Tesla - Earnings Call - Q3 2011

Transcript

Speaker 7

Good day, ladies and gentlemen, and welcome to the Tesla, Inc. third quarter 2011 financial results and Q&A conference call. At this time, all participants are in a listen-only mode. To queue up to ask a question at any time during the call, please press star and then one on your touch-tone keypad. As a reminder, today's conference call is being recorded, and if you require operator assistance during the presentation, please press star and then zero. Now, I would like to turn the conference over to your host, Jeff Evanson.

Speaker 0

Thank you, Matthew, and good afternoon, everyone. Welcome to the Tesla third quarter 2011 financial results Q&A session. I'm joined today by Elon Musk, Tesla's Chairman, CEO, and Chief Product Architect, and Deepak Ahuja, Tesla's Chief Operating Officer. We announced our financial results for the third quarter shortly after 1:00 P.M. Pacific Time today. The shareholder letter, financial results, and webcast of this Q&A session are all available at the company's investor relations website at ir.teslamotors.com. Like last quarter, this call will consist of some brief remarks by Elon, followed by time for questions and answers. We will conduct the Q&A session live, so if you have not already done so, please log in now if you wish to ask a question. During the course of this call, we may discuss our business outlook and make forward-looking statements. Such statements are only predictions based on management's current expectations.

Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent Form 10-Q filed with the SEC. Such forward-looking statements represent our views only as of today and should not be relied upon after today. We also disclaim any obligation to update these forward-looking statements. Let me pass the call to Elon.

Speaker 1

Hi, thanks for joining us. I think we can proceed directly to questions, since there's no point in me reading something that you already have. Jeff, let's just go directly to questions.

Speaker 7

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star, then one. Our first question comes from Adam Jonas of Morgan Stanley. Your line is open.

Speaker 8

Hi, thanks, everybody. Elon, first question. The long-term supply contract with Panasonic, you said it gives you increased visibility on variable costs for cells, but do you also have increased confidence in the cost? I.e., based on what you've seen so far, is it better than you thought? The second part to that question is, if over time you have a competing supplier that offers a lower-cost solution, do you have any opt-out from Panasonic? If so, what are some of the costs or types of costs for that opt-out? Thanks.

Speaker 1

Sure. We do have firm pricing from Panasonic, so we have very good predictability as to what the price will be over the next four years. We are not obligated to purchase all of those cells. It is possible for us, if Panasonic becomes uncompetitive, to exit the deal with relatively small—there's some penalty, but it's quite small. That being said, I feel pretty confident that Panasonic is going to be in the lead position from a cell manufacturing standpoint for quite some time, and we have pretty good visibility into what others are doing. I think we've got the best cell partner in the world, and it's going to remain the best for quite a while.

We do expect over that period of time, let's say the next four years, to make a lot more cars than we've currently talked about in the Panasonic deal, which is on the order of 80,000. That definitely leaves room for a second source, if that's supposed to make sense.

Speaker 8

Thanks. Can I ask a question about leasing? Any progress on making or establishing any leasing partners as you get closer to the commercial launch of Model S?

Speaker 1

I've had a number of conversations, but I've just decided to deprioritize that initially because there really doesn't seem to be a need to have leasing take place in the, probably in the first, certainly the first six months, but I think maybe even in the first 12 months. It's better for us to focus on more important things. We could certainly get a leasing deal done, but it just doesn't seem to be necessary to achieve our volume targets in the first, let's call it, 6 to 12 months.

Speaker 8

Okay, that's all I have. Thanks very much.

Speaker 7

Thank you. Our next question comes from Dan Galves with Deutsche Bank. Your line is open.

Speaker 4

Good afternoon. Thanks for taking my questions. I just wanted to ask, can you just give us an update on kind of what's left to be done before launch of the Model S? How do you feel like your suppliers are performing? Is there anything you're worried about in terms of suppliers on time or tooling getting to you guys on time?

Speaker 1

Things are going very well. I'm always sort of reluctant to say things are going very well because it's a case of that jinxing things, but things are going very well. We have over 90% of the factory tooling equipment in place. I don't really know of any one thing that I would call out as being particularly risky, but there are a lot of little things that could potentially arise. What I'm trying to make sure of is that we have the agility to respond to any one of those things. We have sort of a special forces team that's on the engineering and manufacturing side that can go and tackle any specific problem once it arises, but we don't know what it is yet, if that makes any sense. Things look great. I mean, I don't really have anything to complain about right now.

