Tesla Motors Inc TSLA
Q4 2010 Earnings Call Transcript
Transcript Call Date 02/15/2011

Operator: Good day, ladies and gentlemen, and welcome to the Tesla Motors Fourth Quarter 2010 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. As a reminder, this conference is being recorded.

Now I will turn the call over to Jeff Evanson, Vice President of Investor Relations. Please begin sir.

Jeff Evanson - VP of IR: Thank you Tyrone and thank you everyone for joining us this afternoon. Welcome to Tesla Motors' earnings call for the fourth quarter of 2010. With me on the call today are Elon Musk, Chairman, Product Architect and CEO of Tesla Motors; and Deepak Ahuja, our Chief Financial Officer.

Before we begin the call, I'll read the following statement to inform you of certain Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. During the course of this conference call, we will discuss our business outlook and make other forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are only predictions based on management's current expectations. Actual results or events could differ materially from those predictions due to a number of risks and uncertainties, including those discussed in the Risk Factors section of our most recently filed 10-Q filed on November 12, 2010 and our Financial Prospectus related to initial public offering filed with the SEC and as amended on June 29, 2010.

In addition, any forward-looking statements represent our views only as of today, and should not be relied upon as representing our views as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

With that I'll turn it over to Elon.

Elon Musk - Chairman, Product Architect and CEO: The fourth quarter was another solid quarter of execution on all aspects of our business, including Roadster, Model S and powertrain. Model S Alpha phases went really well, very pleased with that and the development of Model S is on track.

We did quite well in the powertrain business with increasing the deliveries and orders for the Smart EV, completion of the development program for the Daimler A-Class, and commencement of the Toyota RAV4 EV development program. We also added (indiscernible) talents. This is a point that's really worth emphasizing that the quality of the people we're attracting to Tesla is just really phenomenal. I mean it's absolutely at the best of the (automobile) industry and of the hi-tech industry.

I think perhaps one of the best indications of this is, if you were to attend a college fair, anyone of the college fair where Tesla is present and looked at the line at the Tesla booth and compared that to the line at any other booth, including Facebook, Google, Apple or anyone else, the Tesla line is the longest line at the entire recruiting fair. I think that says a lot.

On the Roadster business, they are doing pretty well. It's increased 10% sequentially in revenue driven by better selling prices and a favorable leasing mix. Despite seasonality, because obviously people aren’t desperately looking to buy a two seated convertible sports cars in the middle of winter, we delivered 149 Roadsters globally, on pace with the resulting much easier selling environment of the September quarter. We have also increased the order from Lotus, going to a total of 2,500 cars from 2,400. We are not going to increase it anything beyond that, even though there is actually demand that's in excess of doing 2,500 vehicles, because we want to stay true to our original commitment that the Roadster is intended to be a limited edition collector's item. So if we're increasing it just by 100 vehicles from 2,400 to 2,500 because we are seeing quite a bit of demand, but we are not going to go beyond that. It will allow us to sell few more units in 2011-2012.

As far as regional expansion, we opened a new store in Tokyo where Akio Toyoda personally attended, and just recently last week we had the Washington D.C. (another one) store opening. Coming up we are going to have the San Jose store in Santana Row, opening in a few months and this is going to be one of the first stores that really emphasizes our new model for selling cars. We are not quite prepared to talk about it now, but I think it will be something that's worth paying attention to in the future.

Model S is on plan for first customer deliveries in mid-2012, so really no change from what I talked about in last quarter or what we mentioned at the IPO. There will of course be a slow ramp in production in 2012 with it reaching steady state production in 2013 as we've talked about in the past. So as far as the Alpha build, I drive the latest Alpha build every week and as I said I think the car is great even at this early stage. Although it is a sedan, which is comparable in size to a 5 Series BMW or a Mercedes E-Class or Audi A6, it feels very light and agile on the road, has tremendous power as you expect from Tesla – from something with an advanced electric motor. So, I am really pleased with how the product is developing. I think this car is going to be, the car that even if it wasn’t electric would be the preferred vehicle among premier sedans.

So we completed as scheduled last quarter, so we are driving it in December and accumulated a lot of miles now. We've actually finished just this week our 15th Alpha prototype, a body-in-white prototype, and last month we exhibited an expanded view of the body-in-white at the North American Auto Show in Detroit. Part of the goal of that show was really to emphasize the quality of vehicle engineering at Tesla, because this is one of the least appreciated aspects of Tesla’s capabilities. I think people generally appreciate that we've got the world's best powertrain, they can also appreciate the aesthetics of the Model S by looking at it, but we really had to go under the skin to show that the vehicle engineering is just as good as the powertrain engineering and the aesthetic design.

It’s an all-aluminum body and chassis and in fact will be the only aluminum car made in North America. The next most advanced car is probably the Audi A8, which is also made in Germany, but we feel there are reasons to say that the Model S was actually more advanced and better on the objective metrics for things like torsional rigidity, surface-to-weight and strength-to-weight safety characteristics, internal usable volume, and that kind of thing, better than the A8. So it's going really well in that respect. We feel very confident about having a compelling beta that will be available for test drive the summer of this year.

