Tesla Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 19, 2023

There are 12 speakers on the call.

Operator

Everyone and welcome to Tesla's Q2 2023 Q and A Webcast. My name is Martin Viecha, 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 pm 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.

Operator

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

Speaker 1

to join the question queue. But before we jump into the Q and A, Elon has some opening remarks. Elon? Thank you, Martin. So just a Q2 recap.

Speaker 1

In Q2, we achieved record vehicle production and deliveries and record revenue of about $25,000,000,000 in a single quarter. Model Y became the best selling vehicle of any kind globally in Q1, surpassing the likes of likes of Corolla And Golf. So it was the number one vehicle of any kind, including vehicles that are at a seller par lower price. This is, I I think an incredible achievement by the Tesla team and just a huge thank you to our customers for their support. So this came in spite of high interest rates and a lot of macro uncertainty and nonetheless We managed to achieve operating margin of about 10%.

Speaker 1

We continue to target 1,800,000 vehicle deliveries this year. Although we expect that Q3 production will be a little bit down because we've got summer shutdowns for a lot of factory upgrades. So just probably a slight decrease in production in Q3 for Sort of global factory upgrades. In the long term, autonomy we think is going to just Drive volume through the ceiling next level and our future robotaxi products, The dedicated robo taxi products we think have quite the infinite demand. So, the way we're going to manufacture The robotaxi is also itself a revolution, so it's revolutionary design made in a revolutionary way.

Speaker 1

It will be by far the highest units per hour of any vehicle production ever. So very excited about that. With respect to Autopilot and Dojo, in order to build autonomy, we also need to train our Neural net with the data from millions of vehicles. With the more I mean, this has been proven over and over again. The more training data you have, the better the results.

Speaker 1

And I mean there are times where we see basically in a neural net, Basically, it's sort of at a million training examples, it barely works. At 2,000,000, it slightly works. At 3,000,000, It's like, wow, okay, we're seeing something. For me, it's like 10,000,000 training examples. It's like it becomes incredible.

Speaker 1

So There's just no substitute for a massive amount of data. And obviously Tesla has more vehicles on the road That are collecting this data than all other companies combined by, I think, maybe even an order of magnitude. So I think we might have 90% of all A very big number. So, you know, the success in AI endeavors is a function of talent, sort of unique data and computer resources. And we have outstanding capabilities in all three arenas.

Speaker 1

And I really just don't know how anyone could do what we're doing even if they had our software and had our computer if they did not have the training data. So Speaking of which, our Dojo training computer is designed to significantly reduce the cost of neural net training. It is designed to it's not optimized for the kind of training that we need, which is a video training. So, we just see that the need for neural net training, again, talking about being a quasi And the things is just enormous. So I think having We expect to use both NVIDIA and Dojo, to be clear.

Speaker 1

But there's we just see a demand for really VAST Training Resources. And we think we may reach in house neural net Enrollment training capability of 100 exoplops by the end of next year. So To date, over 300,000,000 miles have been driven using FSD Beta. That 300,000,000 mile number is going to seem Very small, very quickly. It will soon be billions of miles, tens of billions of miles.

Speaker 1

And the FSD will go from being as good as a human to then being vastly better than a human. We see a clear path to full self driving being 10 times safer than the average human driver. So And between Autopilot, Dojo Computer, our inference hardware in the car which we call Sort of hardware 34, but it's really dedicated. It's a high efficiency inference computer that's in the car. And our Optimus robot We continue to build our release candidates of the Cybertruck on our final production line in Austin.

Speaker 1

I'm actually here in Austin at the Gigafactory. This is the first truck that we're aware of that will have 4 doors over a 6 foot bed and will fit into a 20 foot garage. So it's a little bigger on the outside, but it's even bigger on the inside. So it's a I think that's a one of the Elements of good design is it should feel bigger on the inside than it looks on the outside. And this is no small car, but We really cared about the exterior dimensions of the Cybertruck down to the last millimeter.

