SpaceX (SPCX) Q3 FY26 Earnings Call Transcript

Unidentified speaker00:00

To increase lead activations in Q4. Starlink consumer

Unidentified speaker00:23

United government and the continued momentum in the aviation industry. Aviation remains a major growth opportunity as we're still early in the install installation phase with many of the largest carriers worldwide and have line of sight into an accelerated activation path into 27 for our key partners.

Unidentified speaker00:36

Connectivity gross profits doubled year over year with gross margins of 55% including a one-time benefit of roughly 3% primarily driven by tariff refunds in the quarter.

Prepared remarks

Bret Johnsen00:51

Excluding the one-time benefits though adjusted EBITDA margins expanded roughly 2% year over year. Looking ahead the satellite roadmap is a key driver of both the capacity and capability of our connectivity segment.

Bret Johnsen01:08

Through the end of the year and throughout 2027 we expect to deploy V3 broadband satellites in meaningful volume with each Starship launch ramping towards a payload that delivers over 20 times the downlink capacity of the current generation of Falcon 9 launches today.

Bret Johnsen01:23

In parallel we will ramp Starlink Mobile V2 satellites on Starship starting in 2027 and leverage our newly enhanced wireless spectrum portfolio to expand our direct to cell service and become a major mobile carrier as Gwynne mentioned in the United States.

Bret Johnsen01:37

Across all three of our connectivity applications Starlink broadband Starlink mobile and Starshield the launch cadence on Starship is expected to drive a step change in total capacity coverage and service quality.

Bret Johnsen01:58

SI or super intelligence was again the standout growth driver for the quarter. Segment revenue increased substantially to 7.6 billion dollars up 5 billion dollars quarter over quarter and 6.7 6.7

Bret Johnsen02:03

Billion year over year

Bret Johnsen02:10

Primarily powered by the ramp of

Bret Johnsen02:15

Our cloud

Bret Johnsen02:21

Services agreements.

Bret Johnsen02:27

We meaningfully improved

Bret Johnsen02:33

Prove the segment's profitability

Bret Johnsen02:45

Profile as we monetize newly deployed capacity and delivered powerful operating leverage for the business. We ended the third quarter with 1.7 gigawatts of nameplate compute capacity.

Bret Johnsen03:07

Driven and we're acting the supply and external demand expect to have additional new customers in future deals and will continuously evaluate the highest margin use for compute assets across both new and existing cloud service agreements and serving inference for our own SI products.

Bret Johnsen03:28

we're seeing the market is extraordinary at current pricing new compute deployments are generating a payback of less than a year pricing is currently tracking slightly above the high end of the 30 to $50 per watt range we were discussing just last quarter which further supports the attractiveness of these terrestrial SI investments.

Bret Johnsen03:40

We'll continue to be demand led and prudent in the pace of deployment matching our disciplined and proactive capital planning for procurement of semiconductor supply to the near term customer demand.

Bret Johnsen03:54

Our current customer contracts for SI compute have the benefit of allowing us to flexibly manage our capacity for our own model training purposes as be able to monetize for our SI cloud service agreements

Bret Johnsen04:10

Revenue at favorable pricing as the market availability continues to tighten. Advertising revenues grew 19% year over year as we momentum on the new advertising tech platform that we rolled out just last quarter in Q2.

Bret Johnsen04:22

SI segment adjusted EBITDA was $5 billion up $3.8 billion quarter over quarter and $5.4 billion year over year driven primarily by higher margin cloud service agreements.

Bret Johnsen04:58

SI segment operating income was $431 million but excluding the 1.2 billion of stock-based compensation expense related to the cursor acquisition the segment delivered 1.6 billion dollars of operating profit just in Q3. double clicking on the share based compensation expenses of the 60 billion equity value for Cursor when we purchased it 23 billion did towards retaining key employees and replacing outstanding equity awards including revesting agreements for key executives these equity awards will be recognized as stock based compensation over roughly the next three year vesting period.

Bret Johnsen05:27

Total company capital expenditures in the third quarter were 19.6 billion dollars primarily in support of our SI compute build out Starship infrastructure and satellite production We ended the quarter with substantial backlog totaling 63 billion dollars as of September 30th of which 17.5 billion was recognized as deferred revenue approximately 42 billion of this backlog is expected to be recognized within the next year.

