Tesla Inc ($TSLA) Q2 2023 Earnings Call

Good afternoon everyone and welcome to Tesla's second quarter 2023 Q&A webcast. My name is Martin Vika, VP of investor relations, and I'm joined today by Elon Musk, Zachary Kirkhorn, and a number of other executives. Our Q2 results were announced at about 3 p.m. Central time in the update deck we published at the same length 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 the Q&A, Elon has some opening remarks. Elon.

Thank you very much, Elon. And I think Zach has some opening remarks as well.

Yeah, thanks Martin. As Elon mentioned, Q2 was another record quarter of production and deliveries as well as records in profit for energy and services and other businesses. Congratulations again to the Tesla team on the continued progress. As we navigate through a period of economic uncertainty, rising interest rates, volatility in consumer confidence, and regulatory change, I want to comment on our financial approach. First, the single most important priority is to ensure we are continuing to invest heavily in the core technologies that will drive the long-term value of the business. This includes increasing spending on AI-related technologies such as full self-driving, Optimus, and Dojo as well as new products such as Cybertruck, our next-generation platform, and the Semi, as evidenced by the continued growth in our R&D spend. This also includes continuing our investments in capacity expansion not only in our vehicle factories but also our supercharging network, service, internal applications, and battery processes as we continue with meaningful capital expenditures to lay this foundation for the future.

Second, we continue to work towards our goals of maximizing volumes on both our vehicle and energy business, but most importantly doing so in a way that generates the capital to continue our pace of R&D and capital investments. This requires a strong focus on per-unit COGS reductions in each of our key businesses as well as working capital improvements on raw materials, work-in-process inventory, and customer AR, all of which progressed appropriately in Q2. If we look specifically at our automotive business, our gross margin showed a modest reduction and remained healthy despite action taken to further improve vehicle affordability early in the quarter. We realized per-unit cost improvements in nearly every category including material cost and commodities, manufacturing costs, and logistics while also continuing to rapidly increase the build rate in our Austin and Berlin factories. For our energy business, we improved margins and gross profit driven by cost reductions and deal economics, particularly with Megapack. As a reminder, storage volumes are typically volatile sequentially based on the types of projects and their specific revenue recognition milestones.

As we look forward to the rest of the year, I want to reiterate Elon's comments on Q3 volumes driven by planned downtimes for factory upgrades. These upgrades will also carry some amount of factory idle cost. However, we are working to minimize as much as possible. It's also important to keep in mind the uncertainty in the macro environment which can impact our execution positively or negatively in the near term. Regardless, we continue to remain dynamic with a focus on fundamental efficiency and a long-term outlook. Congratulations again to everybody on a great quarter.

Thank you very much, Zach. And let's go to investor questions. The first question on licensing FSD we've already answered. So let's go to the second one. The second question is, what is the status of 4680 cells? How far are you from the specs you laid out on Battery Day? When do you expect to achieve what you laid out on Battery Day?

Yeah, first I'll just start with a little bit of a production update. So, in Texas, 4680 cell production increased 80% Q2 over Q1 and the team surpassed 10 million production cells produced here in Texas. So, congrats to the team for that. Their focus on yield reduced our scrap bill by 40% quarter over quarter and that resulted in a 25% reduction in cell COGS. Here in Texas we're preparing to launch our Cybertruck cell which is 10% higher energy density than current production. That was accomplished through process and mechanical design optimization. As we scale Cyber cell production through the end of the year and early next, we should be in a comfortable place on cost per cell. Against our battery energy density targets, the Cyber cell is at our expectations on a like-for-like electrochemistry basis. We're yet to integrate silicon or in-house cathode production, both reviewed on Battery Day, which do bring significant further energy density and cost improvements, but that is a topic for another day. Lastly, it is important to remember that most of what we focused on at Battery Day was the Tesla-engineered 4680 production system and the improvements we strove to achieve on equipment, factory density, capital cost, and utility cost reduction, all of which we are realizing in our Texas scale-up to date.

Thank you very much. The next question is, can you talk more to the upcoming Tesla energy products and how your thinking has evolved on the revenue model given Tesla's AI capabilities? How do you see the long-term mix between hardware margin and recurring software margin from Autobidder as this segment accelerates?

