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Tesla Motors, Inc. (TSLA)

Q3 2012 Earnings Call

November 5, 2012 8:00 AM ET

Executives

Jeff Evanson - Investor Relations

Elon Musk - Chairman, Product Architect and CEO

Deepak Ahuja - Chief Financial Officer

George Blankenship - Vice President, Sales & Ownership Experience

Analysts

Adam Jonas - Morgan Stanley

Patrick Archambault - Goldman Sachs

Amir Rozwadowski - Barclays

Aditya Satghare - Lazard

Aaron Chew - Maxim

Carter Driscoll - Capstone Investments

John Lovallo - Merrill Lynch

Elaine Kwei - Jefferies

Ben Schuman - Pacific Crest

Dan Galves - Deutsche Bank

Andrea James - Dougherty & Company

Michael Lew - Needham

Ben Kallo - Robert W. Baird

Presentation

Operator

Welcome to the Tesla Motors third quarter 2012 financial results Q&A conference call. (Operator Instructions) I would now like to turn the conference over to your host, Jeff Evanson.

Jeff Evanson

Good morning, everyone. Welcome to Tesla Motors' third quarter 2012 financial results question-and-answer conference call. I'm joined today by Elon Musk, Deepak Ahuja, and George Blankenship, key executives of the company to answer your questions today.

We announced our financial results for the third quarter at 3:30 am 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.

Today's call is for your questions, but we would like to keep the call to 45 minutes today, so ask that you'd be succinct in your questions. We will conduct the Q&A session live. So please press *1 now, if you'd like to ask a question.

Now, during the course of this call, we may discuss our business outlook and make forward-looking statements. Such statements are 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 10-Q filing with the SEC.

Such forward-looking statements represent our views as of today, and should not be relied upon after today. We also disclaim any obligation to update these forward-looking statements.

And now, operator, could we please have the first question.

Question-and-Answer Session

Operator

Our first question is from Adam Jonas of Morgan Stanley.

Adam Jonas - Morgan Stanley

First question, how many vehicles are coming clean off the line with no material rework at this point? And I'm just curious, has any model really come pure off the line at all without much rework? Thanks.

Elon Musk

We do get some cars that are required meaningful rework. But generally we're trying to maintain extremely standard of qualities. So if we see some that's even a minor aesthetic issue, we want to correct that. And now that most vehicles require some work to correct minor issues. A lot of issues are not something that mostly would even notice, but we're trying to get as close to perfect as possible.

Nonetheless, we are able to get to a production rate, which is annualized at 10,000 cars a year. And I feel really good about where we are with respect to manufacturing the vehicles.

Adam Jonas - Morgan Stanley

If you think about all the issues that were affecting the early production of the vehicle, what are the key ones that you've solved, which ones have yet to be solved, and is the list of new problems growing, meaning, are there any additional new problems that you're finding or all the issues that you know in terms of either quality or supply known and that's a shrinking list now?

Elon Musk

Our biggest issue has been getting all of the parts of the vehicle on time for suppliers and at a very high quality. I think we're through those issues. There are no supply issues that I'm aware of right now, that prevent us from achieving at an annualized production rate of 20,000 vehicles a year, basically within next four, five weeks.

So it's looking good. That's not to say something couldn't crop up, but it's looking quite good. And we're seeing a rapid decline in the number of correct issues that needs to be corrected as vehicles come up in the line. So it's getting better very quickly. So right now, I feel very optimistic about with the way things are. And I'm not aware of any issues in front of us getting to the 20,000 units to our annualized production volume.

Adam Jonas - Morgan Stanley

Deepak, just a couple of very quick ones for you. On the reservation outlook, I know you're targeting a new high-water mark in terms of unit reservations over 13,200 by yearend. But when we look at the reservation balance on the balance sheet, should we assume that that's going to be lower, and if it is lower, can you give any kind of lower bound of that, meaning should it be going to still be over $100 million end of year?

Deepak Ahuja

Yes, I think it definitely will be over $100 million. And you're right, to the extent signature reservations come off. We have collected a much higher deposit on them compared to general production reservations. So there would be some adjustment in our reservations balance to account for that.

Adam Jonas - Morgan Stanley

And then on R&D, you gave the flat 4Q guidance around $60 million. That is a quite a bit higher, I think many people on the call would have expected. Are you able to explain kind of why is it running higher and is $60 million a quarter a run rate, we should use going in the next year?

Elon Musk

Yes, I think we should be, as the letter has indicated this is still a 19% reduction from the prior quarter, and that's primarily as we have pulled out all the manufacturing related expenses. Most of our R&D count now is people at this point, and we are focused on future product development, bunch of actions still continue to improve our products. So I think that's fairly reasonable rate going forward.

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