Bret Johnsen05:47

Looking ahead demand remains robust across all three segments particularly in our cloud services business we remain on track to deliver our previously stated goal of 100 billion dollars in ARR by the end of this year defined as annualized revenue based on the month of December.

Bret Johnsen06:12

SI infrastructure continuing to come online at Memphis and South Haven gives us visibility into an accelerated build path through the remainder of this year. As a result we're on track to reach nearly 2.2 gigawatts of nameplate compute at the end of this month alone in October and have a clear line of sight as Elon highlighted to nameplate compute in the range of 2.5 to 3 gigawatts just by the end of this quarter.

Bret Johnsen06:55

Because of the additional capacity coming online this quarter we expect fourth quarter capital expenditures to now be in the range of 35 to 40 billion for this quarter we also expect total company gross margins in Q4 to be more consistent with the second quarter given some one-time benefits and customer mix that we highlighted in Q3 given the increased visibility into our compute contract pipeline over the next six months we have the opportunity to provide additional look forward guidance on the acceleration we see in our business in Q1 2027. We now see total company revenues in the range of 33 to 37 billion dollars for Q1 of 2027.

Bret Johnsen07:14

In closing we are in a transformative phase for the company's financial profile we're investing aggressively across SI compute Starship development and production and next generation Starlink broadband and mobile constellations the three areas we believe will generate the highest long term returns.

Bret Johnsen07:35

These are demand led investments in markets with visible tangible returns in the near term. We're building the infrastructure of the future with discipline focused on capital efficiency strong returns on invested capital and maintaining a strong investment grade balance sheet while still moving with the velocity to capture the opportunity in front of us.

Bret Johnsen07:49

The combination of our diversified earnings base focused on extreme vertical integration and the robust demand in the market for super intelligence gives us conviction in the path ahead with that I'll turn it back to Andrea

Andrea Williams08:06

Thanks Brett we're now going to begin the Q&A section if you'd like to ask a question please use the raise hand function at the bottom of your screen if you've dialed in today please press star nine to raise your hand and star six to unmute yourself

Andrea Williams08:12

I think we've assembled a queue

Andrea Williams08:18

We will take the first question from Adam Jonas at Morgan Stanley

Adam Jonas08:20

Hey everybody can you hear

Andrea Williams08:20

Yep

Adam Jonas08:26

Great first Elon thank you for making flying cars real

Elon Musk08:27

you're welcome

Adam Jonas08:32

That was freaking insane it's my first comment

Adam Jonas08:35

And that's one of them

Adam Jonas08:41

It's it's super inspiring for people all over the world especially young people that want to build

Adam Jonas08:42

Yeah

Adam Jonas09:26

Um I got a two part question on Tariff Lab you want to make chips you want to make crazy amounts of chips onshore or in a safe and secure place so first can you confirm if SpaceX has placed orders for EUV machines if so when do you expect delivery and just as a second part to the question when you take a first principles approach to the semi fab supply chain I know you've toured TSMC ASML AMD Lam these are very impressive companies as I'm sure you'd agree but where do you see the biggest areas to improve their processes and supply chain when you do it you know your way thanks

Elon Musk09:31

Well I mean we're just figuring out chip fabrication so

Elon Musk11:22

But I I give it I'll tell you what our internal expectations are which obviously I put you know big error bars in this because we don't know if we will actually achieve this or not but it's what we're aiming for internally is to make our first sort of test chip functional in approximately May or June of next year that's just a kind of a SRAM chip or something to basically test the line that's at the research fab in Austin and we're aiming to our aspiration is to reach volume production around Q3 of 28 at Tariff Fab at Gibbons Creek the main Tariff Fab location now these are very aggressive dates and we're very appreciative of ASML and all of our other suppliers in accelerating equipment deliveries in order to achieve this outcome let's just say that that that outcome of achieving volume production is at least in the set of possible outcomes for Q3 or Q4 of 28 so these are obviously like insanely fast time frames for chip production we do have I think some significant potential breakthroughs in chip fabrication but I I don't think I should discuss that on an earnings call let's not give away the shop here and but I am optimistic that that we will dramatically accelerate chip production and that that Tariff Fab will ultimately do what the name suggests which is to make a terawatt of super intelligence chips per year

Andrea Williams11:29

We'll take our next question from Doug Anmuth at JPMorgan.

