Since Tesla announced its offer to buy SolarCity, which is still contingent on a vote by the shareholders, Wall Street has turned on the company with analysts issuing notes claiming that there’s little to no value in the deal. Barclays analyst Brian Johnson issued a note saying that he sees “little in the way of synergies and much in the way of cash burn.”
It’s not like Wall Street analysts have the best foresight, Johnson himself is ranked #2,713 out of 3,984 analysts on TipRank with an average return of -0.7%, but they represent the point of view of the financial sector.
As for the point of view from the actual customer offering/product side, a merger between Tesla and SolarCity will certainly open the door for some interesting product integrations and new distribution opportunities.
This morning, Elon Musk held a conference call and explained how the merging of the two companies will create an interesting offering on the product side. We’ve embedded the whole call below which is a “must listen” for anyone trying to understand the background and the thinking going into the Tesla – Solar City Merger, but we also highlighted some amazing quotes from Elon:
Tesla’s CEO said that the company needs to integrate the required hardware for a solar installation into its home battery pack solutions in order to get the cost down by avoiding the duplication of hardware. The company would need to partner with solar installers to make that happen, but since Musk is also a shareholder of SolarCity, the US’ largest solar installer, Tesla can’t be seen as giving the company a special treatment.
“If we give a special deal to SolarCity and SolarCity is not part of Tesla… then why are we doing that?”
By acquiring the company, Tesla would become vertically integrated in terms of solar + storage solutions and it wouldn’t need a deal with a solar installer.
“It makes the execution a lot easier, and cleaner, and more effective.”
He added that Tesla will become the perfect example of an energy company in a sustainable energy future:
“A sustainable energy future will be primarily solar (on the energy production side) and virtually entirely electric vehicles (on the energy consumption side).”
Then it got even more interesting when Musk said that if he could talk more about the product side of SolarCity, it would shed more light on why it makes perfect sense for Tesla to acquire the company. He then talked a little about SolarCity becoming a large producer of solar panels through its Silveo purchase and its new 350W modules.
“So far SolarCity has not been significantly differentiated on the product side with the solar panels and cells, but they will be in the very near future.”
It sounds like Musk knows something we don’t about SolarCity’s new solar panels. He said that there are plans that have not been made public yet and therefore he can’t talk about it, but he is “very optimistic” about those plans.
He added that he visited SolarCity’s 100 MW pilot facility in Fremont, California, where the company already started production of the new solar panels, which will soon move to its 1 GW factory in Buffalo, New York.
Elon made it clear that SolarCity will be well-positioned to take its share of the solar market:
Only 1% of US homes have solar – it is a massive addressable market with 40-60M households could do solar if they wanted to – if the economics were right and if they liked the aesthetic and if it’s easy to do – then they would do it. The future market there is really gigantic.
He came back to the aesthetic of the panels a few times during the call. He said that the new panels will enhance the aesthetic of the roof on which it is installed and therefore add to the value of a house instead of decreasing its value – again based on aesthetics.
Musk also described how Tesla will be able to sell the solar arrays through its network of retail locations around the US. Customers will have a one-stop shop to buy an electric vehicle and a solar installation to power the vehicle and their home. He expects that it will significantly reduce SolarCity’s cost to acquire new customers, which currently adds a significant $0.55/W on new installations.
It should also lower the cost of the installation itself since Tesla will be able to make only one home visit for both the energy storage solution and the solar array.
During the call, he also talked about its new passion for manufacturing. Last month during Tesla’s 2016 Shareholders Meeting, Elon said that he recently came to the realization that the potential for improvement is at least a factor of 10 greater in manufacturing vehicles than in the actual vehicle engineering. He talked about focusing his efforts on manufacturing:
“We realized that the true problem, the true difficulty, and where the greatest potential is – is building the machine that makes the machine. In other words, it’s building the factory. I’m really thinking of the factory like a product.”
On today’s call, he added on the subject at 41 minutes – when talking about manufacturing, Elon is channeling Muhammad Ali:
“At Tesla we put a lot of effort into becoming the World’s best manufacturer…and I really mean that… I’m highly confident that we will be… the world’s best manufacturer. Just as we said we were going to build the world’s best car. We did that.
You know at SpaceX we said that we’d build the world’s best rocket. We did that. We are going to be the world’s best manufacturer…and not by a small margin but by a margin that people didn’t even think is possible.”
Another great quote about manufacturing, this time about battery cells at the Gigafactory:
“The exit rate of cells from Gigafactory will be faster than bullets from a machine gun.”
That’s it for our highlights of the call. You can listen to it in full here:
Full transcript (thanks reader Frank!) below:
Todd Maron, Tesla General Counsel: I just wanted to briefly touch on some of the process points and why yesterday;s announcement may have looked somewhat different to people who normally see these kind of announcements. It’s actually somewhat of an easy explanation but it is somewhat of a unique situation. Usually I know that everyone is used to seeing an announcement with there is actually a definitive agreement that’s reached, and not just simply an offer, and obviously in our situation we are only announcing an offer. And as a result you didn’t receive the same kind of information you would receive when an agreement is reached, such as the agreement itself and detailed financial information about the combined company.
The reason for is Elon is a five percent stock holder in SolarCity and he is required by the securities laws to keep the market informed through a Schedule 13D filing about his plans with respect to those holdings. Because of Tesla’s decision to make an offer to SolarCity and Elon’s support for that decision it was appropriate to amend his Schedule 1-D to update the market even though no definitive agreement had yet been reached. It’s obviously our hope to engage in a due diligence process with SolarCity and ultimately reach that agreement, and all that information that you would customarily see at that time, including the agreement itself and detailed financial information about the combined companies would be provided then.
But the result of this is that this is a more transparent process because you’re essentially seeing behind the curtains more than you would ordinarily see in a transaction because you’re actually getting additional information up front at the offer stage and getting an advanced look at the strategic business rationale for the deal. And with that, I’ll actually pass it over to Elon so that he can speak more about the strategic rationale for the deal and why we do think that combining the two companies makes sense here.