We can't comment on future product roadmap but I can provide a quick energy Q2 update. Megapack continues to show strong demand globally with Lathrop ramping successfully to meet our contracted projects in 2023. As stated last quarter, Megapack margins are in a reasonable place in line with our vehicle target margins. The second final assembly line at Lathrop is progressing on schedule, eventually doubling capacity ahead of our full factory ramp in 2024. We have several exciting large projects in construction or nearing completion including the Kapolei project in Hawaii, the Riverina project in Australia, several projects in California, and one here at Gigafactory Texas that I toured today. Actually, we want to thank our customers, utilities, and grid operators for trusting us with these projects. On the Autobidder question, we continue to grow Autobidder contracts in wholesale markets like Australia, Texas, UK, and California with over six gigawatt-hours under Tesla's dispatch next year. In the UK, our project performed best in the industry in Q2. Autobidder does have software margins and is an enabler for hardware sales, but it's a relatively small contributor to revenues given how much deployment growth on the Megapack hardware side is occurring. It's important to remember that these large capital projects have lifetimes of 20 years of recurring revenues. On an annualized basis relative to upfront capex, they are small. On the residential side, we have some fun things happening. We recently surpassed a half million Powerwalls installed. Just this week we were launching Charge on Solar which allows Tesla Powerwall and vehicle customers to charge their vehicles using their excess solar and drive only on the sunshine that hits their roof. Yesterday we began paying customers in Texas for participating in our virtual power plant to provide grid support to ERCOT. We expect these credits to lower our median customer's annual bill by a third and to increase these credits over time as we expand market access. And today we are expanding Tesla Electric enrollment to new Model 3 owners in Texas, followed by all Texas vehicle customers over the rest of the quarter. Unfortunately, and somewhat similar to Tesla Insurance, bringing Tesla Electric and VPP capabilities to our customers requires working through a fractured regulatory environment on a jurisdiction-by-jurisdiction basis. In the long run, the value of residential energy software and hardware will be driven by the level of market access that utilities, market operators, and regulators permit. Where Powerwall is eligible to provide the full stack of energy services like peaker capacity and system buffering, such as in Australia, we can more than double the value of ownership relative to a typical system today.

Thank you very much. The next question is, could you quantify the benefits to COGS per unit from the IRA battery manufacturing incentives and secondly battery raw material declines year to date?

All right, I can take that. On the first part of the question for IRA manufacturing incentives, we provided previous guidance that we expect these to be for the course of this year in the range of 150 million to 250 million per quarter. We are staying within that boundary as we guided previously. So that was the case in Q2 as well. I will note, and I think we've mentioned this before, that this includes a 50-50 sharing of credits for qualified cells from our long-term battery partner, Panasonic. On the commodity side, we are continuing to see improvements there. As we've discussed previously, lithium is the most notable improvement so far. I think I commented on this on the last call because typically we see this coming about a quarter before it actually is realized in our financials. And also just as a reminder, we're not fully exposed to the price of lithium. Our supply chain team has done a terrific job in partnership with a bunch of other companies to put in place some long-term agreements here, but we do have some exposure that moves up and down. We're also seeing benefits in aluminum and steel, which I think is great. Not as large as the lithium impacts but they contribute nonetheless. So if we add up the total impact of this in Q2 relative to prior quarter, it's about the same size and magnitude as the IRA benefits that we also received.

You know, just to put this in context, as you look at COGS per unit sequentially from Q1 to Q2, I think there's two things to keep in mind there. The first is that our S/X mix for deliveries increased quite a bit from Q1 to Q2. So as you think about fundamental cost reductions, it's important to adjust for that. And then secondly, as we continue to work on reducing our Austin and Berlin costs, which we did quite a bit of that from Q1 to Q2, these factories are still slightly above Model Y production costs elsewhere. And in the quarter, our mix of Austin and Berlin related builds increased. And so, that's something to consider as you model out the impact from Q1 to Q2 in terms of costs per unit. I do want to ask Karen if there's anything else on the commodity side or just more generally you want to add here.

Yeah, as you mentioned, Zach, we've naturally been a little bit hedged from the lithium position because of the long-term contracts we have in place, but we have seen reduction in pricing across the board for all commodities that specifically go into batteries such as nickel, cobalt, and graphite. And the reductions in pricing translate into thousands of dollars when you look at it from a per-vehicle impact. We're taking advantage of the historically low commodity pricing in certain areas to kind of extend some of those fixed-price contracts through the end of the decade. So it's a playbook that we'll continue to kind of go back to as we look to the future.

Thank you. The next question on FSD. Have you considered allowing FSD transferability as a lever to allow existing customers to upgrade to a new Tesla instead of being locked into an existing car due to the price of FSD?

We don't get to this one-time thing. Okay, right. The next question. When will we give more information about the Cybertruck orders, estimated delivery schedules, pricing, and specifications?