We do want to make sure this car is as close to perfect as possible, and you know I think we could ship cars sooner than July if we had lower standards in that regard. We want to really create a good impression with customers from the moment they receive the car. We don't want to rush the market.

Speaker 4

Okay, yeah. That sounds good. My next question is related to the mix of vehicles. When do you expect to kind of let the reservation holders start specifying or speccing the cars? I guess, more longer term, do you feel like you have the flexibility to kind of meet whatever mix of vehicles comes at you in terms of options, battery sizes, and that type of thing?

Speaker 1

In fact, we're just deciding that right now, which is to figure out what is the best way to price the various options such that it strikes a good, happy medium between customer value perception and gross margin, you know, the cumulative gross margin to Tesla. We really want to put a lot of thought into that, then we may need to adapt, obviously, if our assumptions are wrong after we put out the option mix. We do expect to have that out before the end of this year, so I'd say December at the latest.

Speaker 4

Okay. Is there any, I mean, you feel like you've got the flexibility to kind of meet whatever mix of vehicles people end up ordering?

Speaker 1

I think so. In the first several months of production, we're going to constrain the option mix to a pretty high, you know, you have to basically, you have to order stuff that's got a pretty high option mix initially. For example, and we said this several months ago, for the first five months or so, we won't be offering the 160-mile range vehicle. It'll just be the 300-mile and 230-mile range. There'll be probably a few, there will be a couple of other options that are kind of mandatory in the initial period. That makes it easier for us to constrain the number of variables in the startup production, so we don't have too many variations of vehicles coming out of the factory. I think that's sort of the best way to take advantage of early demand.

It's kind of like, you know, when they bring out a new CPU or something like that, it would initially be expensive, and then it would go down later as production increased. We're kind of insisting that people buy the heavily optioned car initially, at least for the first several months.

Speaker 4

Okay, makes sense. One more, if I could. You know, based on the CapEx guidance, it looks like the CapEx is going up a little bit, slightly, next quarter. Will that represent the peak of the CapEx spend for the next several quarters? Any indication you can give us on kind of the trajectory of, you're not really burning cash because you're drawing the loan, but in terms of operating cash flow and CapEx, the trajectory of the negatives over the next several quarters, will it be moderating?

Speaker 1

Deepak, would you like to take that?

Speaker 2

Sure, Dan. You know, on a four-year basis, as you can see, we have taken down the CapEx guidance slightly. Although in the big scheme of things, that timing difference really doesn't change things and doesn't matter much. It's difficult for us to predict exactly what the quarterly CapEx is given some of the timing issues and how we pay suppliers. I think as we pull together our 2012 guidance and share that with you during the Q4 earnings call, we can give you a better sense at that point of how CapEx will be spread through the year.

Speaker 1

Okay, thanks very much.

Speaker 0

Thanks, Dan.

Speaker 7

Thank you. Our next question comes from Andrea James of Dougherty & Company. Your line is open.

Speaker 9

Hello. Good afternoon.

Speaker 1

Good.

Speaker 9

In the quarter letter, it says something about CapEx may come in at the low end of the guidance, and then you go on to say, "In spite of controlled expenditures on certain projects," and you want to keep that confidential. I guess any type of context would be helpful. You know, what are you trying to convey by sharing that sort of mysterious detail? What are investors supposed to take away from it?

Speaker 1

I just mentioned this on the last earnings call, which is I think it makes sense strategically to keep a few cars close to our vest and not reveal everything. That's essentially, you know, that's part of what I kind of hinted at there. I think those are smart decisions that should, I mean, the things that we're doing, they're very important for long term. When we do unveil them, I think people will, at least most people will agree that those are sensible things to do. I mean, we're not spending the time on that, but we're spending enough to make sure that when the timing is right, we can be quick to market with a few things that I think people aren't expecting. Sorry to be so obtuse, but you know, previously, we've been very, we've always been extremely open about things.