With respect to Fremont, our manufacturing facility, this is really a substantially integrated manufacturing facility for the Model S. This includes stamping, plastics, paint and body assembly – body assembly shops and manufacturing of powertrain components. This is really taking advantage of an amazing infrastructure that we inherited from Toyota where they made the Toyota Corolla and Tacoma trucks.

Some of us agree with this strategy, but I think vertical integration is a smart move. It allows us to adapt quickly to rapidly innovate and will such control our unit costs. This is quite important for a small car company, because we don't have the leverage of a larger car company. So whereas a large car company could has leverage with suppliers because they can always say well if you don't do a good job on this program, we'll not give you access to another program or something like that. We don't really have that flexibility or that leverage. So it is important for us to say, okay if you are supplier or not, we can do a job for you (indiscernible) and have that be a credible threat.

The largest hydraulic press line is being assembled in Fremont on schedule. This is really epic. I mean, it is the largest hydraulic press line in North America, one of the largest in the world, and we expect it to be fully assembled by the second quarter this year.

We finalized the Model S production layout and we're going to – we're actually going to design it to allow for 20,000 units on a single shift and this is slightly different from our prior plans where we put 20,000 on a double shift. It's a little bit of extra money spent now. We think it lays a better foundation for the future, because it means that we can go to double shift or even say a triple shift and quickly adapt to increased customer demand. Particularly, bringing in something like a Model X, if we want to rapidly scale to sort of an annualized production of 40,000 or 50,000, then this allows us do that without having to reconfigure the line substantially.

The Model S Alpha powertrain is looking very strong. I don't think this is a risk at all for Model S, besides I think it will be better than – it's better than what I expect and my expectations are very high. So I think, this looks really very strong. I'm very excited about the idea of soft of the sport version of the Model S or performance version of Model S that potentially outperforms something like the M5, which I think would be a great product.

Supplier sourcing for production remains on track. Really, it's almost entirely done, and this is an important data point, because one of the question is, well, is Tesla going to stay on track for the expenditures for the Model S program in terms of its total ED&T and the like, as well as does Tesla have a sort of a handle on the unit costs. I think having almost all supply agreements done, and they're going to say that, yeah, we feel good about both of those elements, I think, it is very important, and that is the case.

So, yeah, we have suppliers picked up for equipment and process finalization of the paint shop, which is of which is (Griffin) and BASF, and I've talked before about how important I think paint is because it's a really, really important detail of the car. So on the body shop side, (indiscernible) or final assembly (indiscernible), tooling supplies kick off is also underway, the kick off of tooling for dies for stamping, that's Fuji is the die supplier. They are hard at work and have been for a few months.

As far as Model S reservations, we now have over 3,700 reservations. Bear in mind that minimum amount for reserving Model S is $5,000, so this sounds like it’s a $100 reservation, it’s a $5,000 reservation, and we still are getting very minimal (resource with) this asset and it's really going to be around the middle of this year, maybe the second half of this year really when we start to ramp up our sales effort on Model S sort of to coincident with having beta vehicle that we can give people test rides in.

On the strategic relationships, want to just drill into that a little more. The Daimler business continues to progress well. Daimler has increased their order by 300 vehicles to 1,800 for the Smart. This is the third time that Daimler has increased this order, which were originally just 1,000 units. So I think it shows that there is continued interest from Daimler, and we delivered a record amount of battery chargers in the fourth quarter.

As far as the A Class EV, as I mentioned, development work is essentially done. We're now shipping production battery packs and chargers, certainly looks quite promising. For the Toyota RAV4 EV total development revenue is projected to be about $69 million. In this case we're providing the entire electric vehicle powertrain including the motor and gear box in addition to the battery, the charger, and software, and we’ve met the first major milestone under the agreement delivering RAV4 prototype since July and we're just about to finalize the production supply agreement. Obviously Toyota choosing to have Tesla powertrain for RAV4 is tremendous endorsement. I think really having both Toyota and Daimler, Daimler is a Company that invented the internal combustion engine Carl; Toyota is the largest car company in the world and leader in hybrids and to have them as a strategic partner is obviously a great honor for us and really couldn’t ask for a better endorsement of our core technology.

Then there is also Panasonic. Panasonic e-vehicle has – they invested in Tesla late last year, which is a great validation. They were also kind enough to state publicly that Tesla has the most advanced battery pack technology in the world for EV applications. We continue to work to optimize the 18650 form-factor specifically for automotive use. This is an important point that sometimes people are unaware of which is that, although with Roadster we use an almost unmodified laptop cell, in the case of Model S, it's actually a highly modified cell that has the same external dimension as a laptop cell, so we can use the automated cell handling equipment, but it is significantly different internal geometry. This redesign has come at the behest of Tesla and we're able to transfer those changes to other suppliers. This is not an exclusive supply agreement that we have with Panasonic, and we do expect to establish a second source for cell supply, given its importance, although Panasonic of course remains our preferred number one for cell supplier.

