Q2 2025 was defined by Tesla's Robotaxi launch in Austin, the first paid rides with no one in the driver's seat, alongside an autonomous factory-to-home delivery. Total automotive revenue rose 19% sequentially on stronger new-Model-Y ASPs even as deliveries grew only 14%, and the energy business hit its highest gross profit yet on high-margin Powerwall deployments. Free cash flow was thin at $146 million as CapEx climbed, and management flagged near-term headwinds from ~$300 million of sequential tariff costs and the pending repeal of the $7,500 EV credit at the end of Q3, warning of a few rough quarters. Elon reiterated a goal of covering roughly half the U.S. population with autonomous ride-hailing by year-end, an Optimus 1M-unit/year target within five years, and his concern over his ~13% voting stake.
Good afternoon, everyone, and welcome to Tesla's Second Quarter 2025 Q&A Webcast. My name is Travis Axelrod, Head of Investor Relations, and I'm joined today by Elon Musk, Vaibhav Taneja, and a number of other executives. Our Q2 results were announced at about 3:00 P.M. Central Time in the Update Deck, to be published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question-and-answer portion of today's call, please limit yourself to one question and one follow-up. Please use the raise hand button to join the question queue. Before we jump into Q&A, Elon has some opening remarks. Elon?
Thanks, Travis. We've had a very exciting quarter. We were able to successfully launch Robotaxi, providing our first drives with no one in the driver's seat, with paying customers in Austin. As some may have noted, we've already expanded our service area in Austin. It's bigger and longer, and it's going to get even bigger and longer. We were expecting to really greatly increase the Austin service area to well in excess of what competitors are doing. That's hopefully in a week or so, a couple of weeks?
Yeah, a couple of weeks.
A couple of weeks or so. Then we're getting the regulatory permission to launch in the Bay Area, Nevada, Arizona, and Florida, and a number of other places. As we get the approvals and we prove out safety, we will be launching autonomous ride-hailing in most of the country. I think we'll probably have autonomous ride-hailing in probably half the population of the U.S. by the end of the year. That is at least our goal, subject to regulatory approvals. I think we'll technically be able to do it. Assuming we get regulatory approvals, it is probably addressing half the population of the U.S. by the end of the year. We are being very cautious. We do not want to take any chances. We are going to go cautiously. The service areas and the number of vehicles in operation will increase at a hyper-exponential rate.
Some other notable things. Model Y in June became the best-selling car in Turkey, Netherlands, Switzerland, and Austria. It is, I believe, the best-selling car of any kind in the world still. Autonomy is a big factor there. Even with just supervised self-driving, it's a huge selling point. It's worth noting that we do not actually yet have approval for supervised FSD in Europe. Our sales in Europe, we think, will improve significantly once we are able to give customers the same experience that they have in the U.S. This is, I think, a very important point to convey. We've been working with our main country regulator, which is the Netherlands. I think we're close to getting approval with the Netherlands. It's got to go to the EU. It's quite a Kafkaesque.
In fact, Kafka had no idea that something like the EU could exist. Beyond Kafka, challenges with bureaucracy. We will get the approvals. I think we'll get some people in Europe will have an experience similar to that of the U.S. in most of Europe this year, hopefully at least partially in this quarter. We also had some regulatory challenges in China, which we're hoping to unblock shortly, because we also cannot provide supervised FSD in China currently. We hope to unblock that soon. That's another major. It really is the single biggest demand drive. Within the U.S., as we get confident about safety in different geographic areas, we'll loosen up on how much somebody has to be laser-focused, have their eyes laser-focused on the road, because that's been a common complaint.
In fact, it does create an odd safety issue where people will sometimes disengage Autopilot, then do something, change the radio, or maybe look at the phone, drive with their knee, and then re-engage Autopilot, which obviously is less safe than simply keeping Autopilot on. Anyway, that experience will improve in the next several weeks. Because of our focus on Austin with no one in the driver's seat, the production release of Autopilot is actually several months behind what people experience on a Robotaxi in Austin. Now we have the Robotaxi in Austin launched. We'll be adding back those elements so that there will be a step change improvement in the Autopilot experience for people outside of Austin. As you can tell, this is very much sort of autonomy is the story. We need the physical product without which you cannot have autonomy.