I just wanted to make the point that strategically going forward, there's a few things that it doesn't make sense to be completely open about for competitive strategic reasons.

Speaker 9

Okay. One more, then I'll hop back in the queue. We see the SmartForTwo program winding down, and now it looks like you might have something new and Mercedes related. I guess, how do we think about that, the size relative to the SmartForTwo program?

Speaker 1

In deference to timeline, I can't make any specific comments about the deal. We're really waiting till they're ready to talk about it some more. I'd love to talk about it, but I do need to be respectful of our key strategic partners.

Speaker 9

When do you think you'll be able to speak more about it?

Speaker 1

Hopefully around the end of this year, but that's really going to be upon the mutual consent of Daimler and us. I mean, it's when they're ready to talk about it, then that's when we talk about it.

Speaker 9

Okay, thank you.

Speaker 7

Thank you. Our next question comes from Himanshu Patel of J.P. Morgan. Your line is open.

Speaker 3

Hi, good afternoon, guys. A couple of questions. Elon, on the last call, you had made a vague reference to some additional strategic opportunities. Was that the Daimler LOI? Was that what that was in reference to?

Speaker 1

No, that was, you know, I was referring to something different.

Speaker 3

Okay. Number two, can you?

Speaker 1

Just not for this load. Yeah, yeah.

Speaker 3

Could you guys talk a little bit to Roadster volume? The quarterly cadence really kind of picked up. It looks like you sold three times as many. I guess the growth rate is 45 units more than Q2, which seemed like it was three times as fast as what you saw Q1 to Q2. What kind of happened in the third quarter? Is there any way for us to think about the quarterly cadence of Roadster volumes? Is there any seasonal trends here that we should be thinking about either?

Speaker 1

Yeah, I mean, Roadster, of course, is always intended to be kind of a limited production vehicle. There certainly is some seasonality given that it is a convertible sports car. It will tend to sell a little bit better in summer than in winter. I wouldn't read too much into Roadster sales one way or the other. The biggest value that the Roadster has to Tesla is really as kind of an advanced scout to help us understand how to make an electric vehicle, how it operates in all sorts of different countries and different climates and regulatory regimes. It's kind of a beach head, you know. It's really served its purpose very well. We're really now moving away from that to the next major phase of things with the Model S. I think that's what really matters in the long term.

Speaker 3

Okay. If you could speak a little bit to the kind of pace of reservation bookbuilding on the Model S, it looks like you're doing about 300, 350 reservations a month here. Is there something to the pace of that that we should be thinking about prospectively? Does it ever become nonlinear at one stage? I mean, it sounds like you're starting to be a lot more aggressive on the marketing, but I'm just wondering if you had a view on how we should think about that.

Speaker 1

The rate of Model S reservations does appear to be accelerating. I should point out, we're not paying for any advertising. As long as we actually advertise the Model S, we get a lot of press, and obviously, we have our stores. Our sales team, particularly in North America, is starting to shift its focus from the Roadster to, well, it has shifted its focus at this point, at least from the Roadster to the Model S. It is noteworthy that without advertising, you're seeing this growth. I think that probably a lot of people don't realize that. This is just word of mouth and our sales team.

I think something that people who are interested in buying Model S should appreciate is that if the Model S reservations continue to appreciate, continue to accelerate, it's very important for them to put down a deposit soon or they'll be getting a car in 2014. I think sometimes people are under the impression that the Model S is kind of like how other cars are, where there's a ton of them on the lot, and you can just go to the lot and buy one, but that's not the case. They're all sold out way in advance.

Speaker 3

Okay. I guess one last question. I think at the press release, you guys make a reference to OpEx rising slightly as you kind of prep for the factory launch. Deepak, I'm wondering if you can talk a little bit about it. You know, the $74 million non-GAAP OpEx number this quarter, how does that sort of move over the next two, three quarters? Does it, I guess, you know, I'm trying to understand, is that a linear sort of mild rise, or does it sort of have a big spike in Q1 or Q2?