Speaker 1

So it's just we're trying to get right in the middle of the Goldilocks zone, Not too big, not too small. And then really maximize the utility of the volume. And we can't wait to start delivering it later this year. Some other highlights, our global supercharging network now stands at over 50,000 roughly 50,000 connectors and over 5,000 locations. As I think a lot of people are aware, The Tesla starting the Tesla charging standard, which we made open source and is now called the North American charging standard.

Speaker 1

We're deeply honored that Ford, GM, Mercedes and many other OEMs have signed up to use our Connector and gain access to our charger network. We strongly believe in helping Other car companies to accelerate the EV revolution and just trying to do the right thing in general. So That's a goal there. Then It's only I think I want to emphasize like very strongly, this is a very important point, is that, Tesla Just as with the North American charging standard, although we're not licensing in that case, we're not licensing, we're just making it available. But we are very open to licensing our full self driving software and hardware to other car companies.

Speaker 1

And we are already in discussions with early discussions with a major OEM about using the Tesla FSD. So we're not trying to keep this to ourselves. We're more than happy to license it to others. And lastly, our new lithium refinery and cathode facility are progressing well. In conclusion, we continue to focus on making as many calls as we can, while maintaining healthy financials.

Speaker 1

Our artificial intelligence development is Obviously entering a new era, and we're incredibly excited about what's to come. Our other businesses such as mega packs, supercharging service And whatnot all started to become a meaningful contributor to overall profitability this quarter. And then lastly, I'd just like to Profusely thank all of our employees who are making a lot of extra effort during uncertain times. Thank you very much for your hard work and the impact you're making.

Operator

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

Speaker 2

Yes. Thanks, Martin. As Elon mentioned, Q2 was another record quarter of production and deliveries as well as records and 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 and consumer Confidence in regulatory change.

Speaker 2

I want to comment on our financial approach. First, the single most important priority is to Sure. We are continuing to invest heavily in the core technologies that will drive the long term value of the business. This include increasing spending on AI related technologies Such as full self driving, Optimus and Dojo, as well as new products such as Cyber Chuck, our next generation platform and the semi, as evidenced by the continued growth in our R and 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.

Speaker 2

2nd, 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 and 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 We recognize 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.

Speaker 2

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 factor 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 the long term outlook.

Speaker 2

Congratulations again to everybody on a great quarter.

Operator

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 4,680 cells?

Operator

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?

Speaker 3

Yes. First, I'll just start with a little bit of a production update. So in Texas, 4,680 cell production increased 80% Q2 over Q1 and the team surpassed 10,000,000 production sales produced here in Texas. So congrats to the team for that. They're focused on yield, We reduced our scrap bill by 40% quarter over quarter and that resulted in a 25% reduction in cell COGS.

Speaker 3

Here in Texas we're preparing to launch our cyber truck 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.

Speaker 3

Lastly, it is important to remember that most of what we focused on at Battery Day was the Tesla engineered 4,680 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.

Operator

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 auto bidder as the segment accelerates.

Speaker 3

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, MAGAPAC margins are in a reasonable place in line with our target market vehicle target margins. The The second final assembly line at Lathrop is progressing on schedule eventually doubling Lathrop capacity ahead of our full factory ramp, in 2024. We have several exciting large projects in construction or nearing completion including the KES project in Hawaii, the Riverina project in Australia, several projects in Morning.

Speaker 3

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 auto bidder question, we continue to grow auto bidder contracts in wholesale markets like Australia, Texas, UK and California with over 6 gigawatt hours under Tesla's dispatch next year. In the U. K.

Speaker 3

Our project performed best in the industry in Q2. Auto bidder does have software margins and is an enabler for hardware sales, but it's a relatively a small contributor to revenues given how much deployment growth on the MegaPack hardware side is occurring. It's important to remember that these large projects, These large capital projects have lifetimes of 20 years of recurring revenues on an annualized basis relative to upfront CapEx are small. On the residential side, we have some fun things happening. We recently surpassed a half 1000000 Powerwalls installed.