Thank you. The next question is, critics of Giga casting contended that process makes vehicles harder and more costly to repair essentially pushing cost onto the customer. Could you share some details about the initial repair experience with Giga Cast vehicles?

Yeah. Thanks. This is Lars. And Martin, that's like simply not true. There's a misconception that traditional bodies are easy to repair but they are made of multiple materials and multiple joining methods. Spot welds and rivets have to be drilled out. Panels and structural adhesive have to be chiseled out. Dried adhesive has to be removed. Stampings cut. Blah blah blah.

Yeah. And so putting that back together means time and money. Using an example of replacing a rear cast rail on a Model Y. To do that versus what we replaced it with from the Model 3, it's 10 times cheaper and three times faster to do it with the cast rail. My design team works with our collision repair team since we're closed loop on this with insurance and we design specific parts that make it easier and faster to repair and we have an incentive to do that because we have our own insurance and our own body shops. We expect that we'll continue to do this and collision repair will continue to become cheaper and faster over time and we already make this available to all body shops through our Tesla-approved body shop training.

Thank you. Next question. How many Optimus bots have been made and when will they be able to start performing useful tasks?

Certainly not a compelling humanoid robot.

Thank you. The next question is, how has the order intake trended relative to production levels during Q2 and how has it trended in the quarter-to-date period? Conceptually, how does Tesla decide when is it appropriate to reduce prices or add other sales incentives to increase demand?

DM us.

Thank you. Let's go to the next question. With the emphasis of price cuts to drive volume growth eating into automotive gross margin, can investors expect to see automotive gross margin stabilize or even rise due to efficiencies outpacing the cuts? And if so, when?

I fully agree with you. I mean, I think the only thing in the short term that matters is what I said in my opening remarks, which is, are we generating enough money to continue to invest in the portfolio of products and technologies that the technical teams are investing in right now? This is intense. It's intense in terms of investment. It's intense in terms of potential.

And vertical integration. It's not even just like new products, but also.

We don't, you know, and others, but.

And so at least from my perspective, what matters is continuing to generate the cash to invest. That means continuing to be hyper-focused on near-term cost reduction because everything we do in near-term cost reduction provides capital to reinvest. Hyper-focused on working capital management, of which we've made quite a bit of progress there on the raw materials and WIP side of that. We've been very focused on accounts receivables as well to ensure that we can continue to reinvest the cash. You know, this is what we're focused on.

And you know, so there's a set of this that we control. We have a pipeline of cost reductions. We are getting tailwinds in the commodity space right now, as Karen mentioned. That's helpful. Variability around average selling prices, you know, goes back to Elon's point. We don't control interest rates. We don't control macro consumer sentiment. But we have an obligation to be responsive to that to ensure that we're matching supply and demand and keeping things balanced. And so this is how we're managing the next handful of quarters. Soon enough, these quarters will be behind us. They won't be part of the present value of future cash flows of the business. And so we want to make sure we keep that view and make sure that the long term of the business is exactly the way that we want it to be.

All right. Thank you very much. And now let's go to analyst questions. The first question comes from Dan Levy from Barclays. Dan, feel free to unmute yourself.

Great. Good evening. Thank you. Wanted to start first with a question about your efforts in AI and Dojo. It's pretty clear it sounds like you're accelerating your focus. Can you maybe provide us with a sense of what the process is of refining the product? Is it more machines? And maybe you could give us a sense of when the payout starts, when you start to see the payout, and what the resource outlay is, what should we expect on the opex front as a result of this?

Yeah.

Great. Just to add to what Elon mentioned. So, you know, the numbers that he mentioned are between R&D spend and capital spend. And you know, this is moving quickly. And so we provide a three-year outlook on our capital expense. We are considering these expenses in that outlook. And as that moves up and down, we'll continue to update our guidance in the Q.

And it's just difficult to predict how quickly we can execute on it.

Great. Thank you. Just as a follow-up, I recognize there's some incredible macro uncertainty right now, but you're sticking with your near-term volume target of 50% CAGR. As we just think about sort of in the year ahead, Cybertruck is going to be some contribution, there's going to be some help from further EV penetration growth, but to what extent are you willing to sacrifice on pricing to keep that 50% volume CAGR intact? Or are you thinking differently about margins versus your prior commentary of willing to sacrifice on margins to get more share?

Thank you. Let's go to the next analyst. The question comes from Emanuel Rosner from Deutsche Bank.