Speaker 1

Sure. Before that, let me just add that our reservations in Q3 for Model S were $1,150, so they were closer to between $350 and $400 a month, as compared to $1,000 in Q2. There was clearly an increase in Q3 that we saw. In terms of OpEx, as you know, all our manufacturing-related expense, in addition to R&D, is being booked as OpEx until we are in the launch mode for the Model S. At that point, our manufacturing expenses will move out of R&D into cost of goods sold. As a result, as we continue to hire more people and we will hire more of the production workforce in the next few quarters and start training them and getting ready, clearly, our manufacturing-related expenses will continue to increase, and that is going to drive our OpEx primarily.

At the same time, we will see some decline in Model S development expenses as some of the testing and supplier ED&T work gets done. There is a bit of in and out happening. It is really once we are in the production mode of Model S and manufacturing expenses are in cost of goods sold, then we will see an appreciable drop in OpEx.

Speaker 3

Thank you.

Speaker 7

Thank you. Our next question in queue comes from Carter Driscoll of Capstone Investments. Your line is open.

Speaker 8

Thank you. Good afternoon. I want to ask the first question, if I may, about maybe you could add some additional color about the Model X, what you're hoping to unveil in December. Do you think you will be able to have an alpha model and produce by then? Could you maybe compare and contrast the Model X with the Model S in a little bit more detail? If I understand correctly, you are going to be using the same powertrain and chassis. Could you maybe just drill down a little bit without revealing anything you don't want to, compare why the Model S would be in one segment versus the Model X being targeted at another type of customer segment?

Speaker 1

Sure. I don't want to give away too much because obviously, there wouldn't be much in the unveiling. Whereas the Model S, our goal is to address the premium sedan and to some degree premium SUV market. With the Model X, we're also trying to bridge a market, but we're trying to address primarily the SUV market, bridging to the minivan market. What we're trying to achieve with the Model X is to have more functionality than a minivan, meaning it's easier to get in and out of. You can pack more cargo along with the people. I think that's really missing. Right now, for a lot of people, I know they're forced to buy a minivan, and they kind of hate it, but they need the functionality. We want to give them that functionality.

In fact, we want to give them more than that functionality in something that looks really cool.

Speaker 8

Better aesthetics, a little bit more functionality. Do you anticipate that you'll be able to price segment? I imagine the minivan segment is a tad more price-sensitive than the premium sedan group.

Speaker 1

The premium SUV, I mean, I know a lot of people who can afford to pay a lot more for a minivan, but there's just nothing out there to buy. There really, really is a premium minivan. There's certainly premium SUVs, like the Porsche Cayenne and whatnot. I mean, it's like some of the Porsche Cayenne, it's got less room than some sedans. It's like a sedan with more ride height. It doesn't even look that great. Sorry.

Speaker 8

That's fair criticism. All right. Thank you for that elaboration. Could you also maybe just talk? You had made, I guess, a public statement that you expect to reach net profitability in 2013. Could you talk about what you're expecting? Obviously, the first six months, you're trying to limit the option range to reduce the level of potential production defects and tightly control that initially. Could you talk about in 2013 where you think the mix of options and range, you know, whether you're talking the 160, the 230, or the 300, where do you think that mix will be to get you to that 25% targeted gross margin line and what the variables might be that would increase it above or below?

Speaker 1

I can give you my, obviously, just my best guesses. I think most people are going to probably want the 230-mile range car. I think a lot of people are going to want the 300-plus-mile car. Actually, we think it'll probably be the 310 to 320 miles range. There's some other advantages to that car in that we're going to be offering a much longer battery warranty. There's some cool things that we're going to tie into long-distance intercity fast charging. I think we'll see probably most people with the 230, then next largest being the 300 and then the 160. There's a number of other options that are pretty cool. I mean, the roof, we have the biggest roof opening of any car, I believe, any sedan or SUV or anything.

In fact, I think the Model S panoramic roof is the closest thing you can get to having a convertible without it being a convertible. I think a lot of people want to pick that option. The air suspension, which is able to dynamically adjust the ride height according to the load of the car, and it also improves efficiency on the highway because it can hunker down. You can raise the car going through heavy snow and sunrise. I think a lot of people, I hope a lot of people pick that option because I think a lot of people don't even realize you can, like how cool an option that is. It kind of depends on how well we can convey the value of having that.