Elon Musk, Tesla CEO: I touched on most of this yesterday and I think what most of this call is mostly going to be about is getting into some of the detailed questions that people have. In order to solve the sustainable energy question we sustainable energy production, which is going to come primarily in the form of solar. Combine that with stationary storage and electric vehicles and you have a complete solution to a sustainable energy future. Those are the three parts that are needed and those are the three things that I think Tesla should be providing.
It just because increasingly obvious as we were developing the Powerwall and new versions of the Powerwall and we integrate more of the inverter electronics and intelligence in the Powerwall, you really need to take the solar panel and the solar system into account when doing that. Otherwise you duplicate a lot of hardware, it doesn’t work together as well, it’s more expensive, the installation cost is essentially higher — you’ve got the solar Powerwall, the solar panels, if you’ve got an electric car you’re going to install the wall connector home charging system. That’s potentially three visits, at least two visits. In terms of the sales process itself, when we’re selling somebody the Powerwalls very often they’re curious about solar and want to do the same thing. So then not being able to sell them solar directly at Tesla through our stores is pretty inefficient.
As we look to, say, Model 3 — a $35,000 car — that same person at the same moment we can sell them roughly an equivalent amount of solar panels and Powerwalls, effectively almost doubling the sale at that time and then putting it all in at the same time. The word “synergy” is banned like it’s some sort of dirty word, but I think these synergies are really more common sense. Obviously it’s more efficient to do this as an integrated system at the sale and at the installation and in terms of just general maintenance and managing the customer relationship.
I think that makes it a pretty obvious thing. It’s quite difficult to create an integrated project if you’re forced to be at arms length and two different companies. If we give a special deal to SolarCity and SolarCity is not part of Tesla, why are we doing that? We can do that if SolarCity is part of Tesla, we can’t do it if SolarCity is a separate company. This just makes the execution, I think, a lot easier and cleaner and more effective. I think it’s really kind of a no-brainer, if we didn’t do this it would make Tesla’s execution harder and worse.
The tide of history very strongly purports it will be an energy future of primarily solar and virtually entirely electric vehicles. There may be things that temporarily interrupt that tide of history, but in the long term it will overwhelm everything. And our goal is to accelerate the advent of that future as fast as possible and this helps us accelerate it. That’s the reason, and, uh, yeah.
There’s some questions about, like, if this will increase our debt position or balance sheet. It really doesn’t, we’ll take a close look at SolarCity and we’re doing that as the recourse steps, though that’s what matters. The cash flow that SolarCity will generate covers all of the recourse debt, they are headed to a cashflow positive situation in the next three to six months on the outside and that’s where the company’s been steering itself. Reducing their growth rate by some degree to achieve that cashflow positive position, but they’re very quickly on their way to getting there in short order. We expect it to be a net cash generator, not a user of cash, particularly when taking into account the dramatic reduction in the cost of solar systems sold through our stores. The biggest factor in SolarCity’s increasing costs per watt in Q1 was their sales cost. That’ll go in quite the other direction with sales through Tesla. I’d love to talk more about what’s going to happen on the product side, obviously that would shed a lot of light on this deal and why it makes total sense and is a no-brainer, but I can’t talk about materials that aren’t public plans, except that I’m very optimistic about those plans. To date, SolarCity has not been significantly differentiated on the product side, the solar panels themselves; they certainly will be in the very near future. Looking carefully at what SolarCity’s been saying in its earnings calls and announcements, that should also pretty clear — SolarCity’s saying that there will be significant part differentiation. There’s the Silevo acquisition, which I think it the best technology out there for high efficiency, low-cost solar panels. And at the same time, very significantly improving the aesthetics of the solar panels. I think there’s quite a radical difference between having solar panels on your roof that actually make your house look better versus ones that do not, I think it’s going to be a night-and-day difference. We can’t go into the details of those because making future product announcements that are really exciting obviously effects future product sales and a portion of that is not yet public information, but I do believe it fits together very well with Tesla’s plans on the Powerwall and Powerpack side. We can turn it over to questions at this point.
Brian Johnson, Barclays: Thank you, I have about three questions — one for Elon, but why don’t we start with the general counsel and Jason. For Todd you talk in the letter to the directors not voting. Can you give us a sense of because this will come out in the proxy eventually, of the discussions between the two companies. Is there actually a committee of the directors, how independent do you consider the remaining directors, do they have any personal ownership of SolarCity, and the other things that are likely related to the board issues?
Todd Maron, Tesla General Counsel: This tracks a little bit back to the stage of the process that we’re in. When a deal is announced, if that happens, all this stuff will come out in terms of exactly what the process was at every point. The key points now are that Elon and Antonio have recused themselves from the board process of voting on the transaction and they’ve also committed that if there’s a deal that the disinterested shareholders would vote on the deal, if the majority of those disinterested share determine the outcome of the vote. Beyond that, it’s really too early in the process to get into all the different details, but rest assured that all of that will come out once there’s actually a definitive agreement that’s reached. At this point it’s probably more appropriate to focus on the business rationale for why this deal makes sense.
Brian Johnson, Barclays: When you say recused from voting, does that also mean recused from discussion and not present in the room when this is brought up?
Todd Maron, Tesla General Counsel: No, it was recused from voting.
Brian Johnson, Barclays: For Jason, given your talks earlier in the year about focusing on cash and even stipulating perhaps that SolarCity could reach some sort of cash breakeven by fourth quarter, how did this change your view of the pro forma companies in terms of their cash usage and their need to potentially go back to the capital market, to their debtor equity, to finance the ongoing business.
Jason Wheeler, Tesla CFO: Yeah sure, on the Tesla side, I stick with the statements that we made on previous earnings calls. On the SolarCity side, as Todd as laid out, we’re just at the beginning of the process now, and the only information I’ve had access to is what’s publicly available. So I don’t have anything to say about the pro forma combined entity at this point and we’ll start to look at that as we get into the full due diligence now.