Doug Anmuth11:56

Great, thank you. Elon, can you talk more about just how you're working through those constraints in power cooling and infra and just what gets you comfortable with the 13 gigawatts ending 27 and then Brett if you could also help us understand how you're thinking about the funding requirements just as you look out to that kind of capacity thanks

Elon Musk12:52

Yeah well I mean three gigawatts of that or very close to three gigawatts is what we expect to have done just the next few months so you can just look at the rate at which we are actually deploying and turning on compute what I think you hear from I guess other hyperscalers is you don't hear a lot of detail about how many GPUs they're actually turning on every month and with us you are I'm being very as precise as possible about this it is absolutely insane to be deploying providing the power and all of the electrical equipment the cooling the batteries the networking and everything else that's needed to turn on 220,000 GB 300s a month but that is actually what we're doing right now and that pace will obviously accelerate next year we're not going to slow down

Elon Musk13:15

I I don't think again I should I don't want to some of this if you say like how we're going to get all this power let's just say like we actually we do have a plan that gets to 20 gigawatts of power and cooling by the end of next year but I that is not something that I should spell out that that's that is highly proprietary because if I tell you about it others are going to try to do the same thing

Elon Musk13:43

And I'm not saying we'll have 20 gigawatts of power I'm saying we have a plan where if everything goes right we'll have 20 gigawatts of incremental power I should say next year so 23 gigawatts roughly in total now I don't expect everything to go right that's why I said I I'm confident of 10 highly confident of 10 next year and 20 is in this is difficult but not impossible

Elon Musk14:20

And I mean some of the things we're doing I I have mentioned publicly so we're casting the blades for the turbines so SpaceX already has a very advanced castings capability that was developed for rocket engines so we have I think actually the most advanced casting capability on Earth because the demands for castings for rocket engines exceed the demands for everything and anything else you could possibly imagine so

Elon Musk14:38

So taking that that that incredible team that has I think objectively the most advanced casting technology in the world and saying hey can you guys also make some blades and veins for terrestrial turbines is is as much easier than what they have done in the past

Elon Musk14:45

And when we talk to the turbine suppliers they tell us that the blades and veins

Elon Musk15:12

Are 12 to 18 months behind the rest of the turbine meaning they can deliver everything except the blades and veins 12 to 18 months before they can deliver the blades and veins so casting is is this really difficult bottleneck and if anything it seems to be getting worse so so that means that we can bring power online 12 to 18 18 months faster than anyone else

Elon Musk15:25

that's the kind of advantage that's difficult to replicate unless someone else is doing advanced casting is building an advanced casting shop they will be unable to compete with SpaceX in this regard

Elon Musk15:39

And we're looking at many different sources of power not just gas turbines there's we obviously want to use solar wind and every other source of power that we can obtain

Elon Musk16:07

We think there's also a lot of opportunity for inference compute if you manufacture modular inference compute at the factory level and then such that it's the power and cooling are built in at the factory and then you distribute modular inference compute clusters all over the country if not all over the world

Elon Musk16:13

That that's about as much as I I should say about scaling power and cooling

Elon Musk16:37

But But I I like said I at this point I'd say I feel highly confident of 10 10 gigawatts incremental next year so 13 total and some number over 20 is is the probability of achieving that is is rising rapidly

Bret Johnsen16:51

Doug the second part of your question related to funding I think we certainly have the advantage related to others in that we are

Bret Johnsen16:57

Great have a very strong balance

Bret Johnsen17:07

Sheet and there are a number of available pools of debt capital that that we are talking to it

Bret Johnsen18:01

Capability starts to fund itself in a pretty near term situation and so the fact even that we're finishing this quarter with more capability starts the funding mechanism even into the first half of next year so you have your operational cash flows first and foremost you have multiple pools of capital available in the debt market especially because of our investment grade status and strong balance sheet and then you also have the opportunity from what we've seen to partner with I would say the whole value chain related to on the vendor and customer side so there's nothing easy about SpaceX for sure and so might as well have the finance piece be part of the challenge at the same time but we have a lot of conviction that we are going to be able to do this in a very measured fashion and continue to keep ourselves in that IG status along the way.

Bret Johnsen18:05

And certainly if you look at our track record with respect to capital efficiency

Bret Johnsen18:05

Absolutely

Bret Johnsen18:13

Starship and all of other projects you'd be hard pressed to find any company in the world that is as good at capital efficiency as SpaceX.

