Tesla Minutes: "No competitor to Autopilot even with binoculars, the second Tesla may be in China"

The following is the content of the Tesla.US Q4 earnings call. For a detailed interpretation of the earnings report, please click "Tesla's story is being reshaped, and the time to test faith has arrived!"

I. Core Data vs. Market Expectations

1. Revenue side: Quarterly revenue of 24.32 billion U.S. dollars, YoY+37.2%, lower than market expectations (-4.5% miss).

2. Gross margin: Quarterly gross margin of 23.8%, YoY-3.6pct, lower than market expectations (-1.2pct beat).

3. Production and Delivery Status:

(1) Total production of 439,701 vehicles in 4Q22, YoY+44%; deliveries of 405,278 vehicles, YoY+31%.

- 20,613 Model S/X vehicles were produced and 17,147 were delivered.

- 419,088 Model 3/Y vehicles were produced and 388,131 were delivered.

(2) Annual production in 2022 was 1,369,611 vehicles, YoY+47%; deliveries were 1,313,851 vehicles, YoY+40%.

- 71,177 Model S/X vehicles were produced and 66,705 were delivered.

- 1,298,434 Model 3/Y vehicles were produced and 1,247,146 were delivered.

4.23 Year Guidance: Single vehicle price of 47,000 USD, car sales of 1.8 million.

II. Key Points of Performance Meeting

1) As of January 23, the backlog is about twice the current production capacity.

1. Different models may receive different amounts of IRA tax deductions, and these tax deductions are still changing. This year's quarterly referral revenue is about 150-250 million U.S. dollars, and it will increase quarter by quarter as sales grow.

2. The insurance business has an annual revenue of approximately 300 million U.S. dollars, with a quarterly growth rate of approximately 20%, which is faster than the growth rate of automobile deliveries. Approximately 17% of car owners use Tesla insurance.

3. Cybertruck is still expected to start production in mid-2023, but initial production capacity will be low, and mass production will begin in 2024.

5) The current annual production capacity is 2 million vehicles, and the sales target for 2023 is 1.8-2 million vehicles.

III. Meeting Minutes: Detailed Content

3.1. Management Speech

[1] Business Perspective

a Overview of Indicators

Despite challenges such as forced production stoppages and high interest rates in 2022, the company still achieved outstanding annual performance: delivering more than 1.3 million vehicles; operating profit margin of 17%, leading the industry; net revenue of 12.5 billion U.S. dollars; and free cash flow of 7.5 billion. b. Demand

By January 2023, the order volume has hit a record high at about twice the production capacity. Model Y prices have been raised to cope with the strong demand. Despite a slight contraction in the US auto market, demand for Tesla remains strong.

c. Price

The price of electric vehicles is crucial, as many consumers still cannot afford Tesla's prices. The company's goal is to manufacture vehicles that more people can afford, and these price changes do have an impact on the average consumer.

d. Cost

Cost control has made good progress, and production costs in Berlin and Austin have decreased as production volume has increased.

e. FSD

FSD Beta version has been made available to about 400,000 paying users in North America for on-road testing. This is the only way for consumers to test the latest AI-driven autonomous driving and create autonomous driving milestones. Currently, the FSD Beta version has driven 100 million miles on city streets (excluding highways), and the data shows excellent safety performance.

f. Battery

By the end of 2022, 4680 batteries capable of supporting the production of 1,000 vehicles per week will be produced, and 100GWh of production capacity is being added. The company's long-term goal is to produce more than 1,000 GWh of batteries autonomously, while continuing to rely on external suppliers to expand production scale. Breakthrough plans have already been made to reduce the cost and increase the energy density of 4680 batteries.

g. Energy Storage

Energy storage is growing at an astonishing rate and will continue to accelerate. The three pillars of sustainable energy in the future are electric vehicles, solar energy, and wind energy, and energy storage (for storing solar and wind energy) is crucial. Energy storage is the road to fully sustainable development in the future, and Tesla's goal is to accelerate development as quickly as possible in this field. Production of the giant energy storage battery Megapack is being accelerated, and the growth rate of Megapack production capacity even exceeds that of automotive production capacity.

In summary, Tesla will continue to manufacture and sell as many vehicles as possible, expand production capacity, maintain the industry's best operating profit margin, and become the best automaker. Automotive manufacturing technology is Tesla's most important long-term advantage.

[2] Financial performance

2.1 Operating performance

In 2022, revenue increased by over 50%, and free cash flow increased by over 50%. Profit margin leads the industry. Improving management efficiency has made good progress, and non-GAAP operating expenses as a percentage of revenue have increased.

