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Tesla Motors / SolarCity Conference Call June 22, 2016

Tesla Motors / SolarCity Conference Call June 22, 2016

For those unable to listen in, I will be live blogging the call.

http://ir.tesla.com/eventdetail.cfm?EventID=173879

Here's the guts:

Process points: why this may look different, but unique situation. Used to seeing an announcement with a definitive agreement. We are only seeing an offer. Elon is 5% shareholder, and must keep the market informed about his holders. Schedule 13-G must be updated even before an agreement is reached under SEC regulations. More transparent, actually seeing behind the curtain. Board approved the offer. Now have delivered offer to SolarCity, who will set up their process. Diligence 2=3 weeks to get a signed merger agreements and disclosures, financials and proxy statements. Shareholder vote in the next few months. Tesla doesn't decide public market price. Neither high nor low acquisition premium. Every element is very reasonable. Nothing out of whack. Extremely normal to have an acquisition premium of that size. Much lower than LinkedIn. Here we're talking about a 30% premium. You don't get to exchange on a zero premium. Up to the share owners. I think this makes things better in the future, not worse. Anyone voting against this is voting against their best interest. I have zero doubt about this. Arguably, we should have done it sooner. It gives us enough time to create a very compelling integrated product and bring that to significant scale next year. We don't have a good basis for doing some special deal with solarcity because it's potentially a conflict of interest, but goes away if we are one company. That's not a good rationale for working. No good moral or legal basis for treating solarcity differently, unless we are one company.

Sustainable energy production combined with stationary storage combined with EV is the solution to sustainable energy future. As we develop new versions of the powerwall and new inverter electronics, take the solar panels and system into account or you duplicate hardware. Integration is an issue. In terms of the sales process, powerwall sales drive solar sales. Not being able to sell solar directly at Tesla is inefficient.

Model 3 purchaser can buy equivalent value of solar and powerwall, effectively doubling the sale, and installing them at the same time. Synergy is a bad word, but it is more efficient, at sale, installation, maintenance and managing customer relationship.PRETTY OBVIOUS THING TO DO.

If we don't do this deal, we make Tesla's goals more difficult. Tide of history supports a sustainable energy future. Primarily solar. Virtually entirely electric vehicles. This deal helps accelerate sustainable transportation.

Does this increase our debt position? It really doesn't. We'll take a closer look at SolarCity. What really matters is recourse debt only. Cash flow is generating enough for the recourse debt. SolarCity is headed for a cash flow positive situation for the next 3-6 months. Reducing their growth rate to achieve cash flow positive. We expect it to be a net cash generator, when taking into account the greatly reduced cost of sales when made through our stores. Estimates are based on "what stands to reason" looking ahead to model 3 sales, if we are selling powerwalls of comparable value in the same sales footprint, our cost of sales should drop in half. Maybe not entirely in half. 30-40%.

Cost per watt for sales will drop in Tesla Motors showrooms/stores. It makes total sense and is a no brainer, but can't talk about material nonpublic plans. Except we are optimistic about those plans. To date solarcity has not been significantly differentiated on the product side, but basically will be in the fairly near future. Listen carefully to SolarCity earning calls, it should be clear that there is going to be Silevo for high efficiency low cost solar panels and improving the aesthetics. There is quite a radical difference between a panel that makes your house look BETTER than those that do not. After the conclusion, I will summarize all material disclosures in the post, so please let me know if I've missed anything.

Future product announcements is not yet public information, but I do believe it "fits together" with Tesla's plans with powerwall and powerpack side. 1% of US homes have solar. Massive addressable market that is unserved. At least 40-60 million households are possible for solar. Future market is gigantic. On cash front, don't expect SolarCity to have a material impact on Tesla's cash needs. Positive cash flow by the end of the year.

Silevo advantage is much more efficient than chinese panels. You can get 1/3 more power on the same roof. Aesthetically speaking Silevo panels look a lot better. Done right, we can make your roof look better with panels than without. The biggest asset we would be acquiring is the installers and all the people trained in permitting, paperwork, complexities across the country and how to deal with 37 different roof types. Standardized installations, and some strengths in the SolarCity sales side we can take advantage of. Silevo technology is going to make a big difference. This will be the lowest price per watt in the world. I've spent a lot of time in the trail plant and there is nothing to stop it from being competitive.

Yea. Storage costs will drop dramatically with each passing year. Exclusion of certain situations like NV and AZ, it will be ahead of the net metering. Like NY. 2-3 year time frame. Some utilities will exaggerate impact of solar on grid, but you do need to buffer the power. Valid, but exaggerated, argument. Will work fairly well. Ultimate solution for earth.