Speaker 3

Just this week, we are 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 credit To lower our median customers annual bill by a third and to increase these credits over time as ERCOT expands 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 Our customers requires working through a fractured regulatory environment on a jurisdiction by jurisdiction basis.

Speaker 4

In the long run, the value of

Speaker 3

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 peak capacity and system buffering such as in Australia, we can more than double the value of ownership relative to a typical system today.

Operator

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.

Speaker 2

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 $150,000,000 to $250,000,000 per quarter. We are staying within that boundary as we guided previously. So that was the case in Q2 as well.

Speaker 2

I will note and I think we've mentioned this before that this includes a fifty-fifty sharing of credits for qualified sales 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.

Speaker 2

Our supply chain team has done a terrific job in partnership with another 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. Just to put this in context, as you look at COGS per unit sequentially from Q1 to Q2, And there's 2 things to keep in mind there.

Speaker 2

The first is that our FX 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 COGS per minute.

Speaker 2

I do want to ask Karin if there's anything else on the commodity side or just more generally you want to add here.

Speaker 5

Yes. 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 The batteries such as nickel, cobalt and graphite and the reductions in pricing translate into 1,000 of dollars when you look at it from a per vehicle impact. We're taking advantage of the look historically local market 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.

Operator

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.

Speaker 1

Yes, this is a question we get asked a lot. So, we're excited to announce that for Q3, we will be allowing Transfer of FSD. This is a one time amnesty. So It needs to be you need to take advantage of it in Q3, but or at least place the order in Q3 within reasonable delivery time frames. So, yes, yes, yes, I hope this makes people happy.

Speaker 1

We don't get to this one time thing. All

Operator

right. The next question, when will you, give more information about the Cybertruck orders, estimated delivery schedules, pricing and specifications.

Speaker 1

The demand is so far off the hook, you can't even see the hook. So that's really not an issue. I do want to emphasize that the Cybertruck has a lot of new technology in it, like a lot. It doesn't look like it doesn't look like any other vehicle because it is not like any other vehicle. So And the production ramp will move as fast as the slowest and least likely elements of the entire Supply chain and internal production.

Speaker 1

So I wouldn't expect I hope it's smooth. We're certainly better at production ramps than we've got a lot of experience with production ramps. But, you know, first order approximation is there's like 10,000 unique parts and processes You're in the Cybertruck, and if any one of it'll go as fast as the least lucky, you know, least well executed element of the 10,000. So Always very difficult to predict the ramp initially, but I think we'll be making them in high volume next year. And we will be delivering the car this year.

Operator

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

Speaker 1

That must be why everyone's copying us.

Speaker 6

Yes. Thanks, Elon. This is Lars. And Martin, that's like simply not true. There's a misconception that traditional bodies are easy to repair, But they're made of multiple materials and multiple joining methods.

Speaker 6

Spot wells and rabbits have to be drilled out. Panels and structural adhesive have to be chiseled out. Dry adhesive has to be removed, standing's cut, blah, blah, blah.

Speaker 1

It's a crazy patchwork quilt.

Speaker 6

Yeah. And so putting that back together means time and money, Using an example of replacing a rear castrail on Model Y, to do that versus like what we replaced it with from Model 3, it's 10 times Cheaper and 3 times faster to do it with the castrail. My design team works with our collision repair team since we're closed loop on this With insurance and we design specific parts that are 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.

Speaker 6

And we already make this available to all body shops through our test or approved Body Shop

Speaker 1

Training. Yeah. Closing loop on collision repair, factoring that into design is is a big deal. It's crucial. I don't

Speaker 6

think anyone else can do it

Speaker 1

With that ecosystem that we have. So Yeah. And and we are actually able to change the details of the casting with inserts. And we actually do do that all the time. So because the answers actually wear out and need to be replaced anyway.

