Four of them are telematics-based—Texas, Illinois, Ohio and Arizona—and in California we offer a more standard insurance product based upon regulations there.

We are pushing for California to change the rules to allow telematics, which measures how safely someone is driving. Current California rules are contrary to the best interest of consumers and should be changed.

We've been in Texas for about three months. The data shows the frequency of collisions by drivers who are given feedback on how they drive is quite a bit lower than otherwise. Take rates in Texas have been quite strong. We measure conversion rate from quote to purchase, and we're encouraged by interest in Texas. We have enough history there to see loss ratios and how the economics work, and we're on the right track. We're comfortable with what we've seen in Texas to move as quickly as possible to scale across the U.S. Specifically on being in all states, this is a slow process because insurance is regulated at the state level, so we have to work through each department of insurance in each state. Our internal goal is that by the end of the year we will be in enough locations that 80% of our customers within the U.S. could choose to sign up for Tesla Insurance if they wanted to. There's uncertainty around that based on regulatory processes, but that's our goal. As we roll out in more states and each incremental state becomes a little less effort than the prior, we'll turn attention to Europe. We might begin work on Europe by the end of the year, depending on progress in the U.S.

Thank you. Next question is, what is your expected max capacity from each of your current factories—Fremont, Shanghai, Berlin and Austin? And timing for new factory announcements?

We don't want to comment on a specific next capacity number. It's always possible to increase output of any given factory, but you must consider logistics costs of transporting cars, especially as cars become more affordable; you want factories closer to customers. Even if you could increase output at one factory, it may not be the smart thing to do. For example, with Giga Texas, we'd want to deliver Model Ys to the eastern two-thirds of the U.S. from this factory to reduce logistics costs. We will continue to increase output in Fremont, Giga Nevada and Shanghai. As I said at the beginning of the call, 2022 is the year we will be looking at factory locations to see what makes the most sense, possibly with some announcements by the end of this year.

And the next question is, what are the biggest obstacles for Cybertruck volume production besides battery shortage?

Batteries will probably not be the limiting factor in Cybertruck production. There's a lot of new technology in the Cybertruck that will take time to work through. There's also the question of average cost of the Cybertruck and whether it's affordable. You can make something very desirable, but if it's not affordable that constrains buyers. I worry more about how to make the Cybertruck affordable despite having advanced technology. Aspirationally, we'd like Cybertruck to be on the order of hundreds of thousands of vehicles per year, but it will take time to get to that level.

Thank you. The next question is, how much of Tesla's margin improvement is from: number one, economies of scale; number two, production line design efficiencies; number three, reduced transportation costs from multiple plant locations; number four, pricing versus cost inflation; or number five, other sources? And how much further could margins improve and why?

There are basically four major factors to margin improvement over the last year, in no particular order. First, our mix has shifted to more Model Y as we've ramped that program in Fremont and Shanghai; the Model Y carries higher profit than the Model 3. Increasing volume on that program yields labor efficiencies and fixed cost amortization, reducing costs. Second, localization in Shanghai has been a huge help for margins—logistics, duties and also different line design that was more efficient from the start. Third, the transition to the new version of Model S and Model X ramping over the year helped. Fourth, we've done various price increases in certain markets on certain models. Looking ahead a quarter or two, we have ramp inefficiencies from the launch of Austin and Berlin. We also face pressures from inflation, supply chain and raw materials. Where that nets out in the immediate term is hard to say, but we will drive to increase margins as much as we can. As Elon mentioned, software will be a significant margin driver over time. As Full Self-Driving features roll out, take rates should rise, and the robotaxi opportunity has material upside on margins from software.

Everything pales in comparison to the value of a robotaxi or personal driving. You go from having an asset used perhaps 12 hours a week per passenger car to maybe 50 or 60 hours a week—a roughly fivefold increase in asset utility. The cost doesn't change. That's where the massive value is.

Thank you. And the last question from investors is Elon mentioned Level 4 autonomy could be achieved this year. Is that based on initial FSD beta rollout experience or is Level 4 ability predicated on Dojo being completed online?

As mentioned earlier, Dojo is not required for Full Self-Driving. It should have a positive effect on the cost of training networks. The important question is the march of nines of reliability—99.999% or 99.999999%—the numerical reliability gets challenging. Being safer than a human is a low standard; humans are often distracted and tired. Anyone in the FSD beta program can see interventions per mile trending down and improvement is fast. There are several profound improvements to the FSD stack coming in the next few months. I would be shocked if we do not achieve Full Self-Driving that is safer than human this year. I would be shocked.

Thank you. Let's go to analyst questions now. The first question comes from Jed from Canaccord. Jed, feel free to unmute yourself and ask a question.

Hi. Thanks, and congratulations on a great year. Elon, my question is around Megapack and the energy business. Regarding supply chain constraints you mentioned, there seem to be two different strategies with Megapack and Powerwall. Powerwall was addressed with 4680 and 2170 developments. Could you talk about supply chain and LFP for the Megapack and what we should expect?

We think stationary storage—Powerwall and Megapack—will transition to an iron-based system, basically a non-nickel system. Manganese could also be part of the future, but primarily iron. Iron is abundant, as is lithium. You can expect stationary storage to transition to iron over time; manganese is a wildcard. We did short-change the energy business last year; vehicle production took priority over energy. Long-term, this is likely to be a terawatt-hour-per-year level business. It's very vast.

That's helpful. So you see 2022 as the opening of the energy business reaccelerating?