I think from a gut standpoint: what allows us to offer the most compelling product to consumers and business. A seamless integrated product is better. You don't want a heterogenous system integration problem. Interfaces break down, and people pointing fingers. One integrated system just works. We can guide the integrated product to just be better. In addition, cost savings to be had in the same store, if we can sell twice as much dollar volume. If installation crew is able to do everything in a single visit, then that's much better. Some percentage better, that's material. That's the threshold for making a decision. If you just cut the business logistics costs in half. With a seamless product, you have fewer breakdowns.

SamO | June 22, 2016

Conference call starting late 7:35AM EST

Tâm | June 22, 2016

Thanks SamO for volunteering as usual.

SamO | June 22, 2016

Here to discuss the rationale for acquisition of solar city

Elon Musk
Todd Marin
JB
Jason Wheeler on the call

SamO | June 22, 2016

:-) @ Tâm

SamO | June 22, 2016

Process points: why this may look different, but unique situation. Used to seeing an announcement with a definitive agreement. We are only seeing an offer.

Elon is 5% shareholder, and must keep the market informed about his holders. Schedule 13d must be updated even before an agreement is reached under SEC regulations.

More transparent, actually seeing behind the curtain.

SamO | June 22, 2016

Elon Musk:

Mostly this call is to get into detailed questions.

powerwall presentation is part of why this is a "correct move".

SamO | June 22, 2016

Sustainable energy production combined with stationary storage combined with EV is the solution to sustainable energy future.

As we develop new verisions of the powerwall and new inverter electronics, take the solar panels and system into account or you duplicate hardware.

Integration is an issue.

When you add in, you'd have 2-3 visits.

In terms of the sales process, powerwall sales drive solar sales.

Not being able to sell solar directly at Tesla is inefficient.

SamO | June 22, 2016

Model 3 purchaser can buy equivalent value of solar and powerwall, effectively doubling the sale, and installing them at the same time.

Synergy is a bad word, but it is more efficient, at sale, installation, maintenance and managing customer relationship.

PRETTY OBVIOUS THING TO DO.

SamO | June 22, 2016

Difficult to do an integrated product as two arm's length transactions.

SamO | June 22, 2016

Can't do that if SolarCity and Tesla are separate companies.

NO BRAINER.

If we don't do this deal, we make Tesla's goals more difficult.

Tide of history supports a sustainable energy future. Primarily solar. Virtually entirely electric vehicles.

This deal helps accelerate sustainable transportation.

SamO | June 22, 2016

Does this increase our debt postiition?

It really doesn't. We'll take a closer look at SolarCity.

What really matters is recouse debt only.

Cash flow is generating enough for the recourse debt.

They are headed for a cash flow positive situation for the next 3-6 months.

Reducing their growth rate to achieve cash flow positive. We expect it to be a net cash generator, when taking into account the greatly reduced cost of sales when made through our stores.

SamO | June 22, 2016

Cost per watt for sales will drop in Tesla Motors showrooms/stores. It makes total sense and is a no brainer, but can't talk about material nonpublic plans. Except we are optimistic about those plans.

To date solarcity has not been significantly differentiated on the product side, but basically will be in the fairly near future.

Listen carefully to SolarCity earning calls, it should be clear that there is going to be Silevo for high efficiency low cost solar panels and improving the aesthetics.

There is quite a radical difference between a panel that makes your house look BETTER than those that do not.

SamO | June 22, 2016

Future product announcements is not yet public information, but I do believe it "fits together" with Tesla's plans with powerwall and powerpack side.

SamO | June 22, 2016

Q Brian Johnson Barclays

Q: Discussions between two companies and independence?

Todd: Elon and Antonio have recused themselves and have agreed majority of disinterested shareholders must be in favor. Just focus on business rationale.

Q: How does this change your view of cash usage and go back to capital markets?

A: No comment, we are doing full due diligence.

Q: What % of current Tesla customers own solar?

Elon A: 1% of US homes have solar. Massive addressable market that is unserved. At least 40-60 million households are possible for solar. Future market is gigantic.

On cash front, don't expect SolarCity to have a material impact on Tesla's cash needs. Positive cash flow by the end of the year.

Q: How to integrate solar and car sales and service, with aggressive Model 3 schedule.

Elon A: This makes Tesla's future execution easier NOT harder. Need to have an integrated product,with powerwall and powerpack designed to work with a particular system and can't do that if we are two separate companies.