Speaker 1

So we can actually make design changes to the inserts and tweak the castings to, but the the casting, you know, basically, cast rear rear body or front body, is lighter, cheaper, better for noise vibration and harshness, much easier to manufacture. And it's better in every way. And that's why so many other car companies are copying us. It's probably They don't know if they well, they certainly put out a lot of press releases about it. I think it's basically going to be how all calls are made in the future.

Operator

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

Speaker 1

10,000,000 Yes, I think we're around 5 or 6, but it's like, there's an we're 10, I guess, Yes. In terms of how many are working and what phase, but it's sort of Yes. There's more every month. Yes, I think a lot of interesting things about the Optron spot. We found that there are Actually no suppliers that can produce the actuators.

Speaker 1

There are no off the shelf actuators that work well for a humanoid robot

Speaker 3

At any price. Certainly not compelling, do you know that?

Speaker 1

Yes. Not a humanoid robot that can do something that, you know, the things that you can do. So we've actually had to design our own actuators that integrate the motor of the power electronics, the controller, The sensors and really every one of them is custom designed. So, and then of course, we'll be using the same, inference hardware as the car. So, you know, and but we are in designing these actuators, are designing them for volume production.

Speaker 1

So they're not just lighter, tighter, more and more capable than any other actuators that we're aware of that exist in the world. It's also actually manufacturable, so we should be able to make them in volume. The first Optimist that is that will have all of the Tesla designed actuators, sort of production candidate actuators Integrated and walking should be around November ish. So And then we'll start ramping up after that. In terms of when we'll be able to do some useful things, like we'll first be trying this out in our own factories and just proving out its utility.

Speaker 1

But I think we'll be able to have it do something useful in our factories sometime next year. I would be Yes, I'm pretty confident of that. So yes, and it's going well. I should say, another cool thing about Optimus is that, you know, there's just in the U. S.

Speaker 1

Alone, there are 2,000,000 amputees. And, I was just talking to the Neuralink team. And, by combining a Neuralink implant and a robotic arm or leg for someone that has had their arms on the leg or or or arms and legs amputated. We believe we can give, basically a cyborg body that is incredibly capable. $6,000,000 man in real life.

Speaker 1

The board don't want to cost $6,000,000 $60,000 man. So that was impressive, but it's it will actually so that actually could be a really I think it would be incredible to potentially help millions of people around the world and give them Yes, a rumor like that is as good, maybe long term better than a biological one.

Operator

Thank you. The next question is, how has the order intake trended relatively to production levels during Q2? And how is 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.

Speaker 1

Yes, I guess demand is roughly tracked production, so Which is what we aim for, is is, we look at, you know, so it's something that we have that really, I think, no other carmaker has Yes. We have real time demand and real time production. Like, so 7 days a week, I get an email or an order generated email that shows output from all factories, and orders globally. So it's like a real time thing on the pulse of Earth, basically. And we're just of course according to what the mood of the public is.

Speaker 1

Buying a new car It's a big decision for the vast majority of people. So, anytime there's economic uncertainty, people will generally Pause on new car buying at least to see what happens. And then, obviously, another challenge is the interest rate environment. As interest rates rise, the affordability of anything bought with debt decreases, So effectively increasing the price of the car. So when interest rates rise dramatically, we actually have to reduce the price of the car because The interest payments increase the price of the car.

Speaker 1

So and this is at least up until recently, it was, I believe the sharpest interest rate rise in history. So we had to do something about that. And if somebody's got a crystal ball for the global economy, I really appreciate it. I forgot to borrow that crystal ball. Yeah.

Speaker 1

Exactly. Damn me. It should be not on Twitter. So, I mean, one day, it seems like the Well, the economy is falling apart. On the next day, everything's fine.

Speaker 1

I don't know what the hell is going on, to be totally frank. I wish I did. So I mean, that's why I say like, I always on Twitter, I posted like, just really advising Because I care a lot about the small shareholders, especially ones that have stuck with us through thick and thin. I love you guys. And so we can't control these macro shocks You know, or the manic depressive nature of the stock market.