So as far as 18650's internal, we see at least for the next several years, we do not see anything better than an 18650 and those who think that there is a large format cell that's better, I would simply ask what is the cost per kilowatt hour and what is the energy density and until some – as that supplier comes back to us with a number that's better than the 18650, it will obviously be foolish to use anything except the 18650. It's really as simple as that.

Just a little bit of operational guidance. Last quarter our primary objective was the completion of the drive with alpha prototype, and you can see videos on our website of that car doing great carving turns through Southern California. This quarter our Model S related activities include finishing off the (predevelopers), doing extensive testing of the (offers) in a variety of climates, testing, braking, safety, handling, NVH and all the rest. We're completing the last release of (indiscernible) parts suppliers and executing detailed readiness plans at each of the stamping, plastics, paint and final assembly shops.

Later on this year, we will be going into beta build. Beta build, it's kind of like its standards of hi-tech. When something is at beta stage it is almost (indistinguishable) from the production article, except that of course there's still a series of bugs that have to be worked out and maybe some corner case functionality that needs to be added and that kind of thing, but it's really what you see at the beta phase it is almost identical to what you would receive in production, and we feel confident of having our first beta build this summer.

Just maybe a few cents just on the Model X and maybe clarify a few things on that front before I hand it over to Deepak Ahuja because I've seen a few incorrect things that have been printed.

The Model X is a variance on the Model S platform. So, it a crossover SUV. It's intended to be cooler than any other SUV in its aspiration, but actually have functionality that exceeds that of a minivan. This is a tough goal to achieve, but I think we have a better shot at doing that. That's why we we're raving it. Pricing would comparable to that of the Model S, and so this is not our third-generation last production vehicle. That vehicle is still several years away. The Model X is really just a way of generating potentially twice as much volume in the premium vehicle segment offering a crossover SUV in addition to sedan, and we are looking to unveil the design prototype about at the end of this year.

With that I'll turn it over to Deepak.

Deepak Ahuja - CFO: Thanks, Elon. The primary take away from the quarter is that in addition to delivering on the Model S as Elon has shared you, we've continued to improve revenue and gross margin of our existing business. As the December quarter marked the end of our fiscal year, I will discuss both our quarterly and annual performance, and then concludes with some thoughts on guidance.

While discussing the financials, I'll provide commentary on both the GAAP and non-GAAP basis. Our non-GAAP financials exclude non-cash charges related to stock-based compensation and change in the fair value of our outstanding stock warrants. A reconciliation of the non-GAAP information is included in our earnings release.

Turning first to the P&L; overall revenue for Q4 was $36 million, a 16% increase over Q3 and almost double of that reported in Q4 of last year. For the year, revenues were $117 million, up slightly from $112 million for 2009. Given that we were shipping Roadster against two-year backlog during most of 2009, we believe the 2010 performance is a strong result for the Company.

Let me remind you that we report revenue in two categories; automotive sales and development services. Automotive sales consists primarily of Roadster sales and to a lesser extent the sales of powertrain components to OEMs as well as zero emission vehicle credits. On the other hand, development services revenue consists of services we provide to other OEMs to develop electric powertrain components and systems for their vehicles.

Starting with the Roadster portion of our automotive sales, as Elon mentioned, we delivered 149 Roadsters in Q4 versus 151 in Q3. We believe this is a very good result given that our sales have some degree of seasonality during winter months. Average selling prices increased as compared to the prior quarter. This result when combined with the lower leasing mix contributed to a 10% sequential increase in Roadster-related revenue to $20 million in Q4.

For the year, Roadster revenues were $76 million as compared to $112 million in 2009. A comparison there is a bit apples to oranges, again due to the two year reservations backlog in 2009.

Looking at the powertrain components portion of automotive sales, revenues were up almost 80% sequentially to $9 million in this quarter. We achieved our third consecutive record quarter for deliveries of battery pack and chargers to Daimler. As Elon noted, Daimler increased its order by 300 battery packs and chargers for the Smart Fortwo EV, hence the total program is now up to 1,800 units. We currently anticipate delivering these components until the summer of this year.

In Q4, we also started recognizing revenue from the delivery of battery packs and chargers for the Daimler A-class program, which we expect to continue through the balance of 2011. It's worth noting that our revenue per unit for the A-class battery pack is roughly double that for Smart Fortwo which is in proportion to the increase in the size of the battery capacity.

For the year, powertrain revenue was $22 million. This portion of our revenue stream was negligible in 2009 since we had just started shipping production powertrain components in Q4 of 2009. Overall, automotive sales revenues increased sequentially by 25% to $29 million, which we believe is a strong result. On a full year basis, automotive sales revenues were $97 million as compared to $112 million in 2009, again due to higher Roadster sales in 2009 to clear out the two year reservations backlog.

Turning to development services revenue, development services revenue decreased sequentially by 10% to $7 million in Q4, primarily due to the completion of the Daimler A-class development program during the quarter, but this was partially offset by work underway on the Toyota RAV4 EV program.