With a single company we can make a more compelling product. Fundamental economic goodness of the transaction.

[See automobile as backup to powerwall]

SamO | June 22, 2016

Charlie Anderson Dougherty

Q: Shareholders of Tesla synergies number?

A: Estimates are based on "what stands to reason" looking ahead to model 3 sales, if we are selling powerwalls of comparable value in the same sales footprint, our cost of sales should drop in half. Maybe not entirely in half. 30-40%. And a drop on SolarCity side.

Basically selling twice as much in a single transaction

SamO | June 22, 2016

"significant" reduction. Definitely better than if the companies were separate.

Q: Why now vs two years from now?

A: We're ramping up powerwall and powerpack, developing version 2-4. Silevo panels are about to be produced, improving the power and aesthetics a lot. SolarCity will get there on their own, but their journey will be accelerated as a part of Tesla.

Powerpack and allow you to go off-grid, why wouldn't you do that?

SamO | June 22, 2016

Q: Strategically, the valuation is what the market is having issues with. Mentioned debt, exchange ration, not jeopardizing the future . . .

A: Tesla doesn't decide public market price. Neither high nor low acquisition premium. Every element is very reasonable. Nothing out of whack. Extremely normal to have an acquisition premium of that size. Much lower than LinkedIn. Here we're talking about a 30% premium.

SamO | June 22, 2016

Q: How do you expect short term shareholders to vote in favor?

[These are the most ridiculously unintelligible questions ever]

A: Exchange ratio, there are some bounds. You don't get to exchange on a zero premium. Up to the share owners. I think this makes things better in the future, not worse. Anyone voting against this is voting against their best interest.

I am zero doubt about this. Arguably, we should have done it sooner. It gives us enough time to create a very compelling integrated product and bring that to significant scale next year.

[My guess is that the car will integrate with the powerpack and do emergency, but not daily cycle duty.]

SamO | June 22, 2016

Collin Rousch Oppenheimer

Q: Lots of cross pollination. Return on capital information?

A: I'm the largest shareholder of both companies. If that wasn't the case, we would present you with a package. But since I am, we have to tell you at the beginning and not the end. We'll certainly have all of that done for you, but the reason its not in a neat package, in our case we have to tell you before we have all the answers and I'm confident it will be extremely compelling.

Q: Silevo and asian competitors are reducing costs, even with savings on installation, it looks like there isn't' going to be a raw cost advantage. How will you improve cost trajectory and a $.15 disadvantage.

A: A lot of our effort is to be the "world's best manufacturer." Build world's best rocket. Built world's best car.

We are going for a margin nobody thought was possible. On a first principle basis, vast improvements are possible.

Silevo advantage is much more efficient than chinese panels. You can get 1/3 more power on the same roof. Aesthetically speaking Silevo panels look a lot better. Done right, we can make your roof look better with panels than without.

If you own a 400,000 house, if you make the roof look ugly, you lose 5%. If you make the roof look beautiful, and the house is worth 5% more. There is a big value delta. Looks great, costs better than anywhere else in the world, that is a winning outcome.

Q: SolarCity is a specialty construction and specialty finance company, where do you see synergy on the finance side or boots on the ground?

A: The biggest asset we would be acquiring is the installers and all the people trained in permitting, paperwork, complexities across the country and how to deal with 37 different roof types. Standardized installations, and some strengths in the SolarCity sales side we can take advantage of. Silevo technology is going to make a big difference. This will be the lowest price per watt in the world. I've spent a lot of time in the trail plant and there is nothing to stop it from being competitive.

SamO | June 22, 2016

Q: Recap timeline, diligence disclosures

Todd: Board approved the offer. Now have delivered offer to SolarCity, who will set up their process. Diligence 2=3 weeks to get a signed merger agreements and disclosures, financials and proxy statements. Shareholder vote in the next few months.

Pungoteague_Dave | June 22, 2016

Insane. The decision to buy an EV car and the decision to buy a solar panel system are not really related. We had solar panels before having an EV. One does not go into a Tesla gallery to buy solar panels at the same time, in one transaction. Silly. The variables are vastly different, require a home visit to determine feasibility. More than half the homes in the US do not qualify technically for solar installation.

And where are all the solar panels at Superchargers? Exactly three locations. Why? It is illogical and technologically unworkable. This was a major Elon promise that never happened.- right up there with the battery swap credits scam. The board needs to intercede here - and quickly, before the lawyers snap into attention.

SamO | June 22, 2016

RBC Capital

Q: How much is this a play with changes to storage and net metering?