Speaker 1

So that's why I recommend against margin loans, in times that are turbulent. If times are not that turbulent, actually, a march alone can be a smart move, within reason. But we're in I would call it turbulent times. Like, I have very high confidence in the long term value of Tesla. Like I see it, I really see a path to it.

Speaker 1

The old adage of buy and hold is right. For investment advice, I'd say like, I don't have a great future pipeline. It's common sense actually. And then generally, if you see if you provided your confidence about what that company's Products or services are when the market panics, buy and when the market is Overly exuberant, you can sell. I am not recommending yourself, Tesla, but, but, yeah, Milo is so high.

Speaker 1

Warren Buffett actually, I think, has a saying and paraphrasing him, but You know, a publicly traded company is like, it's like mentioning living in your house, and some crazy, manic depressive guy comes and stands Outside your house and yells property prices at you. You know, so it's and it's a different price every day. The house is still the same house. So this is a stock market. Yes, you really credit that to Warren Buffett.

Speaker 5

Thank

Operator

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?

Speaker 1

Where's that crystal ball again? If I may, it's like, look, The short term variances in gross margin and profitability Really, our minor relative to the long term picture, autonomy We'll make all of these numbers look silly. I'd recommend looking at Ark Invest. I think their analysis is very good. It's the best that, you know, I mean, and generally, Ventwitt or like the finance the smart finance people on Twitter follow their accounts, Great.

Speaker 1

So that's what that's in my view where you'll get the Best info. So, you know, I strongly believe Tesla is a big long term investment, And don't sweat it when things go up and down. In fact, if the market panics by If the market is a little too exuberant, it's all the time, but just generally, like, I feel confident, Yes, we will deliver over long term but can't control short term. So and this the autonomy is really where it's at. That is accurate.

Speaker 2

I fully agree with you. I mean, I think the only thing in the short term that matters This is what I said in my opening remarks, which is, are we generating enough money to continue to invest? And 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.

Speaker 2

It's intense in terms of potential.

Operator

Frankly, I

Speaker 1

think it's ridiculous that we have positive free cash flow in a capital intensive business while investing Massive amounts of money in new technology.

Speaker 3

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

Speaker 1

Yes, we actually make our shit.

Speaker 5

And so

Speaker 2

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. I'm hyper focused on working capital management, which we've made quite a bit of progress there On the raw materials and web side of that, we've been very focused on accounts receivables as well to To ensure that we can continue to reinvest the cash. This is what we're focused on. Yes.

Speaker 2

And 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 Karne mentioned. That's helpful. Variability around Average selling prices goes back to Elon's point.

Speaker 2

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.

Speaker 2

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 The business is exactly the way that we want it to be.

Speaker 1

All right. Thank you

Operator

very much. And now let's go to Analyst questions. The first question comes from Dan Levi from Barclays. Dan, feel free to unmute yourself.

Speaker 7

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.

Speaker 7

Can you Maybe provide us with a sense of what the process is of refining a product. Is it more machines? And maybe you could give us a sense of When the payout starts to when you start to see the payout and what the resource outlay is, what should we expect on the OpEx front as

Speaker 5

a result of this?

Speaker 1

Sorry, are you saying how much are we going to spend on Dojo or?

Operator

Yes. The R and D of Dojo.

Speaker 5

Yes.

Speaker 1

Well, we're not going to be open loop on our Dojo expenditures. So, but I mean, I think we will be spending So the north of a $1,000,000,000 for the next year on get over the course through the end of next year, it's well over a $1,000,000,000 in dojo. And, yeah. So we've got a truly staggering amount of video data To do training on. And this is another thing, in order to copy us, you also need to spend 1,000,000,000 of dollars on training compute.