Brian Johnson, Barclays: I guess a due diligence question: this was probably scoped out before you did the deal. When you survey Tesla owners, what percent have solar already? What percent are in states where solar would make sense? What are some of the basic merger synergies in terms of customer overlap and customer potential that you guys looked at?
Elon Musk: I think the way to think about this is to not look in the rearview mirror but to look through the windshield. Only about one percent of U.S. homes have solar, so you have a massive addressable market that’s unserved. There’s at least 40-60 million households where they could do solar if they wanted to if the economics were right and they like the aesthetics and it was easy to do, then they would do it. The future market there is really gigantic.
On the cash front we don’t expect SolarCity to have a material impact on future cash needs. I don’t think it’s going to make much of a difference really and they’ll be at positive cash flow by the end of year.
Brian Johnson, Barclays: And just final, you talked a bit about this yesterday, how do you make that your personal time between this and of course the rocket business, given the M&A synergies that you’re trying to get, given the sales and service overlap, that’s kind of a whole separate line of processes and grunt work on the ground from launching a new model car. How do you actually get both the integration of the sales and service system for solar and cars and batteries done at the same time that you’ve got, by your own admission, and aggressive launch schedule for the Model 3?
Elon Musk: My intuition is that’s completely wrong. From my standpoint this makes Tesla’s future execution easier, not harder. It’s increasingly unwieldy to work with SolarCity at an arm’s length basis, we really need to have an integrated product. The Powerwall and Powerpack need to be designed together with the solar system so it’s a one-piece thing. We can’t do that if we’re two separate companies, we have treat SolarCity like they’re any other company, which is extremely unwieldy. From my standpoint this makes execution extremely easier, not harder.
I think SolarCity’s got a great future independent of Tesla, and obviously Tesla does, but being able to integrate things at the product level, at the consumer experience level, at the utility level, the commercial level, it makes it easier, not harder. That’s why we’re doing this. Why should companies exist at all? What’s the point of having companies? The point is that a given company is going to create a more compelling good or service for the customer. Should the companies be two separate containers or one container, and if they’re one container we can make a more compelling product and work together here. That’s the reason for it. That speaks to the fundamental economic goodness of the transaction, and it will be harder if we remain two different companies.
Charlie Anderson, Dougherty: Good morning, thanks for taking my questions. I wondered if shareholders of Tesla will have a synergies number in mind when they vote and if you guys have any early look at what synergies could be and are you expecting much in the way of cost? Just thinking about the incremental cost of combining the products, what will be? It sounds like some of the work has already been done to combine the products, but just any thoughts on that would be helpful.
Elon Musk: We have estimates, because obviously this is still the early stages, they’re estimates kind of on what stands to reason. Looking ahead, particularly to next year, selling Model 3, something on the order of a $35,000 car, if we’re selling Powerwalls and solar systems of comparable value and doing so in the same sales footprint with the same person, of course this is an approximation, but our cost of sales should drop in half, as would SolarCity’s correspondingly. Maybe it’s not entirely half, maybe it’s thirty to forty percent. It’s a very substantial drop on SolarCity’s side and a mature drop on Tesla’s side. You’re basically selling almost twice as much in a single transaction as you otherwise would.
On the installation set-up side, it’s one crew and one visit instead of two to three visits. Ongoing maintenance is one ongoing point of contact and not two or three points of contact. The cost of the system itself is lower because we’re not duplicating at the hardware level. I think that all makes a lot of sense. The final cost for both companies will go down materially. When talking about a 20 percent reduction, 30 percent reduction, 30 percent reduction, it’s pretty significant. And for sure better than if the companies were separate.
Charlie Anderson, Dougherty: I wondered why now? Versus two years ago, versus two years from now?
Elon Musk: The reason now is because we’re really ramping up Powerwall and Powerpacks. Developing version two and plans for version three, version four, and so forth. SolarCity is also preparing to come out with the solar panels as consequence of the Silevo transaction from a few years ago that significantly improve the efficiency and aesthetics of the roof. The aesthetics matter a lot, as at Tesla we’re super sensitive to aesthetics. I think SolarCity’s going to get there on their own, but that journey will be accelerated as part of Tesla as well. It just made sense — if you had a solar system that made your house look better, lowered your cost of electricity, and gave you security against a power outage with the Powerpack and allowed you to go completely off-grid, then that’s kind of a no-brainer. Why wouldn’t you do that?
Spencer Shaw, Albert Freed: Hi, good morning. Congratulations on the offer. A couple of questions I think that people are trying to digest. I think, strategically, that Elon, you made your point clear. I think the valuation is what the market is having issues with. There are some questions about SolarCity’s balance sheet, and you mention about the debt, so how do you put that into context with the exchange ratio that you’ve offered, kind of not jeopardizing the future of Tesla while you make this offer?
Elon Musk: I think Tesla’s getting a pretty good… at the current share price — Tesla doesn’t just decide what a company’s share price in the stock market should be, probably the market does. We’re just keying off of what the public market price, which is decided by people other than ourselves. There’s quite a reasonable high nor low acquisition premium that’s been put forward, subject to due diligence. I think it’s very reasonable, there’s nothing out of what about the proposal. It’s extremely normal to have an acquisition premium of that size. It’s certainly quite a bit lower than, for example, say, LinkedIn, which had a huge premium. Here we’re talking about a low twenties to maybe 30 percent premium. It’s in line with the average acquisition premium for any given public market company, it’s extremely normal.
I think when we’re further down the road, not even far down the road — next year — but particularly as you go further into the future, these items are going to seem like very small numbers. As a combined automotive and power storage and power generation company, the potential is there for Tesla to be a trillion dollar company. If we play a major role in transitioning the world to a new form of energy generation and storage and transport, that’s kind of what happens. One isn’t going to be worried about whether it’s a few hundred million dollars one way or the other here down the road, it’s not really going to make a big difference.