A: Yea. Storage costs will drop dramatically with each passing year. Exclusion of certain situations like NV and AZ, it will be ahead of the net metering. Like NY. 2-3 year time frame. Some utilities will exaggerate impact of solar on grid, but you do need to buffer the power. Valid, but exaggerated, argument. Will work fairly well.

Ultimate solution for earth.

Q: If deal consummated, provided segmented cash flow?

A: Yes, i do think its valuable to have transparency. we will want to show that as much as we can. In some cases, it might be a question of where the cost is allocated, but we don't want it to be like a black box. No information discount to the stock. Clear information give people a better understanding of the company.

Q: Consider vehicle to grid support?

A: long pause debated since the early days of the roadsters and they would do v2g. you do ge a lot of complications backing the car through the wall. when the car is there? When not? How much can you draw the car down? The right solution is to decouple vehicle, stationary battery and solar. And something to supplement that at the grid level with solar and battery utility level installations.

SamO | June 22, 2016

@PD,

You still don't get it . . . sad. Of course those transaction should, can and must happen together.

SamO | June 22, 2016

A: We have to get out of digging up cambrian level fossils and burning them to move. That sounds crazy. That's what it's going to be in the future.

SamO | June 22, 2016

Ben Kahlo Baird

Q: Why not a JV to help work through some of the issues?

A: We don't have a good basis for doing some special deal with solarcity because it's potentially a conflict of interest, but goes away if we are one company. That's not a good rationale for working. No good moral or legal basis for treating solarcity differently, unless we are one company.

Q: Revenue synergies?

A: Anecdotal, way I think from a gut standpoint: what allows us to offer the most compelling product to consumers and business. A seamless integrated product is better. You don't want a heterogenous system integration problem. Interfaces break down, and people pointing fingers. One integrated system just works. We can guide the integrated product to just be better. In addition, cost savings to be had in the same store, if we can sell twice as much dollar volume. If installation crew is able to do everything in a single visit, then that's much better. Some percentage better, that's material. That's the threshold for making a decision. If you just cut the business logistics costs in half. With a seamless product, you have fewer breakdowns.

SamO | June 22, 2016

Q: Have you had conversations with largest disinterested shareholders and how theyu'll vote on this?

A: Everyone heard about it at the same time. Have not discussed with anyone. Large and small at the same time. Has this idea been bandied about? Yea, there have been discussions. Some see it as a natural thing to do. And it is interesting to see the feedback since the announcement. Anyone who is product focused, sent me a congratulatory note with why didn't you do this sooner. Finance folks were more concerned. Value of company will follow the value of the product. Great products = great valuation.

SamO | June 22, 2016

Patrick Archambault, Goldman Sachs

Q: Strategic vision has been laid out, but possible financial sense in the shorter term. My understanding is the storage plus solar is quite small. Rocky Mountain Institute says 5-10 years from LCOE.

It's a big world out there where it's much more expensive. Like hawaii [and Greenland.] Anywhere that has moderately expensive energy costs. Many parts of Europe. Many parts of the US. Over time, it will make sense everywhere. Some wind, of course. Some geothermal. Some hydro. Some tail end of final of natural gas plant operations. Long tail S curve adoption. Beginning of S curve, they underpredict. then it goes through an exponential phase. And then goes to a linear phase. Happened with the internet. Happened with cell phones.

Q: Do you think 5 years for mass scale?

A: Less than that. Just needs to scale to allow the factory to operate at maximum capacity. The factory can operate at max capacity into the future.

Just met yesterday to talk about increasing manufacture of cells, batteries, and cars faster.

SamO | June 22, 2016

A: Volumetric density calculation of a factory, you'll be shocked at how tiny (low single digits) usage really is. What is the factory speed? Really low. Fastest plant in the world is basically grandma in a walker, .2M/sec. Very slow. We can do way better than that. Why is car exit velocity ridiculously slow? 30% manufacturing density seems achievable.

Q: Are these for the next plant or in Fremont in the future?

A: Model 3 we are aspiring to get to version 0.5 where Alien Dreadnought Level 3 is our goal. We are approaching 3X of the best factory in the world. The exit rate of cells will be faster than bullets from a machine gun.

SamO | June 22, 2016

Collin Langling, UBS

Q: Major liquidity concerns. What are they seeing differently?

A: Reduced costs of sales will help SolarCity bottom line, costs to decrease, and increase positive cash flow. 6 months after acquisition is complete, I expect those efficiencies to be there and significant.

Q: You think synergies achieved within 6 months?

A: Yes. meaningful and noticeable by the 2nd full quarter after the acquisition is complete.