Once you have a physical product, the autonomy is what amplifies the value to stratospheric levels. We also launched the Tesla Diner, which has been a huge hit. It actually got worldwide attention, which is unusual for a diner. Diners do not typically get headline news around Earth. This is a pretty special diner. If you are in the LA area, it is worth visiting. It is sort of a shiny beacon of hope in an otherwise sort of bleak urban landscape, frankly. It is really quite a lovely experience. Great job by the Tesla team there. On the Full Self-Driving front, continue talking about that. We are continuing to make significant improvements just with the software. We are expecting to increase the parameter count. Actually, at this point, I think we can probably 10x, almost 10x the parameter.
Yeah, roughly.
Yeah, roughly 10x the parameter count. This is actually a very tricky thing to do because as you increase the parameter count, you get choked on memory bandwidth. We currently think we can 10x the parameter count from what people are currently experiencing. Not just a 4x, actually 10x increase in parameter count. A lot of improvement on the existing hardware to happen. Energy is growing really well despite headwinds from tariffs and supply chain challenges. The Megapack is expanding capacity quickly. We have upgrades to the Megapack that will make it even better. We had record Powerwall deployments again in Q2. I think batteries are just going to be a massive thing. The scale of battery demand is, I think, not that many people appreciate just how gigantic the scale of battery demand is.
The way to think about it is that the U.S. sustained power output for the U.S. grid is around one terawatt. Average usage is less than half a terawatt. If you add batteries to the mix, you can run the power plants 24/7 at full capacity, thus doubling, more than doubling, the energy output per year of the United States just with batteries. That is again a big deal. It is a really big deal. Optimus. We are evolving the Optimus design and really getting Optimus to the point where it is a phenomenal design. We are at Optimus version two right now, sort of two and a half. Optimus three is an exquisite design, in my opinion, and will be an incredible, as I have said many times before, predictive. It will be the biggest product ever. It is a very hard problem to solve.
You have to design every part of it from physics-first principles. There's nothing that's off the shelf that actually works. You've got to design every motor, gearbox, power electronics, control electronics, sensors, the mechanical elements. We've also got to train Optimus to use its lens and its sensors with a neural net. We'll be applying the same techniques that we applied for our car, which is essentially a four-wheeled robot. Optimus is a robot with arms and legs. The same principles that apply to optimizing AI inference on the car apply to Optimus because they're both really robots in different forms. It is important to note that Tesla is by far the best in the world at real-world AI. A clear proof point for that would be if you compare, say, Tesla to Waymo.
Waymo's got the car is best tuned with God knows how many sensors. Yet, isn't Google good at AI? Yes, but they're not good at real-world AI. Thus far, Tesla is actually much better than Google by far, and much better than anyone at real-world AI. By far, Tesla has the best inference efficiency. I think a key figure of merit for AI is, what is the intelligence per gigabyte? People talk about parameters, blah, blah, blah. I think we'll stop talking about parameters and talk about gigabytes because with the parameters, you can have 4-bit parameters, 8-bit parameters, 16-bit parameters. The actual constraints in the hardware are how many gigabytes of RAM and how many gigabytes per second you can transfer from RAM. Therefore, it is not a parameter constraint. It is a byte constraint.
Tesla has the highest intelligence density of any AI by far. I have a lot of insight into this with xAI. xAI's Grok is the smartest AI overall, but Grok 4 is a giant beast. It's sort of at the terabyte level. Kind of important to note, Tesla has the best intelligence density. Intelligence density will be a very big deal in the future. It is now. With Optimus 3, which is really the right design, it doesn't have at this point, there's no significant flaws with the Optimus 3 design. We are going to retool a bunch of things. There'll probably be prototypes of Optimus 3 into this year and then scale production next year.
We're going to try to scale Optimus production as fast as it's humanly possible to do so and try to get to a million units a year as quickly as possible. We think we can get there in less than five years. That's my sort of guess. That's a reasonable aspiration, is a million units a year. Five years. That seems like an achievable target. In conclusion, so far, 2025 has been a very exciting year. A lot of major milestones. We've made clear demonstrable progress in autonomy that a lot of naysayers said we would not achieve. It is worth noting that we have done what we said we were going to do. It doesn't mean we're always on time, but we get it done. The naysayers are sitting there with egg on their face. Great progress by the Tesla team.
Yeah, and I do think if Tesla continues to execute well with vehicle autonomy and humanoid robot autonomy, it will be the most valuable company in the world. There is a lot of execution between here and there. It does not just happen. Provided we execute very well, I think Tesla has a shot at being the most valuable company in the world. Obviously, I am extremely optimistic about the future of the company. The best way to predict the future is to make it happen. We are making it happen here with the Tesla team. I would just like to say thanks to all of our supporters. I think we have got an incredibly exciting future.