Speaker 1

I mean, it's like And it's also hard to you know, you need the data, you need the training computers like big things, well, things Needed to actually achieve this at scale toward a generalized solution for autonomy. It's this is one of the hottest problems ever. You see a lot of AI companies doing LLMs and whatnot. And I'd say, if they're so great, why can't they make yourself a great driving car? Because it's harder, that's why.

Speaker 1

So But I do think that's I think there's some great, great AI companies out there. But just fundamentally, The staggering amount of data we've got to process, we've got to process somehow, and custom silicon is the best way to do that. So that's what Dojo is designed to do is Yes. Optimized for video training. It's not optimized for L and M, it's optimized for video training.

Speaker 1

With video training, you have a much higher ratio of compute to memory bandwidth. So, you know, whereas LMS tends to be memory bandwidth choked. So that's it. I mean, but like I said, we're also we have some we're using a lot of NVIDIA hardware and we continue to We'll actually take NVIDIA hard risk as fast as NVIDIA will deliver it to us. Tremendous respect for Jensen and NVIDIA.

Speaker 1

They've done an incredible job. And frankly, I don't know if they could deliver us enough GPUs, we might not need to dojo, but they can't. So we got so many customers. They've been kind enough to nonetheless prioritize some of our GPU orders. But, yeah, the sheer magnitude of video training, because like I said, we're not trying to just get as good as human.

Speaker 1

We want to get to, 10 times better than human, maybe 100 times better than human. Right now, I believe there's something on the order of 1,000,000 automotive deaths per year. And if you say permanent serious injuries, I think it's probably closer to 10,000,000 per year. And Yes. So it matters if you're twice as good as human, 10 times like 10 times better than here would still mean 100,000 deaths and a million severe permanent injuries.

Speaker 1

So it's like, okay, well, we'd rather be 100 times better. So there's really it's a march of 9s, and we want to achieve as perfect Safety as possible, and, it's fast, truly mind boggling amounts of video and computer needed for that. So, and then I just think there's other applications for Dojo, but we just desperately need it for video training.

Speaker 2

Just to add to what Elon mentioned. So the numbers that he mentioned are between R and D spend and capital spend And this is moving quickly. And so we provide a 3 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 queue.

Speaker 1

Yes. I want to say the fundamental rate limiter on the progress of full self driving is training. That's if we had more training compute, we would get it done faster. So That's it. And it's just difficult to predict how quickly

Speaker 2

we can execute on it.

Speaker 7

Great. Thank you. Just As a follow-up, I recognize there's incredible macro uncertainty right now, but you're sticking with your Near term, your volume target 50% CAGR. As we just think about sort of in the year ahead, Cyber Truck is going to be some contribution. There's going to be some help from further EV penetration growth.

Speaker 7

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?

Speaker 1

It's not about getting more shares, just that, you can think of every car that we sell or produce that has of full autonomy capability as actually something that in the future Maybe worth as much as 5 times what it is today. Because Average passenger vehicle is doing like maybe 10 hours of driving a week, you know, 1 if it's sort of 1 if let's say it's 1 and a half hours A day on average, that's 10 hours a week ish. If you've got autonomous If that vehicle is able to operate autonomously and use be used So either dedicated autonomous or partially autonomous like Airbnb, like maybe sometimes you allow your card to be used by others, Sometimes you want to use it exclusively just like Airbnb, doing Airbnb with a room in your house. The value is just tremendous. So I think it's sort of it would be I think it makes it does make sense to sacrifice margins In favor of making more vehicles because we think in the not too distant future, they will have a dramatic valuation increase.

Speaker 1

I think The Tesla fleet value increase at the point at which we can upload full self driving and it's approved by regulators Will be the single biggest step change in asset value maybe in history.

Operator

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

Speaker 8

Thank you very much. Two questions from me as well. First, following up on the autonomy. So 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.