After bringing on the financial specifications of the RAV4 EV during Q4, we now have the opportunity to earn up to $69 million in development services revenue, as we execute on our deliverables.

We currently anticipate recognizing this revenue over the next four to five quarters, given Toyota's stated intent to enter production with the RAV4 EV in 2012. Just as a clarification, the sale of production parts for the RAV4 EV will be part of a separate agreement, which has not been finalized yet.

On a full year basis, development services revenue in 2010 were $20 million. The comparison with 2009 is not meaningful here since we started recognizing revenue for development services only in Q1 of 2010.

Total gross margins for the quarter were a record 31% as compared to 30% last quarter. Gross margins increased across all revenue lines showing great execution by our entire team. Gross margin from our automotive sales was 20% as compared to 17% in Q3. The highest we’ve ever achieved in any calendar quarter. This was due to a combined focus or a continued focus on both average selling prices and cost reductions.

Gross margin for development services was 78% in Q4, as the timing of revenue recognition did not fully match the period in which we booked the underlying cost of revenues. This mismatch was further heightened in Q4 with the completion of the A-class program and the start of the Toyota development contract in the same period. Remember that this gross margin for development services is not an indicator of future performance due to these timing differences.

Total gross margin for the year increased from just 9% in 2009 to 26% in 2010, while this increase was partially driven by change in mix between the automotive and development services revenue, we also increased automotive gross margin from 9% in 2009 to 18% in 2010. This shows the extent of improvement we've been able to achieve in both our Roadster and powertrain activities. We are intent on keeping the same discipline on the Model S program as well.

Our operating expenses continue to reflect continued emphasis on the development of Model S and our spending on infrastructure. R&D expenses were $38 million for the quarter on a GAAP basis and $36 million on a non-GAAP basis. Non-GAAP R&D expenses increased 40% sequentially primarily due to expenses related to the Model S Alpha prototype build and one-time relocation expenses of our vehicle engineers from LA to Palo Alto.

We also had higher production and engineering headcount that grew by 15% during the quarter and the accelerated completion of engineering work underway at several suppliers. We expect quarterly spending in 2011 to increase moderately from the Q4 level as we continue to execute on the Model S program and the spending maybe lumpy in some quarters.

SG&A expenses for the quarter were $25 million on a GAAP basis, and $20 million on a non-GAAP basis. The 9% increase in our SG&A expenses on a non-GAAP basis from the prior quarter is due principally to the growth of our sales and marketing activities and headcount to support the continued growth of our company globally.

We expect quarterly SG&A expenses in 2011 to increase slightly from the Q4 level as we continue this global expansion. This will be offset by our continued cost control in G&A.

In summary, we are closely monitoring expenses and have strong controls in place to ensure that our spending is (tracking) to our plan.

We are incurring a net loss despite improved margin and will continue to do so for the next several quarters, while you're making significant investments in R&D and our infrastructure to launch the Model S.

Net loss for the fourth quarter was $51 million on a GAAP basis. This loss included $8 million of non-cash stock-based compensation of which $3 million related to our Model S based performance grant, reflecting a higher probability of achieving future milestones.

Without these expenses, the loss in this quarter on a non-GAAP basis was $44 million or $0.47 per share with 94 million weighted average common shares outstanding.

For the year, net loss per share was $3.04 on a GAAP basis and $2.53 on a non-GAAP basis with $51 million weighted average common shares outstanding.

As a quick note, we expect that most of our interest expense will be capitalized until the start of production of the Model S since the DoE loan is being used to build out the Tesla factory in Fremont.

Turning now to the balance sheet; total cash, including our cash in the DoE dedicated account, was $173 million at the end of the quarter. This compares to total cash of $185 million at the end of the prior quarter. Combining total cash with the remaining DoE facility, we had capital resources of approximately $566 million available as of the end of the year. We currently anticipate that this will be sufficient to fund our operations through the launch of the Model S based on our present plans.

Looking at cash flow for the quarter, operating activities consumed $34 million as compared to $46 million in the prior quarter, despite a higher operating loss in Q4. The majority of the cash used in operating activities during Q4 is reimbursable under the DoE loan as it relates to our expanding R&D spending.

Our inventory continued to grow to support our own Roadster and powertrain sales but at a slower rate than the prior quarter. Over the next few quarters, we expect inventory to continue to rise as we have elected to build Roadster at a faster pace than our sales forecast given that Lotus production of Roadster gliders will stop just after year end 2011 and we intend to continue with Roadster sales in 2012.

Capital expenditures were $24 million in this quarter as compared to $67 million last quarter. Recall that last quarter's numbers included $56 million related to the acquisition of the Fremont facility. Over the last two quarters, we have made opportunistic purchases from the old NUMMI operations, particularly in stamping and plastics, which is allowing us to in-source a greater number of parts where we believe it makes good business sense.

For the full year, we invested approximately $105 million in CapEx. This was lower than we anticipated mainly due to timing. We expect that this deferral in spending will now show off in 2011.