Bret Johnsen18:15

Exactly.

Andrea Williams18:19

Next question from Edison Yu at Deutsche Bank.

Edison Yu18:52

Hi, thank you for taking our questions and I'll echo Adam's enthusiasm about the roadster so so there's been a lot of reporting a lot of anticipation of a merger with Tesla I I realize maybe you may be limited on we can say but if we take a step back you know how do you think about the pros and cons of a potential combination and as part of that framework are there any roadblocks that we need to address before embarking on it thank you

Elon Musk19:06

Um I mean this is definitely kind of question where I feel like I'm tap dancing through a minefield um but so I have to be thoughtful about what I say here

Elon Musk19:45

I think so so so both SpaceX and Tesla have formed special committees to discuss this idea at the request of shareholders and these special committees are consist of independent directors and because I'm a conflicted party I can't actually be in the discussions of the special committees so it's this it's sort of a it's an odd kabuki dance where two two two groups of people are talking and I I can't be in the conversation

Elon Musk19:52

I mean I I don't think we should necessarily assume that

Elon Musk20:28

That I think some people out there assume that a SpaceX and Tesla merger is is a certainty and I I think that would be overstating it the you know do do I think it would be a good idea yes but at the end of the day we the shareholders have to be supportive of this and particularly on the Tesla side we will need a 50% vote of all shares not just those who vote but of all shareholders and that's a that's quite a high hurdle to try to achieve so

Elon Musk20:43

And I can just say at this point that the special committees have not reached agreement on the terms of any transaction and obviously there's no guarantee that they will

Elon Musk21:09

But I do think there's a lot of merit to combining the companies as we are pretty much in the super intelligence singularity and there's a lot to be gained from cooperating on developing super intelligence software chip design the Tariff Fab obviously robotics mass to orbit with the you know with the Starmine constellation

Elon Musk21:10

Connectivity

Elon Musk21:28

Connectivity so I think it would be a good idea but it's really up to the special committees of both companies like they've gotta come up with something and then that's gotta be put to the shareholders as a vote

Andrea Williams21:32

Next question from Kutgun Maral at Evercore

Kutgun Maral22:25

Great thank you for taking the question I wanted to ask about Starlink mobile which has come a long way in a short time including the recent low band deal even so there's still some uncertainty about how your spectrum portfolio you know even though it's much improved and possibly will continue to grow can compete with incumbents in the US and part of the unknown for us on the outside is how much coverage and capacity the satellite layer can really provide to bridge the terrestrial gap to peers so what roles do you expect the satellite and terrestrial parts of the network will play and how should we think about the traffic mix between them in delivering a 5G like experience in the US and maybe more broadly how much of the connectivity focus is on traditional retail wireless versus what could be a massive physical AI opportunity thank you

Gwynne Shotwell23:01

Yeah let me Elon can fill in some details but let me point out that the vast majority of mobile connectivity is actually Wi-Fi right I think it's something between 85 and 93 percent is done through Wi-Fi and keep in mind Starlink broadband does a lot of Wi-Fi work as well as far as the mix goes I think we expect that the S band spectrum will provide the majority

Gwynne Shotwell24:08

And then obviously you need the low band spectrum the 800 megahertz spectrum to basically penetrate buildings so if you're not on Wi-Fi you can still receive the signal so I think and by the way I'll correct myself if I'm wrong afterwards but I think the S band will carry the majority and then the low band spectrum will carry less but provide a critical piece by the way and also we talked last quarter at the last earnings call about you know smaller kind of not quite tower capable but smaller radios that we would we could put on already installed Starlink you know homes for Starlink businesses for Starlink towers as well so it's not just the spectrum that we've talked about with the S band we will basically leverage the real estate from Starlink installs and other towers

Elon Musk24:33

Yeah I think we probably should do a longer presentation on the game plan for Starlink connectivity and you know why we think it will ultimately be a business that generates several hundred billion dollars in revenue a year because you are missing some of the pieces that that we're that we know about internally

Elon Musk24:41

I can say we do see a clear path to several hundred billion dollars a year in connectivity revenue

Elon Musk24:53

But I think we should lay probably describe that in a in more detail in a forum that's not limited to a few minutes at an earnings call.