Speaker 8

That's very helpful. Maybe just switch gears quickly, and then I'll flip back into queue. Could you give me a view of where the charging infrastructure is nationally, regionally, and where you expect it to be over the next 12 to, say, 24 months? Whether you think that does support a higher production level that you're hoping to achieve in 2013, obviously a lot of competitor vehicles will also need that infrastructure?

Speaker 1

Yeah, that's a good question. I think we're going to have a very exciting announcement about intercity charging or intercity Supercharging, if you will. We've developed what we call the Tesla Supercharger, which is a 90-kilowatt charger. I think we're hoping to have the first one installed between San Diego and LA, probably in the January or February timeframe. There's a whole rollout schedule for that. We're planning on doing a fair bit of press around the unveiling of the first one because, I mean, when you see what this looks like on a highway with a parking lot, it's like the coolest thing. It looks like an advanced alien artifact landed in the middle of this otherwise drab—well, it's not that drab. I mean, it's not too slow, okay? It just looks amazing.

We'll allow people to charge their cars, to charge 150 miles in 30 minutes, so that you can park, plug your car in, grab a bite to eat, go to the bathroom, and come back to continue your journey. I'm probably getting ahead of myself on that.

Speaker 8

That's very helpful. Do you, obviously, you guys stay on top of legislative developments that affect electric vehicles. Could you talk about some of the noise that perhaps there might be a surcharge in terms of Congress worried about losing the gas tax as EVs proliferate, and how that may or may not impact sales?

Speaker 1

I think that's a high-class problem because, if there are that many EVs, it pretty much means we won. We're selling so many cars that it actually matters to the grid. I think we're probably more than a decade away from that. What we've seen from the Roadster is the vast majority of charging occurs at night in somebody's garage, which I guess one would intuitively expect. The grid capacity at night, it's a huge amount of capacity. It seems to fit well with the existing infrastructure.

Speaker 8

Appreciate you taking my questions. I'll jump back into Q&A.

Speaker 7

Thank you. Our next question comes from Steve Milunovich from Bank of America Merrill Lynch. Your line is open.

Speaker 6

Thank you very much. Could you comment a bit about how you take back customer feedback and any changes that you're looking to make post the reveal on October 1? Obviously, you've generally had very good reviews, but there's been some concerns about seat comfort and a few other things. Do you have the ability or interest in taking that in and potentially making any changes for the production model?

Speaker 1

Oh, yeah, absolutely. There is no way we emphasized it. It was really a beta that people were getting a test ride in because there are a thousand little details that we want to improve from the beta. My goal for the car is to be as close to perfect as possible. Certainly, I mean, the seats need to be extremely comfortable. I mean, just everything needs to be as close to perfect as possible. You obviously cannot be there at a beta. We try to set people's expectations appropriately. I think all of the concerns that I have heard people express about the beta are concerns that we are already planning to address.

Speaker 6

Okay. As I recall, last quarter, you had discussed potentially a large contract. I thought that was with Toyota, and you had suggested it could be an order of magnitude larger than what you'd done before. Would you like to provide any update on that thinking?

Speaker 1

I think we remain quite quiet up to think about the future relationship with Toyota. Along with Daimler, they're a key strategic partner, and things seem to be going very well. As with Daimler, I always prefer to take my cue from a strategic partner before making too much of a, too quick for talking about something too much. I think stay tuned on that front.

Speaker 6

Okay. Thank you. Worth a shot. Finally, as you pointed out, you haven't had to advertise yet. When you begin to ship the car, you'll obviously have enough demand for some period of time, so you won't necessarily need to advertise then. When do you plan on advertising? When you do start to ship, I would think it might be worth, from a branding standpoint, beginning to get out there in any case.

Speaker 1

Yeah, definitely. At some point, we'll do advertising. I think it'll be a few years before we do advertising. I mean, if we're production limited, then there's not much point in spending money on advertising. If we want to get to the point where we're not production limited, then advertising can make sense. I guess we'll probably start some advertising in 2013. That's just a guess. We may not need to in 2013, but I wouldn't say it wouldn't be any sooner than 2013.

Speaker 6

Great. Thank you.

Speaker 1

All right.

Speaker 7

Thank you. Our next question is from Aditya Oberoi with Goldman Sachs. Your line is open.

Speaker 0

Great. Thanks a lot. Can you provide some color around the costs you are incurring in Europe related to the Roadster issue?