Spencer Shaw, Albert Freed: I appreciate your candor about the trillion dollar market cap, I think leads to the future value of SolarCity. In the near-term, because you’re not voting your shares, both on Tesla and SolarCity from my understanding.
Elon Musk: That’s right.
Spencer Shaw, Albert Freed: How do you expect the near-term kind of shareholders or near-term focus shareholders to vote in favor of this? I’m assuming it’s a simple majority, and so it’s kind of a chicken-and-the-egg thing: your expectation of the future is probably correct strategically, but near-term people are not having not enough time to digest this and kind of looking more near-term, and that’s what the concern is — getting to the finish line. And how do you see this getting to the finish line where you see shareholders on the SolarCity being receptive to the merger agreement and then further along Tesla shareholders being receptive to voting in favor of this? Ultimately it’s these two or three ducks — valuation of the exchange ratio and understanding the future opportunity — that will get this to the shareholder vote.
Elon Musk: There’s some balance on the exchange ratio, if it exceeds the balance of reasonableness for any party it wouldn’t happen. The market cap of Solar City is decided by the market, that’s what investors think it is. You don’t get to acquire companies for zero premium, that’s not how it works. Some reasonable premium obviously is appropriate in a situation like this, as it always is. And we’re right where premiums normally are and lower than some recent prominent premiums paid, like the LinkedIn, which evidently was on the order of of 50 percent. I think it’s a reasonable market cap with a reasonable premium, we can maybe quibble around the edge a little bit, but I don’t think there’s anything out of whack there.
This will definitely be up to you guys who own shares. I’ll recuse myself from the shareholder vote, it’ll have to be a majority of non-me shareholders. But like I said, I’m doing this because I think it makes things better in the future, not worse, for everyone. I’d really recommend voting in favor of this because I think anybody that doesn’t vote in favor is going to be voting against their best interests. We’ll certainly abide by the shareholder vote, if there’s any unhappiness we won’t move forward. But I really want to emphasize that I have zero doubt about this — zero — arguably we should have done it sooner. But I think doing it now gives us enough time to create a compelling integrate product and bring that to significant scale next year.
Spencer Shaw, Albert Freed: When you have no doubt, so you believe the special committee independent board when they do their due diligence and reverse due diligence on both companies that you’ll be able to reach an agreement. That seems very likely.
Elon Musk: At the board level, yeah. The board opinion is unanimous from both companies. Unless there is something discovered that I had no idea about that nobody has any idea about, which is extremely unlikely, that the board would vote in favor of the transaction in the price range that was mentioned, then it would be up to the shareholder vote to say yes or no. I think that’s about as fair as one could make it.
Spencer Shaw, Albert Freed: Thank you very much, congratulations again.
Elon Musk: When you hear things like there’s some better way to do this, like morally better way to this, or better way to do this from an execution standpoint, let me know. We’ve tried to do this in a way that’s as fair as possible and going beyond what’s legally required and to make this not just legally correct but morally correct.
Colin Rusch, Oppenheimer: At what point are we going to get financial details here? Clearly there’s been an awful lot of cross-pollination with the boards. The former CFO of SolarCity is on the board of Tesla, JB is on the board of SolarCity, there’s been a lot of sharing. To have a price here without some sort of scope of return of capital I think would be incredibly important for us, so when are we going to get that information? You’re begging off the detailing on synergies, getting specific on return of capital for Tesla shareholders will be essential for getting this done.
Elon Musk: Yeah, I agree. We’re going to have to do this in a but of an unwieldily way because I’m the largest shareholder of both companies. If that wasn’t the case we could do a lot of this and present you with the full and final details of the proposed merger. Since I’m the largest shareholder of both companies we have to tell you at the beginning of the process, not the end. We’ll certainly have all that done for you, but the reason it’s not just in a neat package is because in our case we have to tell you at the start of the process before we have all the answers rather than at the end of the process. We’ll definitely get all of that information and I’m confident it will be extremely compelling.
Colin Rusch, Oppenheimer: The second question is around Silevo. There’s actually a lot going on in terms of manufacturing for solar at this point with Asian manufacturers reducing cost well in excess of what expectations have been, and certainly there’s folks getting around the import duties. Even with the potential savings on installation costs with extra efficiencies at Silevo, it looks like there isn’t going to be that much of a cost advantage just from a raw cost perspective when you look at the price point for solar panels coming into the U.S. that SolarCity would buy. Could you talk a little bit about, I know you’re begging off some of the product details here, but what are you expecting to bring to the engineering process to improve that cost trajectory? By the time you get that Silevo factory up and running there’s going to be, at least, a 15 percent cost disadvantage for their target cost at this point and I think there’s something that needs to get done there to make that a compelling offering.
Elon Musk: Sure. At Tesla we’re putting a lot of effort into becoming the world’s best manufacturer, and I really mean that. I’m highly confident we will be the world’s best manufacturer. I said we would build the world’s best car, we did that. At SpaceX I said we’d build the world’s best rocket, we did that. We’re going to be the world’s best manufacturer — not by a small margin, but my a margin that people don’t even think is possible,
I believe in taking a physics-based approach to analysis, and of the situation is that dramatic improvements are possible on the automotive side and on the Powerpack side. A core advantage of the Silevo technology is that it has significantly higher efficiencies that the very low cost Chinese panels. So on the same surface area of roof you can get as much as a third more power. Aesthetically speaking, the Silevo panels look better, they look a lot better. If it’s done right, we can make your roof look better with solar panels than without. This is a night-and-day difference. If you’ve got a $400,000 house and make the roof look ugly, than arguably you’ve made that worth 5 percent less, or some non-zero percent less valuable. On the other hand, if you’ve make the roof look beautiful, then you’ve made the house more valuable, and maybe that’s plus 5 percent or some non-zero plus percent value in the house. If it is something on the order of 5 percent, then the value delta is close to $40,000. Maybe it’s only 2 or 3 percent and it’s like $20,000. You have quite a big value delta.