Elon Musk24:56

Well we can go a little longer

Andrea Williams25:01

I'll take the next question from Eric Sheridan at Goldman Sachs

Eric Sheridan25:34

Thanks so much for taking the question. Maybe if I could turn to the scaling of compute you laid out at the beginning part of the call when you think about a framework for applying that compute to the external opportunity that presents itself from cloud services relative to the internal needs of that compute for scaling cursor and Grok and Grokpot how is your view evolved about striking the right balance in that mix and how to think through the output from a monetization standpoint of what that mix might produce for the business in the next 12 to 18 months.

Elon Musk25:37

Thanks so much.

Elon Musk25:48

Well the allocation relative the relative allocation of compute to

Elon Musk25:55

Third parties versus internal is something that that's going to change from one month to the next

Elon Musk26:12

I guess as a rough approximation our goal is to kind of split it 50 50 more or less where half of the compute is used internally and half of it is is rented to others

Elon Musk26:29

But that that number could shift 60 40 one way or the other it's it could it's going to be dynamic and obviously our approach is to rent at the effectively the spot market rate as opposed to sign these long term deals

Elon Musk26:37

Our belief is is that the value of compute per watt will increase over time not decrease

Elon Musk27:07

The reason that for that I think it should be obvious to people really is that as you improve the AI software as the models get better and better they're able to you get more useful intelligence per watt and the value of that compute is proportionate to the useful intelligence per watt and that's why you see things like even old computers like H100s renting for more than they rented when they were new

Elon Musk27:23

And I think that's likely to continue I think we're going to face a shortage of super intelligence compute and that shortage is going to remain for a long time so

Elon Musk28:01

So I I think the smart move is to do short term contracts and to and essentially that to make to place the bet on useful intelligence per watt increasing rapidly which obviously is done so that's what's happened so far and also if you look at say how are our short term contracts renewing are they renewing at higher dollars per watt or lower and we see them renewing at higher dollars per watt

Elon Musk28:12

Not lower dollars per

Elon Musk28:18

Watt

Elon Musk29:27

We are also frankly hounded relentless that's just the situation here that's why I posted that sort of video meme of the Monty Python cheese shop sketch where the guy goes into a cheese shop to get some cheese and they actually have no cheese and so he goes like what about this kind of cheese what about that kind of cheese and they really just don't have any cheese so we've actually tried to offload some of our inference compute to other cloud providers so that we can use more compute for training and we get the cheese shop sketch you know they'll say like well we'll ask them about what about some you know GB 300s nope don't have any of those what about you know some GB 200s no don't have any of those what about some TPUs nope what about some trainings nope what about some okay how about some H100s and like well we might have some overseas somewhere and then they'll check and come back say nope we don't have that either so it's like a ridiculous

Elon Musk29:37

Yeah so I don't think we're going to have a demand issue here um and

Elon Musk29:48

Like it's not impossible I'm not saying this will happen it's not impossible that we will have a six month payback period for compute next year

Andrea Williams30:04

We're now going to turn to some questions from individual investors that were posted directly onto our public Q&A platform. Since we've talked a lot about compute deployment terrestrially, let's move to a question on V3 sats.

Andrea Williams30:15

So when will capacity gains from V3 satellites actually show up as meaningfully higher speeds and lower latency? For users how many V3 sats are needed before the network feels noticeably better in high demand areas?

Elon Musk30:31

I think we'll need a few hundred V3 satellites for people to really feel the impact because right now with very few satellites you'll get an impact and then you know 10 minutes later it won't be there.

Elon Musk30:38

So a few hundred satellites and I think we can achieve that by mid next year. It's not yeah

Andrea Williams30:51

Take number six which is can you provide an update on Starbase Louisiana what's the timeline and what's your current confidence level in achieving a first Starship launch from the site as early as 2029

Elon Musk31:05

Well our internal aspiration for first launch from Louisiana is actually in two years so 28 would be is is our goal

Elon Musk31:15

But I think 29 is is is highly likely. I think we'll be at scale launching from Louisiana in scale at scale in 29.

Elon Musk31:18

Highly confident

Andrea Williams31:27

You ready to wrap thanks everyone this wraps up the Q3 2026 earnings report thank you all for tuning in and we will see you next quarter

Bret Johnsen31:29

Thank you