Speaker 1

Well, obviously, Yes, as people have sort of made fun of me and perhaps quite fairly have made fun of me, my predictions about Achieving full self driving, have been optimistic in the past. The reason I've been optimistic is what It does look like is the we'll make rapid progress with the new version of FSD But then, it will curve over logarithmically. So at first, like a logarithmic curve looks Like just sort of fairly straight upward line, diagonally up. And so if you extrapolate that, then you have a great thing. But then It's actually logarithmic.

Speaker 1

It curves over, and then there have been a series of stacked logarithmic curves. Now, I know I'm the boy who cried FSB, But I think we'll be better than human by the end of this year. That's not to say we're approved by regulators. And I'm saying that that would VP in the U. S.

Speaker 1

Because we've got to focus on one market first. But I think we'll be better than hearing by the end of this year. I've been wrong in the past. I may be wrong this time. And the price of FSD so the weird thing is the price of FSD is actually very low.

Speaker 1

It's not high. When you go back to what I was saying earlier, the value of the car increased dramatically if it is actually autonomous. $15,000 is actually a low price, not a high price. And Now we will offer and we have I think we do sort of offer FSD as a sort of monthly subscription, although most people don't know that. So I'd recommend, like, maybe trying it out as a monthly subscription, so you don't have to go with the $15,000 thing.

Speaker 1

But I think, Yes. Obviously, if the car is worth several times, it's original price, $15,000 is actually a low price for FST.

Operator

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

Speaker 9

Great. Thank you very much for taking my question. I'd like to ask about, to stick on this AI topic. We've read with great interest the developments in Dojo today and you've spoken about FSD, But you've also Elon, you started this X dotai company. And for investors that think that There might be quite a bit of value in the AI features and products of Tesla.

Speaker 9

It might be concerning to see Pursuing another endeavor where AI is the focus. So can you talk about how X.ai might overlap, might Perhaps compete with Tesla or in other ways, perhaps it enhances the value of what Tesla does? Thanks very much.

Speaker 1

Yes, I think we'll actually enhance the value of Tesla. There are just some Some of the world's best AI engineers and scientists that were willing to join a start up, but they were not willing to join a large Sort of relatively established company like Tesla. So I was like, that's actually how it got started. I was interviewing a few people and they're like, no, we want to do a startup. I was like, And that's all.

Speaker 1

I I can convince them to join Tesla. So so I was like, okay, well, Better to start up that, that I run than go work somewhere else. That's kind of the genesis of XAI. And XAI is focused on sort of AGI. Yes.

Speaker 1

So it's but I'd like to say, I think there will be some Value that XAI brings to Tesla, also for some of the best for the very best people in the world, they really just want to work on interesting problems. So if you take, say, you know, our material science group, you know, really what Convinced Charlie Korman to leave Apple, where he's very happy and well compensated. And both at in both What we think is the best material science group in the world, was that he got to work at both Tesla and SpaceX. He wasn't willing to leave Apple if it was just Tesla, but he was willing to do it if it was Tesla and SpaceX. So sometimes you get the best talent in the world.

Speaker 1

That's the kind of thing you need to do. And that actually has been very beneficial to Tesla.

Speaker 9

If I could squeeze one more mundane question in, I wonder if you think you can hit The $1,800,000 unit number with current pricing, where do you anticipate needing to continue to lower prices? Because it seems like they've We're stabilized. The trends have stabilized in the last maybe 1.5 months. Should we expect a sort of Continued decreases or more stabilization for the rest of the year?

Speaker 1

Sure. We have sort of restarted the referral program, which I think will be quite effective. As Zack was saying earlier, we don't control the macroeconomic conditions. So if interest rates continue to rise, That reduces the affordability of cars. And for a lot of people, they're really kind of balance that just You're barely breaking even every month.

Speaker 1

In fact, if you look at the rise in credit card debt, they are in fact not breaking even every month. Credit card debt is looking scary. Yes, we just don't control macro conditions. If macro conditions stable, I think prices will be stable. If they're not stable, We would have lower prices.

Operator

Yes. Thank you. Let's go to Colin Rusch from Oppenheimer.