SamO | June 22, 2016

Patrick Jobin, Credit Suisse

Q: Any legal problems with cross marketing rather than acquisition?

A: Morally and legally would be hard to withstand a favored relationship with SolarCity if we are separate companies

Q: Will Tesla Motors provide liquidity?

A: Since SolarCity is constrained from raising equity, Tesla would provide a bridge loan, if needed. But I do not believe one is needed.

SamO | June 22, 2016

Dana Hull, Bloomberg

Q: How does this impact Tesla's retail footprint? Is this an endrun in dealership battles?

A: Yes it does open additional options in retail front. We will still be prevented from including a car transaction, but usually there is no obstacle with providing galleries. COuld still do transactions for solar and batteries.

SamO | June 22, 2016

Shaw, Albert Fries

Q: Is this a bailout of SolarCity? What does this mean for the Gigafactory?

A: I don't know where this bailout stuff comes from. Tesla doesn't decide the market value of SolarCity, who could raise equity quite easily on their own. The gigafactory proceeds independently of SolarCity, but we gear the product to a SolarCity type system. we wouldn't be explicitly exclusionary to other solar companies, but would have to match the solarcity product.

SamO | June 22, 2016

Brian Lee, Goldman Sachs

Q: Visibility in change of control and clawback of tax credits? Consider other alternatives to Tesla offer?

A: We'll talk to the lenders. We did consider other offers, but we think SolarCity is the best company out there. Leader in the field. Silevo technology. Product direction is correct in terms of making rapid progress toward a differentiated product. Nothing else out there like it at all

Silver2K | June 22, 2016

I just hope Elon/Tesla changes Solar City's sales model. He can sell tons more if they stop trying to shaft customers.

SamO | June 22, 2016

Chip Chowdury,

Q: Microgrids and grid space?

A: Productized things. Click here and buy a microgrid. Vs having a tailored situation for all over the place. If you can productizing a microgrid and it just work, that's a good way to go. Consumers appreciate things that are easy and fast. But corporate customers and utilities do too. It blows their mind when they can click a button, we install their thing and it works. Bigness and complexity are not the same thing . Utility customers are surprised at how easy it is. And it is going to get easier in the future.

church70 | June 22, 2016

lol

SamO | June 22, 2016

"Pungoteague_Dave | May 17, 2016
Zero rationale. Zero synergies. Zero chance. Too many conflicts and intracompany loan history already, giving Wall Street heartburn."

LULZ~~~~~~~!

MrLunch | June 22, 2016

Thanks for doing this @SamO

Chunky Jr. | June 22, 2016

Thanks SamO. Very informative.

Madatgascar | June 22, 2016

@SamO - thankyou thankyou thankyou!!!

I think Musk is laying out a pretty compelling rationale. He should reassure investors that Tesla will rethink SCTY's sales approach.

Mike83 | June 22, 2016

Thanks so much SamO. Just got up. I agree. Why didn't they do this sooner as it is a great plan. In addition they can set up Solar panels/batteries galleries where Tesla sales are not permitted expanding Tesla's footprint. The microgrid concept is a no-brainer. Need coffee.

negarholger | June 22, 2016

@PD - "And where are all the solar panels at Superchargers? Exactly three locations."

Exactly three" ? Hawthorne, Tejon, Rocklin, Barstow,... just to name four.

negarholger | June 22, 2016

I was always wondering why SolarCity was not part of Tesla from the beginning.

Ankit Mishra | June 22, 2016

Thanks @SamO.

Madatgascar | June 22, 2016

And nobody has mentioned that Tesla itself will need a market-moving amount of solar for its complete gigafactory buildout and other power generation. As other companies get into the EV market, these issues will become green-cred differentiators.

SUN 2 DRV | June 22, 2016

I COMPLETELY agree with PD... Still no synergies.... Proposing that customers buy Solar and a car together will simply scare people off because it DOUBLES the cost of the transaction.

Elon said it should be obvious that Powerwall should be more tightly integrated with the solar system designs. Yes true, but all that really means is that Tesla shouldn't have done Powerall itself at all. The solution to the issues Elon listed is simply to transfer Powerwall to Solar City. He provided absolutely NO rationale for merging the companies!

Sam_S | June 22, 2016

Much thanks SamO!

SUN 2 DRV | June 22, 2016

And Elon's voice itself (not his normal stuttering) conveyed a tone that he's "guilty of hiding something". He did not sound excited about something positive. He sounded very defensive and exactly like he was trying to pull off some clever hidden transaction.

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