Speaker 1

Oh, you mean with respect to the Top Gear unselling crashing out?

Speaker 0

Yes.

Speaker 1

I have to be a little bit careful because we do have an ongoing legal action there. You know, we're just trying to right a wrong, essentially. Tesla was really wronged by that show, and it left a negative lasting impression in the UK, particularly because that's where Top Gear is strongest. We just have to change that data point that's been conveyed. I think we're making some progress in that direction. If it works, I don't want to say anything that would negatively affect our legal case there. I'll have to probably not say any more before I put my foot in my mouth.

Speaker 0

Maybe I can ask it in another way. You guys mentioned that you are incurring additional costs to correct consumer misperception. Are these costs related to advertising, or are they more just legal costs?

Speaker 1

Yeah, it's not advertising, but certainly legal costs. We do execute marketing events. We have salespeople on salary. Of course, then there's a little bit of brand damage. I mean, we correct that brand damage over time, but it's still there.

Speaker 0

Got it. Can you talk a little bit about what are those 10% of things that are left at the Fremont facility, as you guys mentioned that you are almost 90% there?

Speaker 1

Yeah. It's left for each passing week. I mean, the doors and closures, basically closures, which is sort of doors, bonnet, and trunk. The assembly equivalent for that is arriving, but hasn't completely arrived. That's one example. I think we expect to have that in the next month or two. The next big thing after that will be the stamping dies for the body panels. Those are being made by a Fuji partner on that front. I mean, we should have all of the equipment in place by the end of this year. It's going to be working. We have to work really hard to iron out any of the bugs in the overall manufacturing line. Yeah.

Speaker 0

Got it.

Speaker 1

To add to Elon's information here, a lot of this equipment is at our suppliers and is being tested, including the body enclosures line. When the trials are completed and they're fully acceptable to us, they get shipped to us. A lot of progress is happening at our suppliers at the same time. That's a good point. I should have mentioned that Sizing is our supplier for the assemblies. They've opened up at the facility, and they're debugging it at the facility. Once it's debugged, they ship it to us. In principle, at least at the manufacturing module level, stuff has been debugged. We're just kind of what we've had to do since Fremont is debugging the module-to-module interactions, you know, as stuff moves from one part of the line to the next. That should minimize overall main factory line risk.

Speaker 0

That is why we are doing this. We are continuing to do the beta builds in our Fremont factory. Even though we may not have the full automation, in some cases, our suppliers can provide us those parts based on the automation in their facility. That is allowing us to continue doing the build-out and just refining and learning our own manufacturing processes and interacting with our suppliers as well.

Speaker 1

Right. Exactly. Like that, when Fuji makes a stamping die, they first stamp a bunch of panels in Japan or Taiwan, or whatever the case may be, and then they send us those parts and the stamping die.

Speaker 0

That's very helpful. One last one, if I may ask. The contract you guys signed with Panasonic, is it just for Model S or all the vehicles that will be on the Model S architecture?

Speaker 1

We plan on using a common battery cell. It would apply to all vehicles that use it. It would apply to more than just the Model S, not necessarily to all vehicles, but to more than just the Model S.

Speaker 0

Got it. Great. Thanks a lot, guys.

Speaker 1

Thanks.

Speaker 7

Thank you. Our next question comes from Ben Kallo of Robert W. Baird, and your line is open.

Speaker 5

All right. Thanks for taking my question. I wanted to focus on the retail strategy. It looks like you're going to end the year with about 20 or 25 Tesla stores, I think, is the number. Can you kind of talk about how reservations have changed for the Model S, if you're seeing reservations actually come from the stores or from surrounding areas, whether it's on the internet? Also, can you talk about what metrics each of those locations are going to be judged on as you go forward? Is there actual targets for reservations at each store?

Speaker 1

Yeah. We see most of our reservations coming from the stores, particularly the ones that have high foot traffic. We're still at the early stages, so it's difficult to say what should a store do. The early indications are very promising. We're just seeing an incredible number of people come through our stores in the high-traffic mall and shopping malls. Even if they don't buy a car now, we've kind of planted the seed for them to buy a car in the future, whether it's a Model S, a Model X, or a future sort of third-generation vehicle. I think our store strategy is showing itself to be very powerful and fundamentally different from how things have historically been in the auto business. Most people don't have a positive experience buying a car. For them, they sort of look at it like it's a dental appointment.