Specifically, as of 4Q22, due to uncertainties related to the Chinese epidemic, US tax benefits, and rising interest rates, ASPs have decreased, which in turn has affected quarterly and annual profit margins. In 2022, rising interest rates alone increased Tesla's US market prices by nearly 10%.

In addition, COGS per vehicle increased year-on-year, driven by three factors:

1. Lithium prices are rising as a raw material price leader;
2. Efforts are being made to solve the initial low-efficiency problems of the Austin and Berlin super factories and battery pack factories (i.e., 4680 battery production ramp-up).
3. The proportion of Model Y in the lineup is increasing, and its cost is slightly higher than that of Model 3.

Continue to implement cost-control measures to partially offset the above-mentioned impact, and continue to strive to achieve regional balance of vehicles gradually.

Driven by steady progress in retail and commercial energy storage, the energy business is expected to perform best in 2022. Although there is still room for improvement in terms of cost, the overall trend is on a good development track.

2.2 23-year outlook

Looking ahead to 2023, we will actively leverage our strength and cost advantages, with the following three key points:

a. The demand for Tesla is still strong.

b. Steadily advancing cost reduction measures, quickly increasing production and management efficiency, and maintaining the operating profit margin advantage.

In particular, we are accelerating the improvement of production efficiency in the Austin, Berlin, and battery pack factories. Improvements are being made in every cost area and the increased costs due to the epidemic are being eliminated, such as the accumulation of logistics, expedited shipments, material buffers, parts premiums, production efficiency, and indirect costs.

As the world transitions from inflation to deflation, we expect to maintain strong partnerships with suppliers throughout this process. In this regard, product pricing has taken into account the long-term cost structure, so it will have a short-term impact on operating profit margins, but the profit margin in 2023 will still remain healthy and industry-leading.

c. Third, continue to ensure that funds are prioritized for long-term goals, including expanding battery independent production, launching Cybertruck, developing the next generation of vehicle platforms, expanding production maps, and promoting energy business growth.

(2) Q&A session

[1] Investor Q&A

Q: 2023 year-to-date order trends and comparison with current production speed.

A: Demand far exceeds capacity, so there has been a slight price increase.

Q: How much can Tesla benefit from the Advanced Manufacturing Production Tax Credit (AMPTC)?

A: The subsidy mainly depends on localized production, and the value in 23 years is not significant, but the future is promising. Different products receive different amounts of subsidies, and the law is still being updated.

It is expected that the quarterly score revenue in 23 years will reach 150-250 million U.S. dollars, which will increase synchronously with sales.

The purpose of the law is to encourage more manufacturing to return to the United States, which is also Tesla's consistent plan, and we have good conditions to use this advantage in the next few years.

In addition, the company expects to use the law to improve the affordability of Tesla products for consumers. It is currently $7500 per vehicle tax credit, subject to MSRP and income limits. We hope to use tax credit subsidies to lower prices and accelerate the development of sustainable energy, which is a common goal of Tesla and the law.

Q: After a significant price increase for automotive products globally, analysts expect the ASP for all Tesla models to be around $47,000, and the gross profit margin for electric vehicles (excluding car rental business and carbon emission credits) to drop below 20%. What are the management's expectations for ASP and gross profit margin after price cuts? A: Firstly, there is still a lot of uncertainty in the next 23 years; however, based on current data, ASP and gross margin will be higher than analyst expectations.

Secondly, the ASP drop from 4Q22 to 1Q23 will be less than the configuration price. Like 4Q22, 1Q23 has a backlog of customers, so the cars will be delivered at a lower price due to the extended wait time. Additionally, various programs used in 4Q22 have also lowered the ASP.

Thirdly, the management team is most concerned with operating profit margins. As other businesses, especially the energy business, grow faster than the automotive business, and because they are very focused on operating leverage and improving management efficiency, the metric that should currently be focused on is the operating profit margin (rather than the automotive gross margin).

Fourthly, with every car Tesla sells, they have the ability to generate software revenue (FSD). FSD has huge potential for growth since only a small percentage of cars don't have the hardware to support it. In the future, FSD can be sold at 100% gross margin, and it will grow along with autonomous capability. This is perhaps the largest value asset growth ever.

Q: Will Mask's Twitter comments have a negative impact on the Tesla brand?

A: Mask has approximately 1.27 trillion Twitter followers and is still growing. Despite not being popular with some people, for most people, Mask is quite popular. Twitter is very powerful in boosting global automotive brand market demand, encouraging global car brands to use Twitter to drive sales. Twitter's net worth is enormous.

Q: What is the current status and obstacles of 4680, and when will it reach a scale of 10,000 vehicles per week?