Offsetting our cash usage in the quarter was the drawdown of $15.3 million from our DoE loan facility at interest rates under 3%. Since the end of Q4, we have drawn an additional $15.6 million from the DoE loan facility related to our Q4 spending. I shared with you earlier that DoE funds half the expenses upfront and the remaining half on a deferred basis.

Next, I would like to offer some thoughts on guidance. Since we are main focused on the long-term objective of delivering the Model S on time and as (plans of) stability, we are providing full year financial guidance for 2011. We project revenue to increase by above 40% to 50% in 2011 to a range of $150 million to $175 million. We expect Roadster sales to grow over last year, but still expect some seasonality during the winter months.

The total Roadster program as Elon mentioned is now 2,500 units and we have delivered over 1,500 so far. Thus to the extent, we exceed planned Roadster in 2011, we might not be able to meet all the roads of demand in 2012. As Elon mentioned 2011 should be our biggest year for capital spending for the Model S program, as we will purchase most of the tooling and manufacturing equipment required for production.

Looking at all of our capital expenditures for the full year, we expect to invest about $190 million to $215 million. Remember that the majority of these capital investments should be reimbursable under the terms of our DoE loans. With this level of CapEx spending we can execute on our strategic decisions to increases in sourcing primarily in stamping and plastics. We've also elected to invest incrementally in new technologies primarily in our paint and body shops to produce even higher quality at affordable costs. Furthermore we are investing in additional plant automation as Elon mentioned to expand capacity to produce up to 20,000 units on just one shift. This has about a 1 year payback in terms of safe labor and overhead cost. The strategic benefit to this decision is that it also accommodates either higher Model S production, or the efficient introduction of future models such as the Model S.

Finally, as we have concluded negotiations with most of our suppliers, some investments plan for 2010 have been deferred into 2011 while others have come in at a slight higher cost over plan. Please remember that all depreciation of our capital expenditures related to the Tesla factory will begin after the start of Model S production.

Moving on Model S reservations, we have received slightly over 3400 Model S reservations as of December 31, and have now surpassed 3,700. We plan to disclose this number of refundable reservations received during these earnings calls, but will not provide future guidance on this number. Since, we have not actively focused on getting Model S reservation at this time, we do not regard to the number of new Model S reservations received in any given quarter, to an indicator of our performance at least for the next year or so.

I would like to conclude in summery, by reinforcing that we continue to be excited about our long-term opportunities. This ends my prepared remarks.

Jeff Evanson - VP of IR: Analysts, just a quick note to all of you and our investors as well, we just want you note that when comparing our results to what services such Thomson Reuters present as consensus expectation. These services are reporting a 2010 annual loss expectation of $2.23 per share and clearly this is incorrect since even before this quarter we’d already reported a year-to-date loss of $2.50 a share. We think this discrepancy appears to be driven primarily by a miss read of the sell side analyst models and that maybe attributable to the difference between past, actual and pro forma share counts. So, analysts, we ask you to please make sure that going forward, the consensus service providers actually, accurately reflect what your expectations are.

So with that Tyron, let’s now open the call for Q&A please.

Transcript Call Date 02/15/2011

Operator: Dan Galves, Deutsche Bank

Dan Galves - Deutsche Bank: Just wanted to -- how should we think about cost expectations, how they've changed for the Model S over the last couple of quarters in terms of raw changes to raw material pricing that you've seen in the market. It sounds like this investment in automation for 20,000 units on one shift is a cost reduction but as you've gone through the supplier sourcing process how have your unit cost expectations changed for the Model S?

Elon Musk - Chairman, Product Architect and CEO: I think they are in line. So there's always a little bit of fluctuation in the cost of a car. But really we feel pretty confident of being able to achieve really good margins on the car. I mean there's slight sort of issues like maybe currency risk amongst some of our suppliers or some chance of raw materials going bonkers, I mean those things can affect cost. But overall I feel good about achieving a 25% gross margin that we think we can achieve with the Model S. This really reaffirms our ability to do that.

Dan Galves - Deutsche Bank: On the vertical integration strategy, you talked quite a bit about, is there any part of that essentially that the timing of validating some of your processes could there be a chance that you get to the point where you want to outsource a part of the vehicle production and do you have backup plans or is there any part of that vertical integration strategy that could really change the timing of the Model S launch if it didn’t work the way you thought?

Elon Musk - Chairman, Product Architect and CEO: Essentially in terms of the opportunity which is to reduce the risk of having one or two suppliers that caused the delay in deliveries of Model S. The basic (plus) for in-sourcing is to, if we need to be able to do almost anything in-house. So, we don’t expect to do everything in-house because that would be foolish, but to have the ability, to have that optionality to say worst-case scenario, we can crank 24/7 internally and make that part ourselves is incredibly powerful. I think also, (house keeps the fires on) if we know that we have that capability, because sometimes what can happen is we will wait until you are quite late in the game, before trying to raise costs on you or do some kind of baton switch or tell you that or reveal that they really can't deliver. I have seen that so many times and being able to rally the troops internally and solve that problem is I think very, very important for controlling one's destiny.