It's hard to predict 2022 because we still have lingering supply chain issues globally. The chip side appears to look like it will alleviate at the end of this year or into 2023. There are a large number of chip fabs being built, which is great. There could be other issues; predicting the future is difficult.

The goal is definitely to grow it this year.

It's a question of whether energy doubles, triples or quadruples. Our plans for Megapack and storage this year are ambitious. The exact amount of growth is hard to know. Ultimately, we need to grow it faster than the vehicle business.

It will naturally grow faster than the vehicle business once we can—chip constraints aside. Our primary mission is to accelerate sustainable energy and we're trying to stay true to that.

The next question comes from Ben Kallo from Baird.

I was wondering on the R&D front: you have so many projects. How do you organize R&D efforts so you can start talking about these new products? Is there an incubator or structure for that? Structurally, I'm curious about that. Thank you.

We don't have incubators or separate research centers. We work on things that go into our products. We focus on making useful products the world really needs, iterate fast, then figure out how to make them at scale and at a reasonable price. Prototypes are easy; production at scale is hard. You have to be able to go to volume production and make it economically viable. Execution matters far more than the idea itself. We have a bazillion ideas; the hard part is choosing which ones we will take through blood, sweat and tears to bring to volume production.

Everyone needs to be in the factory often enough to understand the production challenges. If you separate research from production, you lose connection to what is required to scale. The closer you are to production, the faster you'll be able to bring new things into production.

Doing them separately makes it harder to make products. The office we're sitting in now looks over the Giga Texas production line—our offices are integrated into the factory.

The closer you are to applying effort to actual production, the faster you'll be able to bring new things into production.

The next question comes from Toni Sacconaghi from Bernstein.

I have two, please. First, you spoke a lot about FSD and how the economics could be very attractive going forward. I'm wondering if you could share what your current attach rate might be for FSD on your vehicles, or how to think about the progress of attach rate or revenue in FSD in 2021 versus 2020? And how much deferred revenue for FSD was drawn down during the year? I have a follow-up please.

You don't want to be looking at the rearview mirror for FSD; it's not a good indicator for the future. Look out the front windshield because it's a profound step change. Long term, every car will have FSD and the value will be very large. Think about asset utilization: a passenger car is driven maybe 1.5 hours a day on average; many cars sit in parking lots. With robotaxis, you can reduce the need for parking and dramatically increase utilization. That will create a huge change. The Boring Company could be essential to alleviating traffic that may result from autonomous cars, because when travel is dramatically cheaper and easier, there could be many more cars on the road. A robotaxi could be cheaper than a bus or subway ticket. It's hard to quantify but it's a massive change—millions of cars suddenly have four or five times the utility overnight, which is a very big financial number.

Elon, a follow-up: you talked about your product roadmap and your goal to grow at 50% per year or better. That would put you at 3.2 million vehicles or more in 2024. You referenced Cybertruck maybe being 250,000 vehicles. If there is no $25,000 vehicle being worked on, is it realistic to sell more than 3 million vehicles with two high-volume cars and Cybertruck in 2024? How should we think about that and what else is missing?

The gravity of Full Self-Driving is not fully appreciated. If an asset has five times more utilization, it's like dividing the cost of that asset by five. A $50,000 car effectively becomes like a $10,000 car in terms of cost per use—and likely better because users can be productive instead of driving. If cost doesn't change, we will sell as many as we can possibly make.

Thank you. The next question comes from Pierre Ferragu from New Street Research.

I wanted to come back on battery. It's great to hear you expect to sell the first car with 4680 this quarter and at the same time that you don't depend on that ramp to achieve significant volume growth this year. I'm curious how you view 4680 as a form factor suppliers could adopt. In the long run, what does 4680 become? Will it be adopted outside Tesla as a major form factor? Will it be deployed in all cars and energy storage? Do you expect many other companies to use that form factor?

On 4680 as a form factor, we've engaged with a number of partners and suppliers on the form factor; they are working on it. They see it as a way to drive fundamental cost efficiencies in production and cell design to reduce cost. We want people to make 4680 for sure. Should everything be 4680? Not necessarily. It's about cost competitiveness and scalability of manufacturing. For different chemistries, like iron versus nickel-based cells, physics-based differences could drive different form factors. So 4680 doesn't have to be the ultimate form factor for all applications. For example, we don't use 4680 for iron cells.

Thanks. A quick follow-up on chips: you've talked about shortages and supply difficulties. Could you give color on power chips needed for power systems versus traditional logic chips? Is the situation different between the two? Also, are you expanding the scope of your suppliers and should we expect Tesla to bring on additional suppliers in the near term, especially on the power side?

Last year was chip hell—many chips, including silicon carbide inverters were an issue. But a lot of the problems were very simple control chips—small parts that matter, like chips that move seats. There were a lot of annoyingly boring parts such as oscillators that became problems. Many companies over-ordered chips and buffered supply, which magnified shortages. We're seeing alleviation in almost every area, but vehicle output is limited by the single least-lucky part at any time. There are at least 10,000 unique parts in the car; the one that becomes the bottleneck is hard to predict. In general, there's a lot more fab capacity coming online, which is positive for the industry.

Going forward, the idea is to drive simplification—fewer unique parts. On the power side, technology development means the next chip can do the same thing with smaller area, so total fab required to accomplish the function goes down. There's room to grow without needing more fab capacity. In general, there's a lot more fab capacity coming, which is a win.

Yes. It's not a long-term problem because many chip fabs are being built, which is great.

Well, thank you very much. Unfortunately, that is all the time we have for this session. Thanks very much for all your good questions. We'll speak to you again in three months' time. Have a good day. Bye-bye.