A: The 4680 battery has a weekly output of 1,000 in 4Q22.** In Texas, one of the four production lines is already in operation, while the other three are in the debugging and installation phase.

The goal in 2023 is to achieve cost-effectiveness, improve quality, and increase production before Cybertruck. 2024 will be an important year for the 4680.

Q: Will FSD HW 4 appear first on the Cybertruck, and is there a path for upgrading from HW3 to HW4?

A: The Cybertruck will have FSD HW4. It is unlikely to make significant contributions in 23, but it will in 24.

There may not be a need to upgrade from HW3 to HW4, as HW3 will surpass the safety level of most people, and FSD will continue to improve. The most important thing is to improve the average road safety level, and upgrading HW3 to HW4 is both cost and difficulty prohibitive.

Q: When will Tesla's insurance business become a large enough source of revenue?

A: It may take some time for the volume to be large enough to have specific financial disclosures.

However, as of the end of 2022, annual premiums are approximately US$300 million, and the quarterly growth rate is over 20%, exceeding the growth of the automotive business. Of the states where insurance operations are conducted, 17% of customers use Tesla insurance, and the usage rate is continually rising. Most of the adoption occurs at delivery of new cars because it's the first time owners purchase insurance rather than converting later, so there's inherent stickiness.

There are 2 benefits:

First, Tesla provides insurance at competitive prices, which makes other car insurance companies offer better prices.

Second, good feedback loops adjust car and software design, and every Tesla is equipped with the most advanced safety systems to minimize repair costs (the best repair is no repair). Of course, work on after-sales maintenance services is still progressing. Currently, the issue of how to quickly and effectively repair cars and return them to customers is being addressed.

Q: Is Cybertruck production still scheduled for mid-23?

A: Production is expected to begin this summer, but initial production will be slow and not too much inventory will be put in place. Mass production will begin in 2024. The company is installing all of the production equipment and sending castings from Texas to the final assembly plant. More test vehicles will be produced next month, and production capacity will increase in 2024.

Q: Where will Tesla build the next MegaPack factory on each continent given the nearly unlimited global demand for energy storage?

A: The company will update information in the future and site selection is very cautious.

Q: What is the fastest way to achieve a production rate of 1,000GWH?

A: The question will be answered in an announcement this year and next.

Q: Will the sales target of 1.8 million in 2023 be affected by supply constraints?

A: The company currently has an annual capacity of 2 million vehicles, but the target is set at 1.8 million vehicle sales due to unexpected events during production, such as natural disasters. If there are no supply chain disruptions, 2 million cars are expected to be sold in 2023.

Q: Battery cost trends?

A: The company will reach a scale of 100 GWh in Nevada, currently only 35 GWh. Their goal is to produce more batteries in smaller square feet. Tesla's biggest competitive advantage is manufacturing expertise, which is currently being applied to battery packs. There are other exciting products in development that are not yet announced. ** There may be a difficult recession in 23, so long-term stock value cannot be predicted. In the long run, they believe Tesla will become the most valuable company on earth.

Q: Cost headwinds in 4Q22?

A: The pressure on the weighted average cost is about 20 to 25 million yuan per car.

Q: When will single vehicle COGS return to 36,000, after achieving a peak of 42,000 in mid-2022, when Berlin and Texas Giga factories return to normal, and can single vehicle COGS reduce by 10%?

A: The efficiency of production on the 4680 battery in Berlin and Austin needs to be improved, and Tesla will make major improvements in 2023. Cost inefficiency leads to the fact that company personnel will invest a lot of energy in cost control in the future. In addition, changes in raw materials and inflation will result in changes in costs. It is necessary to pay attention to the development direction of the lithium price. The average lithium cost per vehicle in 2023 will be higher than that in 2022, and it is not believed that COGS will decrease this year.

Tesla will try to overcome the headwinds, continuously improve the supply chain to improve efficiency, and simplify logistics transport to reduce costs. Due to the supply chain, the company has gradually gained the benefits of exponentially increasing, but it takes time to reflect in finance. Aluminium oxide prices fell 20% year-on-year, steel prices fell 30% year-on-year, and the global non-sales raw materials market continued to be affected by the European geopolitical situation. Due to natural disasters such as typhoons that occurred in Korea four months ago, energy surged and labor costs were cut, resulting in high production costs. Therefore, significant price adjustments will eventually come, even if it is uncertain when. As Model 3/Y and other models gradually mature through artificial intelligence, the company collects feedback to reduce costs in the powertrain system and bring profits. In 2023, in terms of powertrain, the company pursues materials that meet performance and can significantly reduce costs. Overall, the company improves costs through design and supply improvements.