Dan Galves - Deutsche Bank: Just one other quick one. Can you give us an indication of incremental investment for new top hats and potential timing for those vehicles after Model S?

Elon Musk - Chairman, Product Architect and CEO: Yes, a fair amount of these are just rough approximations, so I wouldn’t treat this as cost for anything. It's been for something like Model X, we're thinking it's between a $100 and $150 million. Total CapEx, hopefully we'll try to get lower end of that, but even if it's at the higher end of that. I mean it's ridiculous to get return on investments, so it's an obvious move.

Operator: Joshua Paradise, Morgan Stanley.

Joshua Paradise - Morgan Stanley: Congratulations on greater execution. You talked a little bit about the battery chemistry that you're developing with Panasonic, so I guess is the chemistry that you're going to use in the Model S within the first version of the Model S finalized or is that still underdevelopment or put refinement?

Elon Musk - Chairman, Product Architect and CEO: It is finalized in the broad brush strokes. There are two for next items that are little details that will continue to be optimized over this year, but there no major I think question marks. We're very pleased with the results we're getting in that test (bags) and I think people will be pretty impressed with the results. I think it's as far as I can tell it's more than what anyone thinks is possible.

Joshua Paradise - Morgan Stanley: Can you give a little bit more information on what you are refining, is it the chemistry or is it the internal geometries or is it something else?

Elon Musk - Chairman, Product Architect and CEO: (indiscernible) There have been some tweaks to the internal chemistry, a lot of tweaks to internal geometry and its fairly proprietary, so we (tackle) about what exactly what they are. Of course, since we have the car on road, and we get five cars and of course – it starts dissecting the pack and the sales but we'll leave it to that point before they can – before they know what exactly we've done.

Joshua Paradise - Morgan Stanley: Then in the past you talked about potential agreements with other OEMs, obviously you have a strong agreement with Toyota, Daimler. Can you give any update on where you are with discussions with other OEMs?

Elon Musk - Chairman, Product Architect and CEO: We had some recent significant discussions with OEMs, with other OEMs besides our two main partners. I mean we do need to be a little cautious about gauging another big OEM deal (indiscernible) right now, given the importance of the Model S program and focus on that as well as making sure we do a great job for Daimler and Toyota. I mean I think we definitely have our hands full right now. I think we want to make sure particularly with respect to our core development which is a very intensive (development) program this year that we do a really good job for Toyota and then likes of Model S, which is kind of our main stay. So, thinking of it, it’s like the odd deals that we could do if we wanted to do them, but we have to make sure that we don’t buy (Indiscernible).

Operator: Patrick Archambault, Goldman Sachs.

Patrick Archambault - Goldman Sachs: I guess a couple of questions on the CapEx spending I think you had said $190 million to $215 million for 2011 if I got that right, and Deepak, how does that compare to what you would originally envision for the year and maybe could you tell us a little bit about some of the variances, what was timing, what's increased vertical integration, what's maybe just cost that is a little higher than you guys have budgeted?

Deepak Ahuja - CFO: Yeah, it is higher than our initial numbers, but for very good reasons that we have fully vetted out and understood, and as we said, as Elon and I have discussed, I think, it’s all strategic related to what makes sense for us to in-source particularly in stamping and plastics, what makes sense for us to go invest in better technology to get that high quality in the paint shop, to get that perfect fit and finish in our body shop. What makes sense for us to add that – spend that extra bit of money and get the 20,000 units on a single shift and get a good payback, which helps us to achieve our total profitability. I think, the bottom line of all of this is that we have sufficient sources of cash on hand, as I mentioned, the $566 million between cash and the DoE loan facility that we feel comfortable about completing the Model S program with that funding in place.

Elon Musk - Chairman, Product Architect and CEO: Yes, in fact, I’d just like to reemphasize what Deepak just said, even if we raise no additional funds at all, we have sufficient availability of capital to complete the Model S program and reach profitability. I think, we just don't want to be really explicit about that. I think, there is (indiscernible) in fact, I mean, arguably an expectation that we will raise some incremental capital for the Model S program, but that would be maybe towards the end of this year in terms of timing, but not like in the immediate future. I think, we wouldn't do it any sooner than after the Model S beta is unveiled, people perhaps can feel get a little more direct sense of what kind of product Tesla can deliver and are they really great products or not, but that seems like the sort of soonest timing that we will do it.

Patrick Archambault - Goldman Sachs: On that note, is kind of the incremental capital that you'd be looking for, for the Model S programs, is that sort of in the zip code of what you outlined to (Dan) there, I think, you had said 100, 150 or something.

Elon Musk - Chairman, Product Architect and CEO: Yeah, it'd be probably in the order of 100 to 150 type of thing.

Patrick Archambault - Goldman Sachs: Okay, and on the beta prototype, when do you guys actually start testing on that for safety ratings?