So being able to have higher power that works great and at costs that are at least as good if not better than what’s coming from anywhere else in the world, that’s obviously a winning outcome, that’s the outcome that we’ll pursue, and I think we’ll get there.
Colin Rusch, Oppenheimer: I’ll follow up on that, I think my question was more around the process technology at Silevo than the ultimate…
Elon Musk: Do you mean the fundamentals?
Colin Rusch, Oppenheimer: Yeah, the fundamentals of the process technology and where you’re going to get the cost out. There are a variety of detailed questions I could come back to you with. My follow-up question on that: fundamentally, SolarCity is a specialty construction and specialty finance entity at its heart. If you look at Tesla being an evaluated manufacturer of a variety of products and a technology company moving into what we see as a fundamentally different business, where are you see the synergies coming back to Tesla — other than the sales side — is there something to do on the specialty finance expertise that you would be bringing in house? And the actual boots-on-the ground, you know, the footprint of SolarCity is incredibly important to actually closing sales and delivering things versus the footprint of Tesla’s customer basis which is very different than the concentrated footprint at SolarCity. How are you seeing the value come back to Tesla other just in the cost of customer acquisition?
Elon Musk: The biggest asset that we would be requiring are the installers, the installation team of SolarCity. And all the people trained in doing the permitting and the paperwork and all the complexities that exist in municipalities across the country. And understanding how to deal with 37 different roof types and having efficient logistics infrastructure for doing the installation. There’s some strengths in the SolarCity sales side that we can take advantage of, but I really do want to emphasize that I think the Silevo technology is going to make quite a big difference. I don’t see any kind of fundamental cost issue that prevents it from being at or lower cost per watt than any other panel in the world.
Colin Rusch, Oppenheimer:Okay, thanks a lot.
Elon Musk: I’ve spent time in the SolarCity/Silevo factory in the Bay Area so I’m familiar with this. My observation is that there’s dramatic improvements, there’s not some physical thing that’s preventing us from being super competitive. It’s actually a relatively straightforward manufacturing process.
Colin Rusch, Oppenheimer: Okay, thanks a lot.
Jeff Evanson, Tesla VP Global Investor Relations: Elon and Todd, I’ve had a number of people emailing in questions about process here, possible timeline. Todd or Elon, if you want to speak to kind of a recap of who needs to vote, who’s recused, and how and when diligence disclosure for the shareholder votes might happen.
Todd Maron, Tesla General Counsel: Sure, I can take that if you want. So, on the Tesla side, the board has approved going forward with the offer, which is why we made the announcement that an offer was made. Elon and Antonio, being directors on both boards, recused themselves from the vote on that. We’re now in the stage where we’ve delivered the offer to SolarCity, SolarCity will set up their board process on their end and decide how to do this so it’s done, as Elon said, not only legally but morally correctly, I’m sure. And then we’ll move into a diligence phase very quickly. Hopefully diligence can take place promptly, so in the next two or three weeks, and we can get to a place where everything makes sense and there’s a signed merger agreement.
At that point, everybody would receive the merger agreement as well as the typical disclosures that would be provided at the time — combined financials, proxy statements, and everything — and we’d move to a shareholder vote. We’re now getting a little further out and it’s harder to predict with certainty, but the hope would be that there would be a shareholder vote on each side in the next few months.
Joseph Spak, RBC Capital Markets: I wanted to get your sense on how much of a play you think the SolarCity bet is on lower storage costs. We’ve seen some gross changes to metering laws and if that sort of continues or if there’s more of that, how long does the business model work? Do you need to see the falling storage costs for it to work and is there confidence in that reason to go forward with the deal.
Elon Musk: Yeah, the storage costs are going to drop pretty dramatically with each passing year. With the exclusion of certain situations like Nevada and maybe Arizona, which we’re working to mitigate, it’ll be ahead of the net metering situation. For instance, in New York a reasonable deal has been arranged and basically this gets ahead of the net metering situation in a 2- to 3-year timeframe. It’s definitely important to us long-term, and although some utilities will exaggerate the impact of solar on the grid, ultimately the impact of solar on the grid beyond a certain localized percentage does have an impact and you do need to bugger the power.
It’s obviously very important for the long term. It’s going to work together well. This is what the world needs, this is the ultimate solution is what we’ve got here. Solar power, stationary storage, electriuc cars. This is Earth’s solution, and we’re going to try to make that happen as fast as possible, and the fundamental good of SolarCity and Tesla will be measured by the degree to which we accelerate that transition. So we’re going to try to make that happen as fast as possible and I think we’ll have an equal impact on that timeframe.
Joseph Spak, RBC Capital Markets: Maybe just two real quick ones. If the deal is consummated, have you given any thought or plan to provide segmented bounty or cashflow to provide a bit more transparency on each line?
Elon Musk: Yeah.
Joseph Spak, RBC Capital Markets: You will do that?
Elon Musk: I do think it’s valuable to have transparency. We will want to share that transparency as much as we can. For some cases it’s going to be where exactly should we cross, it wouldn’t be great if it’s a black box that people can’t figure out and somehow have to parse out what pieces are what. We don’t want to have an information discount to the stock because people are uncertain. So I think that having clearer information gives people a better understanding of the value of the company and its various pieces. It will inevitably lead some people to reach conclusions that maybe we shouldn’t breach or that they’re not sure, but I do believe in transparency.
Joseph Spak, RBC Capital Markets: And then from a technical standpoint, you talk about some greater seamlessness between the entities. Would you also consider allowing vehicle-to-grid support?
Elon Musk: We’ve debated this from the early days of the Roadster. The early proto-Roadsters that we had would do vehicle-to-grid, but you do get a lot of complications through that if you backflow power through the car into the wall. When is the car allowed to do that? When is it not? How much do you allow the car battery to be drawn down? People would be pretty upset if the lights are on in the house but they can’t drive their car because if it leaves all the power in the house shuts down. So I think the right solution is to decouple it: vehicle, stationary battery, and solar.