We want to go to the complete opposite side of things, where you're magnetically drawn into the Tesla store. It's just a really appealing place to be. We don't actually have—they're not really salespeople. They're product specialists. They're just there to sort of explain if anything you want to know about the Model S or electric vehicles in general. It seems to be really going well. We sell clothing as well. We're actually doing quite a good business in Tesla clothing, which is an unexpected revenue source.

Speaker 5

Along those lines, what's the strategy and the rollout of actually having Model S vehicles at each location? Is it, I guess, seen as believing in some ways?

Speaker 1

Sure. Absolutely. It has a big impact if we've got a Model S beta there or not. For the next few months, we have a dichotomy, which is we need beta vehicles for testing, and we need beta vehicles so that customers can see them. We have to make a tough trade between those two competing priorities. That's not going to be an issue a few months from now. We'll start deploying the cars to all of the stores in the first quarter.

Speaker 5

Okay, my last question is on the testing front. Any update on where you are as far as safety testing goes?

Speaker 1

Yeah, the safety testing is looking really good. I've set an extremely high bar, which is to be a five-star safety rating in every category. From what I'm told, if we achieve that, we will be the only car that is five-star safety rated in every category by 2012 standards. That's looking extremely good. We have a fundamental advantage here with the Model S, which is that because we do not have a large engine block in the front, in fact, we've got a front trunk, that gives us a much longer crumple zone than is possible in other premium sedans. I'm not sure what the right analogy is here, but it seems like if you jump out of a five-story window, you probably want to jump into an Olympic-sized swimming pool rather than a kiddie pool.

Having a long crumple zone means that you can spread out the deceleration of the car over a much longer distance, whereas otherwise, other gasoline sedans can't do that because it would just shove the engine right through your chest. That's part of why we can, you know, that fundamentally, that superior architecture is why we think we've got a shot at making this the favorite car in the world.

Speaker 5

Great, thank you very much.

Speaker 1

Welcome.

Speaker 7

Thank you. Our next question is a follow-up from Andrea James of Dougherty & Company. Your line is open.

Speaker 9

Hi, thanks for letting me log in one more. I thought this was interesting. You saw in the UK that a TV show can affect the business in a negative and also in a quantifiable way. The logical follow-up to me would be, did you see a quantifiable effect from the Model S event and the subsequent positive media? If so, how did it track with what your expectations were after the event? Thanks.

Speaker 1

Sure. We definitely had a positive impact from the Model S beta event. Roughly 3,000 people came to visit our factory in Fremont, many of them coming from countries all around the world. Our goal there was actually not media. It was really to let our customers know that their faith was not misplaced. That was the most important thing. In order to come to the event, you have to be a Model S reservation holder. We want to show, this is what the car is, at least in beta form, with the test drives. This is our factory, and it's real, and the equipment's there. When they go home and they talk to their friends and colleagues, they can speak with confidence that they've been in the car and they've seen the factory.

The best people to sell a product are your existing customers because they don't really have any incentives. That was the main goal. I think that's been effective and will continue to be effective. The media was also very positive and helpful as well.

Speaker 9

Did you see reservations increase, or did you see some of the $5,000 convert over to the $40,000?

Speaker 1

We did. There are 1,000 cars in the Signature series, and there's only a few hundred left, actually. We're now at 700 and something of the Signature series up in reserve. In fact, the only way to get a car next year is if you buy one of the couple hundred remaining Signature series cars. We saw a number of people convert to that. It was just an awesome event.

Speaker 9

Thank you.

Speaker 7

Thank you. Our next question comes from Ben Rose of Battle Road Research. Your line is open.

Speaker 5

Good afternoon. Based upon the feedback from the betas with regard to the use of materials in the Model S, are you thinking any differently about possibly using carbon fiber or other advanced materials in the Model X and other forthcoming vehicles?