Elon Musk - Chairman, Product Architect and CEO: Actually, the safety stuff is already underway with the alpha prototype, and that testing is then used to calibrate crash simulations, and then we made modifications from those initial safety tests that are done with the alphas, but there's a slight design integration going to the beta, so speaking of the – that crash testing is actually going to start pretty shortly, and we've already started safety testing of doing things like the ABS brake testing, which is underway with Bosch, and that was an important milestone because we need to get cold weather ABS testing underway, which is great. That’s happening now. Then there is going to be another period of intense crash testing for the betas starting towards the end of summer, and then yet more crash testing that takes place once we have our release candidates, because the beta is in sort of '89%, 90% production design,' but it isn't entire made with production tooling. So we have to get confirmation step with the release candidate articles which should be kind of in the roughly 11 to 12 months from now. That’s just to confirm that the process used to manufacture the cars results in cars that are consistently of the design intent. So, there is a whole lot of crash – there is a tremendous amount of crash testing taking place, because our standards that we're – what we're aiming for here with Model S is pretty extraordinary in terms of safety. We’re aiming for sort of all round five star rating by 2012 standards, which is very high standard to meet. A car that was five star by 2010 standard would be a three star in 2012. So, this is important to appreciate just how high a bar is that we're aiming for, or we can miss that standard by a mile, but still be better than other standards on the road. So, we want to be the best, so that involves a lot of crashes unfortunately. So I mean, we have to do them, but it is sad to see so many getting mashed up, but then this is extremely important competitive dimension, and to me, you know, I'll have my family in it, my friend's families, and I want to ensure this is -- there isn’t the same for car on the road (indiscernible) answer.

Patrick Archambault - Goldman Sachs: I guess I mean one more question related to that actually is the release candidate, can you talk us through that what you have kind of I guess on the assembly tooling product that you released and that's when you get your final rating and have kind of next year is sort of that's the way to think about it at the end of your internal testing process, is that how it works?

Elon Musk - Chairman, Product Architect and CEO: In the U.S., it's kind of I guess a self-certification process. I mean you conduct the tests, you compile the data, but then your tests aren't chaperoned by others. It is different in Europe, the tests are chaperoned, so we'll be doing these tests according to U.S. and European specifications because Model S is designed to (indiscernible) those requirements. So it's actually more of in terms of witnessing tests more on the European side, but yeah, it's basically – alpha is about validating the – calibrating the crash stimulations to the computer models that's what we see in reality is anything that we learn that is not captured in stimulations and then we do integration, go to beta and in the beta phase, we confirm the corrected design and so minor integration in the beta phase, and then the release kind of phase is really just confirming that we've been consistent the way that we make the actual vehicle.

Patrick Archambault - Goldman Sachs: One last just small modeling thing, can you tell us how many battery units you sold for the quarter?

Deepak Ahuja - CFO: I don’t think we've publically shared that information so far.

Patrick Archambault - Goldman Sachs: How about job credits, do you have that handy?

Deepak Ahuja - CFO: I think we did mention that it's about $800,000 in Q4.

Elon Musk - Chairman, Product Architect and CEO: Just on the job credit front, for the Model S, our margin assumptions depend only very slightly on job credit, I think it's only like a few percentage points, or something like that.

Deepak Ahuja - CFO: It’s broader than job credits, global, on any other trading of credits that may be happening in Europe.

Elon Musk - Chairman, Product Architect and CEO: And that said, we are seeing a little more interest in job credits than we previously thought might be the case, but we will see, we don’t know if that's going to materialize or not.

Operator: Andrea James, Dougherty & Company.

Andrea James - Dougherty & Company: A question about some of your OEM partnerships; can you tell us a little bit more about what Daimler was thinking with upsizing the number of battery packs, and is there a possibility of you guys getting a production contract on that?

Elon Musk - Chairman, Product Architect and CEO: Yeah, I can tell you what I think Daimler thinks, but they will be obviously the best candidate to comment on this officially, but they are just taking a lot of interest in the Smart EV. People really like it, and cities around the world as (Tom) referred. So that’s why they have increased the test fleet size and length. I think that's our best rationale there. As far as the larger production deal for smart battery packs that’s, they are going through sort of a detailed RFG preparation process right now. We certainly think that we’re in an excellent position to win such a contract. I don’t want to presumptuous, but certainly we’re in excellent position as our pack is in the test fleet. So, any other alternatives would have to – well, I am not sure what testing process they have to go through, but they would be certainly be behind whatever we’ve done. So, (indiscernible) reason that if the test fleet is using our pack (and charger), that kind of gives us arguably pole position in a production situation for Smart.

Andrea James - Dougherty & Company: As far as the A-Class E-Cell, I think you had said something in your commentary, you mentioned production, can you just – I missed I didn’t quite understand and I didn’t realize that has been – that was production yet?

Elon Musk - Chairman, Product Architect and CEO: Sorry, could you repeat that question again.

Andrea James - Dougherty & Company: I guess, Elon you had said something about the A-Class you start delivering, I thought you said production battery pack, is that a production contract that is in still development?