Thank you very much. Two questions for me as well. First, following up on the autonomy. So, you know, before you start launching these dedicated robotaxi vehicles on existing vehicles, you're improving FSD incrementally. What is your latest targeted timing to essentially release a non-Beta version or an eyes-off version that would trigger much higher take rates? And would Tesla benefit from lowering the price of FSD?

Thank you. And the next question comes from William Stein from Truist. William, go ahead and unmute.

Great. Thank you very much for taking my question. I'd like to ask about, to stick on this AI topic. We read with great interest the developments in Dojo today and you've spoken about FSD, but you've also, Elon, you've started this xAI company. And you know, for investors that think that there might be quite a bit of value in the AI features and products of Tesla, it might be concerning to see you pursuing another endeavor where AI is the focus. So, can you talk about how xAI might overlap, might perhaps compete with Tesla or in other ways perhaps it enhances the value of what Tesla does? Thanks very much.

If I can squeeze one more mundane question in, I wonder if you think you can hit the 1.8 million unit number with current pricing or do you anticipate needing to continue to lower prices because it seems like they've stabilized, the trends have stabilized in the last maybe month and a half. Should we expect continued decreases or more stabilization for the rest of the year?

Yeah.

Thank you. Let's go to Colin Rush from Oppenheimer.

Thanks so much, guys. As you're building out Dojo and implementing what truly is going to be a highly complex set of software, can you speak to the maturity of the operating system and how much outsourced software you're expecting to use in that system?

Okay, thanks so much. That's super helpful. And then can you speak to how you're managing some of the geopolitical risks relative to your capacity expansion? Obviously, as you guys continue to grow at this rate, you're going to be putting some folks out of business and there's going to be some impacts around regional economy. So, just want to understand how you're thinking about that in terms of some of your capex plans and how you're managing some of those relationships with different countries and regions.

Thank you. The next question comes from Mark Delaney from Goldman Sachs.

Thank you very much for taking the question. Tesla has been making progress reducing cost and did so again last quarter. Can you give an update on when you think automotive COGS per vehicle could be under the historical $36,000 per vehicle level and what are the key puts and takes to get there?

This is, I think I was asked this in the past. This is very difficult to forecast. You know, there's a series of costs that we manage. There's a series of costs in which we don't control. And so, you know, particularly on the commodity side, where labor costs go, etc., it's just hard to say.

Definitely there's that, and then there's also the unit economics improve as volumes grow. That's the other thing we're seeing as we're becoming a bigger and bigger part of a lot of suppliers. Economies of scale come into play. There's equipment depreciation that comes into play. Equipment that was commissioned five to seven years ago that used to be a part of the piece price, that's completely depreciated. So we'll see situations where piece price comes down because that equipment contribution has gone away. And then just we continue to have this mentality of continuous improvement in terms of reducing labor, improving automation, and just continue to get better at what we do. So we have seen, I think every quarter we have seen an improvement. Of course the commodities spiked up and down, but just in general the trend is towards being more efficient.

Yeah. Lithium prices went absolutely insane there for a while.

Cobalt's like a third of what it used to be.

Yeah. And you know, we're still early in the ramps, well not early in the ramp, but early in the cost-down curve of Austin and Berlin.

Ramp quality, and then yeah, ramp quality cost.

Yeah. Packaging is a big, big element to that.

Logistics is normalizing, which is great.

So every bit of it.

Logistics is underappreciated.

Yeah. And we made tremendous improvements in cost on all fronts. You know, extract costs we have down to pre-pandemic expected cost levels now and our goal is to go further down.

So yeah, so when we look at our progress from Q1 to Q2 on cost, the way that we look at it internally and normalize for the impacts of mix shift with Austin and Berlin being a higher percentage of our mix, normalized for Model S and X being a higher percentage of our mix in Q2 versus Q1. The sequential cost reduction, it might be the largest we've had in a while. So I think it's great work on behalf of the Tesla team and we just got to keep it up.

Mark, do you have a follow-up question? I think you're muted.

Yep. Yeah. Thank you very much for all the details on that. Maybe you could put a finer point on the downtime impact that you spoke about in your prepared comments. In terms of production impact and then also to what extent there's a margin impact from those factory upgrades that you're planning this quarter. Thank you.

Yeah, the downtime, you know, we don't know exactly the number of cars impacted because, you know, kind of the way that we go into downtime windows for upgrades is, you know, we set aside a period of time but then the team is challenged to go as quickly as possible so that we can get the factories up and running again and minimize that. So it's not a profound reduction, you know, hopefully it's quite small.

Yeah, I think this is unfortunately all the time we have for today. Okay. So we'll speak to you all in the next three months. Thank you very much. Thank you.