Speaker 10

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 soft outsourced software you're expecting to use in that system?

Speaker 1

This is a custom software stack. So, but it is designed such that you can run At a high level, PyTorch and JAX. So But then we have to customize it to actually run on our custom silicon. So the software stack It's a combination of open source software and then Tesla software, all the way to the bare silicon, which is the case for the inference computer in the car.

Speaker 10

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 economies. 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.

Speaker 1

Well, we are this is a period of Unusual geopolitical risk. So I think we're the best we can do is We don't have factories in many parts of the world such that if things get difficult in one part of the world, We can still keep things going in the rest of the world.

Operator

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

Speaker 11

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?

Speaker 2

This is I think I was asked this in the past. This is very difficult to forecast. There's a series of costs that we manage. This year is a class in which we don't control. And so particularly on the commodity side, We're labor, Costco, etcetera.

Speaker 2

It's just hard to say.

Speaker 1

Yes. We saw very inflationary like strong inflationary pressures for a while last year. And now we're which obviously makes very difficult to reduce COGS. And now we're seeing What seemed to be deflationary pressures, certainly deflationary, but deflation is a pressure. But we're seeing commodity prices dropping as was mentioned as Karen mentioned a moment ago.

Speaker 1

And I think I mean, what do you think? I mean, basically, the trends should be deflationary at the commodity level.

Speaker 5

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.

Speaker 5

There's equipment depreciation that comes into play, equipment that was commissioned 5 to 7 years ago, that used to be a part of the piece price that's completely amortized. 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 labor, 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.

Speaker 5

But just in general, the trend is towards being more efficient.

Speaker 2

Yeah, I totally agree.

Speaker 1

We have looked at prices went absolutely insane there for a while.

Speaker 2

Yeah. And they're recovering now.

Speaker 5

Well, also onethree of what it used to

Speaker 1

be.

Speaker 2

Yes. And we're still early in the ramps. Well, not early in the ramp, but early in the cost down curve of Austin and Berlin. So it takes time to work the cost out at first. It's a focus on ramp.

Speaker 2

Ramp brings cost

Speaker 6

out there. Ramp and

Speaker 1

quality and then the ramp and quality cost.

Speaker 2

Yes. And then once that stabilizes, we can divert bandwidth to cost reduction. And so, also in Berlin saw Quite a decent amount of cost reduction on a fundamental basis from Q1 to Q2. We'll continue to do that work. That will be helpful.

Speaker 2

And so we're just going to keep shipping away at it.

Speaker 4

Yeah, packaging is a big element to that.

Speaker 1

Yeah, I think logistics

Speaker 2

is normalizing, which is great.

Speaker 4

Q bot utilization, something that the team has been very focused on.

Speaker 1

So every bit of it. Yes. It's hard logistics is underappreciated. Yes. So I was saying it's like I was in one of tactics, I was in one of logistics.

Speaker 4

And we've made tremendous improvements in cost in all fronts. On, you know, expect costs, we have done, down to pre pandemic expect cost levels now. And our goal is to go further now.

Speaker 2

Yes. So when we look at our progress from Q1 to Q2 on cost, The way that we look at internally normalized for the impacts of mix shift with Austin and Berlin being a higher percentage of our mix, normalized for 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.

Speaker 1

Yeah, it's a game of pennies. It's like Game of

Speaker 5

Thrones for tennis. Mark, do you

Operator

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

Speaker 11

Yes. 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.

Speaker 2

Yeah. The downtime, we don't know exactly the number of cars impacted because Kind of the way that we go into downtime windows for upgrades is 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 it's not profound reduction. Hopefully it's quite small.

Speaker 1

I think we're getting too much into the weeds here. I mean, like we're asking for a level of precision that is not possible to answer. So let's move on.

Operator

I think this is unfortunately all the time we have for today. Okay. So, we'll speak to you all in the next 3 months. Thank you very much. Thank you.

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Earnings Conference Call
Tesla Q2 2023
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