Deepak Ahuja - CFO: Just to clarify, we call it production battery packs because the development contract is over and now, we're providing them battery packs for their test fleet, which will primarily be running in Europe.

Elon Musk - Chairman, Product Architect and CEO: Perhaps small scale production versus large scale production. Its production by Daimler standards because you have to meet all of the very intense safety and reliability standards of Daimler, even for a test fleet. So, Daimler got those as production, as they hold the same standard they would hold a much larger production level.

Andrea James - Dougherty & Company: That explains it, and then about the Toyota upsize that you said $69 million and I think before have been $60 million, is it just you're doing more for them now, it’s a bigger contract than before?

Deepak Ahuja - CFO: Let me just clarify. We signed an initial contract in Q3 for $9 million to provide them some initial prototypes and later on we followed that up with a $60 million in Q4 for the development contract which is (indiscernible) and it needs completely the specifications that they want. So, that's the combined $69 million.

Andrea James - Dougherty & Company: My final question is just on the Model S distribution when can we hope to hear more about I guess you're store rollout and what your plans are there?

Elon Musk - Chairman, Product Architect and CEO: Well, I think there are two parts there. One, is kind of the schedule of store rollout and then the other is the kind of refinement of the whole purchasing and servicing process, the sales and services process for automotive because we're trying to innovate significantly on that dimension of the auto business which is I think historically has been – been rather poor and a lot people would regard their car buying experiences as the worst retail experience they've had, not always but a lot of people would say that and have actually have said that to me. So, we really want to change that, so that you really look forward to buying a car and that you actually would come into a Tesla store to sort of just browse around and kind of see what's happening even if you weren't specifically in a mood to buy a car right at that moment. We want to be really inviting and essentially and our first core prototype of that experience is going to be the Santana Row store in a couple of months, but it is going to take us little bit of time to refine that process, refine the experience. So I think you'll really start to see that kind of develop over the course of this year and as far as the rollout is concerned, right now we're making sure that we're identifying locations in key metros, (more or) less and beginning kind of the long lead process of lease negotiation and permitting and that kind of thing but we're going to try to avoid applying a ton of capital to it too far in advance in the Model S sales because we really won't have any trouble selling the first – the 2012 production of Model S, in fact 2012 production of Model S will probably be sold before – a prediction but I think I'm reasonably safe in doing so that our 2012 production of Model S will be sold out before 2012 starts. I think that is a very likely thing to occur, and so actually there isn't a need to have a huge number of stores because they'll be selling cars not before 2013. So really you'll see like the big ramp in store locations and whatnot for Model S in 2012 rather than 2011 and preparation for really driving sales in 2013. I think that's kind of a sensible strategy.

Operator: Ben Kallo, Robert W. Baird.

Ben Kallo - Robert W. Baird: So could you just talk about your strategy if you'd have one at this point about entering developing markets. So do you plan on developing market specific car malls or would you do this and would you do this alone or with a partner?

Elon Musk - Chairman, Product Architect and CEO: Definitely, by developing markets I think you may be thinking about the BRIC nations. We're trying (indiscernible) not the developing market at this point. Are there particulars markets that you have in mind?

Ben Kallo - Robert W. Baird: Yes, the BRIC markets.

Elon Musk - Chairman, Product Architect and CEO: Okay, I think really of those China is by far and away the most significant given that new cost of living in China are now greater than that in the U.S. That could shift as the U.S. economy improves but that certainly has been for last few quarters. So we're thinking entry into China we are being kind of the 2013 timeframe. As I mentioned just a moment ago that just – just in our existing markets we’ll be – we’ll have covered all of the demand for 2012 or I should say we’ll have demand in excess of the production of 2012 and probably have pre-sold 2012 by the end of 2011. So therefore you know getting to markets beyond that is kind of only important really in 2013 timeframe so that's logically when we’ll go to China. We would go with a – we’ll go direct so we would be just Tesla and not a local partner

Ben Kallo - Robert W. Baird: So as you modify your models if you need to enter those markets, do your costs increase or how do you view cost by entering this different markets?

Elon Musk - Chairman, Product Architect and CEO: We don't anticipate significant modifications apart from local language related stuff and there is sort of small (modification) changes that need to take place. Just as Mercedes doesn't modify their S class significantly by market or BMW doesn't modify their 5 or 7 Series or Maserati doesn't really modify the Quattroporte, I think we would likewise not significantly modify the Model S. Long-term, there maybe market-specific models that we bring out, but I don't anticipate that in the next few years.

Operator: Thank you. I'm showing no further questions or comments at this time, I would like to turn the call over to Elon Musk for any closing remarks.

Elon Musk - Chairman, Product Architect and CEO: Thanks, I don't have any closing remarks. Good questions, I appreciate your time in the call.

Jeff Evanson - VP of IR: Thank you everyone. We look forward to seeing many of you on Wednesday March 2 in San Francisco at Morgan Stanley's Technology Media and Telecom Conference where Deepak will be presenting.

Operator: Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.