Speaker 1

We will be offering carbon fiber as well as a couple of wood trim options, one being lacewood, which is kind of a cool kind of black wood, and the other being a banana leaf. It's actually fallen banana leaf. If somebody's looking for the moral high ground, I don't think we could find better moral high ground than fallen banana leaf as the choice of wood trim. We will continue to try to add some interesting options over time. There will be something very unique to the Model X, certainly. We really want to drive innovation on almost every front with cars. Whatever we can think of that has the potential to amaze and delight our customers, we want to do that.

Speaker 5

Okay. Just one final question with regard to your plans for future vehicles, sort of broadly defined. Is it possible that you would look at some other kinds of off-road categories and maybe sort of non-traditional automotive categories where you could parlay your electric expertise?

Speaker 1

I think we need to stay focused on the Model S, and that's really sort of the battery driving our focus, and then the Model X, which the Model X is going to be a pretty great off-roading vehicle because you also have that air suspension so you can raise the ride height. It's going to have a particularly tailored four-wheel drive system. We think probably the best four-wheel drive system of any car, period. That should cover us, I think, really well on the off-roading front. You know, long term, it's possible we could go into a wide range of areas, but I think in a short period of time, it's very important to stay focused.

Speaker 5

Okay, thank you.

Speaker 7

Thank you. Our next question comes from Jesse Pichol of Jefferies. Your line is open.

Speaker 9

Hi. This is Elaine Quay for Jesse. Thanks for taking our question. Just to follow up on Ben Kallo's earlier question, what exactly is left in terms of the federal and state crash testing and other requirements needed to get a new car on the road and to qualify for the different incentives out there, such as HOV lanes? Have a couple of Model S already been sacrificed, or will they be soon?

Speaker 1

Actually, we've now sacrificed quite a few Model S to crash test lanes. I think it's probably approaching a dozen, and there's another dozen to come. As we iterate through, you know, we do as much as you can with simulations, and you do the crash test to calibrate and validate the simulation, and you go through a series of iteration cycles. We're very close to the end of that. I think the final crash tests are really confirmatory that we've made the correct changes. That's all we can really do. As far as HOV, because the Model S is pure electric, any state that has HOV preference for pure electric, such as California, you'll be able to drive the car fully without a problem, as you can right now with the roads.

Speaker 9

Great.

Speaker 1

Being pure electric, we also don't have, you know, we don't have sort of EPA issues to deal with because we don't have any direct emissions.

Speaker 9

Great. Now that we're talking about a car that could potentially be adopted in much greater numbers than some of the prior, maybe perhaps more niche EVs, are you engaging with any local utilities or anything like that in discussions about potential customer issues with charging? Will there be smart charging apps built in? I guess it's kind of an idiot-proofing question. In case of any potential issues of crashing transformers or tripling their PG&E bills.

Speaker 1

We've had a fair bit of experience with that with the Roadster, not with tripling the PG&E bill, not with the bad stuff you mentioned, but in terms of working out the bugs with charging and knowing what's going to be an issue with some houses out there and what will. That's where the Roadster has been really, really valuable. Where we did make the case with the Roadster, we made them at a small scale in order to avoid making them at a large scale with the Model S and subsequent vehicles. I think we've got a pretty good handle on things. There's a lot of intelligence in the charge algorithms of the Model S, even more so than the Roadster. The vehicle is automatically backed to the input charging voltage, so it must create problems with whatever circuit's feeding it. It's got a really intelligent feedback loop.

Speaker 10

Hey, Matthew, we want to keep the call to an hour. If there are any more questions, let's go to the last caller, please.

Speaker 7

Okay. Our final question will come from Brian Russell of Russell Group. Your line is open.

Speaker 5

Thank you. Good evening. Real quick, on the Tesla stores, as you ramp up to a higher volume and get past the initial reservations, what are the plans for trade-ins? How is that going to be handled?

Speaker 1

We definitely want to enable trade-ins, and we're talking to a couple of large used car groups in the country to be able to handle that in a seamless manner for customers. We will have that ability to deal with trade-ins for the Model S. For the Roadster, we kind of fight that issue, and it wasn't really all that important for the Roadster. For the Model S, it certainly is.

Speaker 7

Okay, thank you.

Speaker 1

All right. Thanks, everyone. I look forward to the next quarter.

Speaker 10

Thank you. Thank you, everybody.

Speaker 7

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may now disconnect.