It’s something you need to supplement at the grid level by have utility-scale solar battery installations. You don’t always have enough surface area on a house, and certainly for an apartment building you don’t have enough surface area, so you have to ground-mount the utility-scale solar battery system and feed that to the grid. If anybody that’s seen my Powerwall presentation, it’s remarkable how little land you need to power the entire United States. It’s crazy. Like a little corner of Texas or Utah, that’s all the United States’ power. And then, there was like one pixel inside that box, that’s the surface area of the battery packs need to support the entire United States. So we’re going to try to build that as fast as we can, not just for the U.S., but throughout the world.
Joseph Spak, RBC Capital Markets: Thanks.
Elon Musk: I really want to encourage people to think about the long-term where this is all headed. If you think about it long-term, there’s really no question about the convergence of Tesla and SolarCity. It’s really just a question of what timing is appropriate for that convergence. It’s basically that SolarCity’s product roadmap and Tesla’s product roadmap, which obviously contain very specific non-public information I wish I could tell you about but I can’t, but the timing, if anything, maybe we should have done this sooner. But I certainly don’t think we’re doing it too early.
And what’s the long-term picture? The long-term picture is a world of sustainable power generation with stationary storage to buffer that power and then electric cars. Tesla’s going to be the leader in all three. If you believe that that’s the future we’re heading towards, which everything points to that being true — we’re going to look back on gasoline cars like we look back at steam engines. It was a phase, it was bit weird. We’re going to look back on fossil fuel power generation the same way: it was a weird phase. We want to get out of that weird phase as soon as we can, and this is all by us accelerating and getting out of this idiosyncratic moment in history where we’re digging up Cambrian-level fossils and burning them. You’ll be telling your grandchildren, “Yeah, you won’t believe what we used to do. We used to dig up the liquidized remains of dinosaurs and old plants and put the in cars and burn them to move, and did the same thing with power plants.” and they’ll be like, “That sounds craaazy.” That’s what it’s going to be in the future, obviously. So, yeah, we’re trying to have the non-weird future get here as fast as possible.
Ben Kallo, Robert Baird: Elon, I understand working together can be cumbersome via separate entities, but could you just talk us through what the difference is of actually owning SolarCity versus maybe doing some kind of JV or some other kind of entity like that to help you guys work through some of the issues.
Elon Musk: The problem is that we don’t have a good basis for doing some special deal with SolarCity because there’s effectively a conflict of interest. Ironically, the conflict of interest goes away for one company but it doesn’t go away for two separate companies. So there’s not really a good rationale for operating a special deal and operating a special deal and only working with one company that I also happen to own. I don’t think we have a good moral or legal basis for behaving in a special way to SolarCity unless we’re essentially one company.
Ben Kallo, Robert Baird: Got it. One more, if I can. Could you rank some of the things that you talk about in the order you look at far as revenue synergies from cross-selling, the technical synergies of being able to work with both the manufacture of the panel side and well as the battery side, and then maybe the third bucket being cost synergies. And maybe if I forgot any out there, maybe list those out there as well in kind of the order that you’re thinking of them.
Elon Musk: I think I’ll have a more definitive answer for you once this process wraps up. What I’m saying here is anecdotal, but it’s kind of the way that I think about it from a gut standpoint. First and foremost: what allows us to offer the most compelling product to consumers and businesses? And it seems the integrated part, that all of this works together, that’s better. You don’t want to have to have a heterogenous systems integration problem. That’s basically where the interfaces break down and then people start pointing fingers and it’s “This didn’t work”, “No, your thing didn’t work.” If there’s just one integrated system then there’s no finger pointing and you can iron out all the bugs and it just works. And you’re not wonder whether you should blame the solar company or the battery company or who knows — it’s just sort of a pain in the but if you’re trying to figure that out if you’re the end customer. I think we can guide the integrated part to be better. That’s our standpoint more than anything else.
In addition there’s obvious cost savings to be had if in the same store we can sell twice as much dollar value. It’s the same store, now selling twice as much stuff. What if the installation crew is now able to knock out three things in a single visit rather than scheduling two or three separate visits, that’s also way better. One can argue “How much better is it?” — it’s definitely some percentage better that’s material. Which is kind of threshold for making a decision, it’s obviously going to be a lot better. If you just cut the business down from two or three to one, you’ve probably cut your transport, labor, and logistics costs maybe in half, something like that. And if you have a seamless integrated product you can have less servicing costs and things are going to break down less. It’s just the thing you want to buy if you’re a customer — why would you want to buy anything else?
Ryan Brinkman, J.P. Morgan: Have you had conversations about this offer already with the largest disinterested shareholders of Tesla and what’s your sense in terms of do the see the same value in combining the two businesses as you do and what’s your sense in how they vote on this?
Elon Musk: We wanted to make sure that everybody heard about it at the same time. We did not discuss it with anyone because we wanted investors small and large to hear about it at the same time. Over the years, has this idea been bandied about with some of our largest shareholders and institutional shareholders? Yeah, there have been discussions. Some of them see it as a natural thing to do.
I think it’s interesting to look at the feedback that I’ve received since we made the announcement yesterday. Anyone who’s product focused sent me sort of a congratulatory note, and, like, “Why didn’t you do it sooner?” sort of message. People with more of a finance focus were a lot more worried about it. In the long run, the value of a company is defined by its products and services. That’s real important to bear in mind. That’s why companies exist, they shouldn’t exist otherwise. The value of the company will follow the value of the product; a company that starts make lousy products is pretty soon going to have a lousy valuation, a company that makes great products is pretty soon going to have a great valuation, because that’s how the system is set up and how it should be set up.