If the economic recession is severe, the company will significantly reduce investment costs. It is expected that investment costs will experience monetary tightening, which will bring higher profit margins.

Q: Is the acceptance of the FSD system by car owners improving?

A: The trend of adopting FSD is very obvious, and enthusiasts have significantly increased with each gradual upgrade. The company's performance in software is as outstanding as hardware, and Tesla is one of the most advanced AI companies. HW3 will also be the most effective and influential inference computer in five years, and HW4 and HW5 will lead the trend in the same way. The company is able to manufacture truly useful humanoid robots through its expertise in artificial intelligence, electric motors, electronic batteries, and advanced manufacturing, and can mass-produce them through central functions. DOJO will be put into operation in late 2023. Many outstanding AI talents from around the world have joined Tesla, and as the company gets closer to solving the real world with AI, no company except Tesla has achieved this goal. This is also where Tesla has the potential for exponential increase in market value.

Q: FSD unlocking deferred revenue means higher future revenue. What percentage of the $15,000 price is prepaid revenue rather than deferred revenue?

A: FSD consists of two parts: the FSD system currently in testing; and Enhanced Autopilot, an advanced driving assistance system. As software updates progress, the remaining total packages will be released over time.

In the shareholder letter, in addition to disclosing the amount of deferred revenue released, the company also includes the balance of deferred revenue not released, which will be released as future software updates are released. Q: Nevada's 4680 battery incremental capacity; Tesla plans to produce a large number of batteries, will not all batteries be placed in semi-trailer electric trucks; assuming all these 4680 batteries will replace and be used in the entire product line, whether to allocate 100GWh in various end markets

A: Not all 100GWh will be put into semi-trucks. But there will be a lot of products that will use 4680 batteries.

Q: Repricing has put many competitors in a disadvantageous position. How do you view the competitive landscape and who will be Tesla's strongest competitor in 5 years?

A: Five years is a long time, and the landscape may change in five years.

In the field of autonomous driving, Tesla is the leading first and it's hard to see the second place even with a telescope.

Although the market is shrinking, the demand for Tesla electric vehicles is growing, almost doubling year-on-year, so the company that follows the trend of electric vehicles is a competitor. Chinese car companies are very competitive, and perhaps Chinese companies may become the second Tesla. Tesla China has achieved success in China by attracting China's best talents, and hopes to continue.

Q: Lowering inflationary bills has created huge incentives for commercial vehicles. Are there plans to accelerate the deployment of commercial vehicles beyond Tesla Semi to promote the use of electric vehicles?

A: Yes, details not yet available.

Q: Restrictive factors of new cars

A: Restricted by lithium, unless the battery problem is solved, it will increase complexity inappropriately, so product releases will be optimized based on available batteries. More batteries will produce more products.

Q: Progress of Dojo and Optimus, is the company expected to break the GPU cluster to support Dojo?

A: Early predictions have a large margin of error. The company believes that Dojo will compete with NVIDIA H1 at the end of this year and surpass it in 2024, and energy use is key to video training. The energy required to train a frame of video has been released at AI DAY 2, and there are orders of magnitude improvements related to GPU functionality. Dojo is specifically designed for AI training, like a giant ASIC, guiding one of the largest GPU clusters in the world. Dojo has basic architectural advantages because it is not designed to make GPUs try to do many things.

Dojo is good at efficient training, with a very high demand for communication between module units, and has discovered ways to improve energy efficiency or each given training unit order of magnitude improvement through Ethernet cables. The training structure of products may have nothing to do with cars, and inference efficiency is very important. The company has the most efficient inference computer so far, and FSD computer is equipped in cars, which may make the product a real car. Q: If the 1.8 million vehicle sales are limited by supply, how should Tesla choose between using price to increase its market share and maintaining a relatively high industry profit margin if demand is limited?

A: The 1.8 million vehicles are not limited by battery supply. Battery supply roughly matches current demand. The rest will go into stationary storage - Powerwall and Megapack.

Q: Will Tesla expand its exclusive financing?

A: Tesla uses exclusive financing to fill the gaps in existing third-party products markets, such as leasing and loans. Exclusive financing is just a tool to support vehicle sales and help more customers buy cars. If there is an economic downturn in 2023, cash will be very important, so Tesla is cautious about using cash for loans and other purposes. As Tesla has no debt, it is in a favorable position to deal with economic downturns. Currently, Tesla has over USD 20 billion in cash reserves, and the interest income from this amount is considerable.

Q: How far away is Tesla from selling an electric vehicle for less than USD 30,000 and making a profit?

A: There may be opportunities in the future.

Risk Disclaimers: Disclaimer and General Disclosures of Dolphin Analyst