Pat Archambault, Goldman Sachs: Thanks a lot for taking my question. I think a lot has been laid out about the strategic vision for this longer-term, but I wanted to piggy-back on one of the earlier questions and just get a sense of the possible financial sense it makes in the shorter term. And correct me if I’m wrong — I don’t cover SolarCity — but my understanding is the storage plus solar piece of that business is actually quite small. You have places like the Rocky Mountain Institute put out fairly detailed studies on combining solar plus storage that suggest the levelized cost of energy won’t be lower than the current available price for maybe 5 to 10 years. But you guys sound very confident that this makes sense sooner, so I just wanted to get your view on that.
Elon Musk: I think the important thing to bear in mind is that it’s a big world out there and there are places where the cost of energy is much higher than other places. For example, in Hawaii the energy costs are very high because they have to ship in all of the fuel for their power plants. So it’s very expensive, so the economics of solar plus battery make overwhelming sense for places like Hawaii, a lot of actually island nations out there. Any place that has expensive energy costs. It’s going to make sense for many parts of Europe and many parts of the United States. Over time it’s going to make sense for everywhere, everywhere is going to solar battery. There will be some wind, of course, some geothermal, hydro, and some long-tail before the final coal plant stops operating and the final natural gas plant stops operating. It’ll look like an S-curve, as is typical for new technology adoption. In the beginning of the S-curve people tend to underpredict what’s going to happen, and then it goes through an exponential growth phase, then an approximately linear growth phase. Usually people overpredict what’s going to happen in the steep linear portion of the growth phase, and then it goes back into a logarithmic to complete the S-shape. It’s what happened with the internet, cell phones; the same thing will happen here.
Pat Archambault, Goldman Sachs: Within the United States do you think that five years is a reasonable timeframe for the economics to start to work?
Elon Musk: Oh yeah, absolutely less than that.
Pat Archambault, Goldman Sachs: On a mass scale?
Elon Musk: It’s going to scale as the factory operates at maximum capacity. We think the factory is going to be operating at maximum capacity as far into the future as we can see. This is all about production. My meetings yesterday were all about guys who need to figure out how to ramp up our production of cells, batteries, electric cars, faster. And addressing every limiting factor that we can. I mentioned manufacturing the machine that makes the machine, order of magnitude improvements are what I think can be achieved. We won’t get there right away, but by version three of the machine that builds the machine: order of magnitude. Competitive car manufacturing will look at that and it will seem like an alien dreadnaught. “What the fuck are you doing? What the hell is that?”
It blows my mind that people don’t realize just how much improvement potential is possible. This bit, we’re talking about high school-level physics are necessary to figure this out. It’s not mega complicated. Just go to the factory, do a volumetric entity calculation of what percentage volume inside this building is doing useful stuff versus is either air or not doing useful stuff, you’re shocked at how tiny that percentage is. Like low single digits. What is the exit velocity of the products? How fast are things moving out the exit? What’s the mass flow, whoa it’s really low. The fastest car plants in the world the car exit velocity is basically grandma with a walker. It’s real slow, it’s 0.2 meters per second. It’s really really slow. We can do waaay better than that. The fastest person can run faster than 10 meters per second, so why is car exit velocity on 0.2 meters per second? That’s ridiculous. Why is the volumetric efficiency of a car factory — it’s usually in the mid-to-low single digits, that’s very low — why shouldn’t it be at least a volumetric density of 30 or 40 percent? 30 percent seems very very achievable. Nobody would design a chip that had volumetric efficiency of 2 percent. It would look ridiculous. And yet we design factories that way.
Pat Archambault, Goldman Sachs: Are these efficiencies you’re looking to put in place for your next Tesla plant, or are these things we can see at Fremont at some stage in the near future?
Elon Musk: You’ll see things moving in that direction. With Model 3 we’re starting to get to version 0.5 of alien dreadnaught level, where alien dreadnaught level is like version 3. Where it’s most obvious is in the cell production. Our engineering team has worked very closely with Panasonic to make dramatic improvements to the cell manufacturing efficiency. I think we’re probably approaching 3x the efficiency of the best plant in the world. I think that’s pretty good. Cells will be going through that thing like bullets from a machine gun. In fact, the exit rate of cells will be faster than bullets from a machine gun.
Pat Archambault, Goldman Sachs: Well, we look forward to the next time you take us around
Elon Musk: The Gigafactory party is going to be an eyeopener
Colin Langan, UBS: A lot of analysts that cover SolarCity are highlighting major liquidity concerns of the company. You sounded pretty confident that that was going to turn cashflow positive. What do you think they’re seeing differently and are you concerned at all that the cash burn may increase after the deal?
Elon Musk: Once we get it done the cash burn is likely to reduce because of reduced cost of sales and general operational efficiencies and a lot of things that are duplicated. We expect costs to decrease and to increase the positive cashflow from the SolarCity acquisition. In my case, like a few months, cutting the fat in pretty short order — let’s say six months after the acquisition is complete I would expect those efficiencies to be there and be significant.
Colin Langan, UBS: In terms of the time horizon, in terms of delivering on goals and promises, particularly around this acquisition, you actually think these synergies could be achieved in six months of closing? It would be that quick?
Elon Musk: Yeah. From the point that the point at which the deal is done, yes. It should be meaningful and noticeable by the second full quarter after the acquisition is completed. I’m highly confident that that would be the case.
Colin Langan, UBS: Okay, thank you for taking my question.
Patrick Jobin, Credit Suisse: Thanks for taking my questions here. A question for Elon or Todd: why not pursue a less capital-intensive matter, at least in the near term, and proceed with more of a marketing or sales relationship between the entities with the cross-sell opportunities and installation efficiencies of the integrated systems. You used the term special deals, but those seem to be the norm between entities if they’re beneficial for both. Are there any legal impediments to having approached some of these synergies in that fashion?
Elon Musk: I think morally and legally we’d find it very difficult to defend a unique relationship that favored SolarCity if we’re separate companies. If we’re one company, then obviously that’s fine. But if we’re separate companies we can’t do that.
Patrick Jobin, Credit Suisse: My second question: everyone’s focused on capital and cashflow here. Elon, from your perspective, would Tesla be receptive or would there be any plans to provide capital to SolarCity in the interim during the pending acquisition. Obviously I’m thinking about it more from the SolarCity side. We saw with Vivint and SunEdison, the pending acquisition disrupted some access to the capital markets in the interim. I’m just trying to understand SolarCity’s near-term path and what you would be willing to do from a Tesla standpoint.
Elon Musk: SolarCity is constrained in the short term from just going out and raising equity itself, several of which would provide a bridge loan if needed. I actually don’t think it’s going to needed, to be clear. That’s something that’s not appropriate to do. We will be there if needed, but I don’t think we’ll be needed.
Dana Hall, Bloomberg News: Good morning. Could you talk a little bit about how you envision this impacting Tesla’s retail footprint going forward and if the Tesla Stores are now selling solar panels and Powerwalls is this sort of an effective end-run around your dealership battles?
Elon Musk: Those are interesting questions. We’re not limited in Stores in terms of selling solar and storage, we could do that and potentially offer to sell the car in a Gallery format. It does open up additional options on the retail front, now that you mention it.
Dana Hall, Bloomberg News: I’m just wondering if a car dealership association can say that it’s a dealership if it’s selling more than cars. If it’s also selling solar panels and Powerwalls, if it’s going to change the look of the stores significantly enough that it helps you guys out with that.
Elon Musk: I think we’ll still be prevented from actually completing a car transaction, even if it’s part of a broader store. Usually there’s not a limit on having Galleries where you simply display the car and have information on it and book complete transaction for solar and batteries. It does open up additional possibilities now that you mention it.
Spencer Shaw, Albert Freed: I have a follow-up. You mention the positives of rolling up SolarCity, and somebody earlier mentioned in so many words that analysts have been saying that this is a bail-out of SolarCity. Can you just mention if shareholders don’t vote for this, what happens? You mentioned that in the next three to six months should be a net cash generator, so it’s not as bleak as some of these analysts have been saying. SolarCity would be in a position if they don’t for the potential transaction with Tesla. And then secondly, what does this deal mean for your Gigafactory? Does it have any change, timeline has changed because you’re going to have more of a capacity or not?
Elon Musk: I don’t think it’s a bail out. Tesla isn’t deciding what the market value of SolarCity, the stock market is. SolarCity could certainly raise capital and equity on its current valuation without any problem. SolarCity is headed to a very healthy place from a cashflow standpoint in short order, certainly in the next three to five months getting to cashflow positive. If the company’s on its own course to being cashflow positive and has the ability to raise equity capital on its own, I don’t see how an acquisition is in any way a bailout. That’s obviously a false description.
The Gigafactory proceeds independently of SolarCity, except that obviously the storage products will be geared towards a SolarCity type system. This wouldn’t be explicitly exclusionary to other solar companies, by the way, it would just be that other solar companies would have to match the SolarCity in order to use that battery product most effectively. It’s not about trying to shut out other solar companies, it’s just about being able to guide the product to where it needs to go. And then we’ll do the right thing with other solar companies if they’re also guiding their products to match. We’re basically not going to be a jerk to other solar companies. This is really about being laser-focused on having the most compelling consumer solution. That’s, I think, the right thing to do.
Brian Lee, Goldman Sachs: I have three housekeeping questions more along the deal itself. In the interests of time, I’ll just run through these quickly. First is, given SolarCity’s relationships with various lenders and tax equity fund structures I was hoping you could talk to any visibility into potentially changing controlled provisions and/or exposure to clawback provisions on solar tax credits that might exist. Second question would be as part of the due diligence will the board consider other alternatives to SolarCity? Third one, then I’ll pass it on, are there any collars or caps on the stock exchange ratio being proposed? And if not, what’s the rationale for that?
Elon Musk: As I said at the beginning, this is really the beginning of the analysis, not the end. Normally we’d a lot closer to the end because with the largest shareholder vote in both companies it’s something we’d have to talk about at the beginning when we don’t have all the answers. But we will compile those and present those to shareholders for their decision in the months to come. Obviously, part of that acquisition process is talking to the lenders and making sure their comfortable and think it’s a good idea — pretty sure they will, but we’re going to talk to them.
In terms of other companies, we did consider that as part of the initial due diligence process, but we think SolarCity is the best company out there. It’s a leader in the field, it has the Silevo technology, the product direction we believe is correct in terms of making relevant progress towards a highly differentiated product. There’s just not another company out there that’s like that at all.
Trip Chowdhry, Global Equities Research: Thank you, I have a quick question for Elon, I was just wondering how does this acquisition play out with opportunities that Tesla may find with microgrids and grid space?
Elon Musk: Uh, yeah, we want to have… I think it’s always good to productize things — you can click here and buy your microgrid versus having a tailored situation for all over the place. If you can productize it, it can happen so fast. I think that productizing a microgrid — just click here and get a microgrid and it just works — I think that’s a good way to go. Consumers obviously appreciate things that are easy, simple, fast. Actually, corporate customers, utilities, they appreciate that too. They don’t have to go through this big laborious process that’s a pain in the butt for them. It blows their mind when they can just click a button and then we install their thing and it works. Just because a product is big doesn’t mean the whole process needs to be complex. Bigness and complexity are not the same thing. Our utility customers have been quite pleasantly surprised by just how easy it is to implement. And it’s going to get a lot easier in the future.
Jeff Evanson, Tesla VP Global Investor Relations: I think that’s the end of the questions. Thank you Todd and Elon and the rest of the team. And thank you investors for all the interest. If you have any closing remarks, Elon, or otherwise we can end it there.
Elon Musk: I think those are a lot of great questions. Obviously we’ll have a lot more information as the diligence process concludes. Hopefully in the reasonably near future. But I think it’s easy to get mired in the details, the right thing is to look up into the future and say “Where is this headed? What are the macro trends? Does this action match where the tides of history are going?” That’s really what’s going to make the difference in the long term, so I just encourage people to think in that way.
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