Great. Thank you very much, Elon. And Vaibhav has a few remarks as well.
Service. As Elon mentioned, Q2 was an interesting quarter in a few respects. We started ramping up the production of the new Model Y at all our factories. We rolled out our Robotaxi service in Austin and delivered a car completely autonomously directly from the factory to the customer's home. It is a seminal point to get to this thing. I mean, it took a lot of effort. I really want to thank everybody at Tesla to make this happen. It was not an easy thing to do, but we did it. It took time, but we have just begun the next phase for the company. The One Big Bill has a lot of changes that would affect our business in the near term. The first among those changes is the repeal of the IRA EV credit of $7,500 by the end of this quarter.
Given the abrupt change, we have limited supply of vehicles in the U.S. this quarter, as we are already within lead times to order parts to build cars. We've rolled out all our planned incentives already, and we'll start paying them back as we start to sell. If you're in the U.S. and looking to buy a car, place your order now, as we may not be able to guarantee delivery for orders placed in the later part of August and beyond. We'll also make changes to certain emission standards by reducing the amount of penalty to zero. This, in turn, will have an impact on the new sales of regulatory credits to other OEMs, and in turn, will lead to lower revenues. While we've never planned our business around such sales, it will nonetheless impact our total revenues going forward.
On the automotive product portfolio, the entire lineup is updated. Globally, we're seeing an increase in the number of test drives. We started the production of the lower-cost model as planned in the first half of 2025. However, given our focus on building and delivering as many vehicles as possible in the U.S. before the EV credit expires and the additional complexity of ramping a new product, the ramp will happen next quarter, slower than initially expected. One thing which is grossly underappreciated, and Elon talked about it, is that all our vehicles in the lineup are capable of autonomy. This is by far the biggest differentiator between us and the competition. Our vehicles top safety standard as is, but with FSD, they are and will continue to set a new standard for safety within vehicular transportation. We published our vehicle safety report earlier today.
You can see a car on FSD is 10x safer than a car not on FSD. We've started seeing an uptick in FSD adoption in North America in recent months, which is a very promising trend. Just to give you perspective, since we moved to version 12 of FSD, we've seen the adoption rates really increase. We've started seeing on the automotive revenue front, despite reduction in regulatory credit revenue, the total automotive revenue increased by 19% sequentially, even though total deliveries only improved 14%. This was primarily due to improved ASPs because of the new Model Y. This helped in improving margin sequentially as well, along with improved mix and higher fixed cost absorption, despite an increase in cost from tariffs. We started seeing the impact of tariffs in our P&L.
Sequentially, the cost of tariffs increased around $300 million, with approximately two-thirds of that impact in automotive and rest in Energy. However, given the latency in manufacturing and sales, the full impacts will come through in the following quarters. Costs will increase in the near term. While we're doing our best to manage these impacts, we are in an unpredictable environment on the tariff front. The margins for the energy generation and storage businesses improved sequentially, while deployment reduced, primarily due to the ramp of power deployments at high margins. We were able to achieve our highest gross profit for the business yet. Note that the overall deployments will continue to vary quarter to quarter. I think Elon covered this, that industrial storage will make a difference in this drive towards AI and data center growth.
The energy requirements are increasing at a rapid scale as AI applications are very energy-hungry. The quickest path to scale up energy is deploying storage. This is something that our customers have started realizing. Despite this business having the largest impacts from tariffs, we are seeing customers willing to accept some of the tariff impacts. The big bill has certain adverse impacts even for the energy business, most notably on the residential storage business due to the early expiration of consumer credits by the end of this year. The challenges of the storage business therefore remain both from the bill and from the tariffs, and we are doing our best to try and manage through this. We will see shifts in demand and profitability. The margins for our service and other businesses improved sequentially, primarily due to higher profits from Supercharging and improvement in insurance and service center profitability.
Operating expenses also grew sequentially as we continued our investment in AI projects, including additional expenses related to employee-related costs, including higher stock-based compensation and depreciation for AI compute. Our operating expenses, especially R&D-related spend, will continue to grow. We believe even in the current environment, it is the right strategy to keep making investments in these areas to position us for the long term. Other income grew sequentially, primarily from the mark-to-market adjustment on Bitcoin holdings, which was a $284 million gain in Q2 while being a $125 million loss in Q1. Just want to remind people that this would keep creating volatility based on the Bitcoin pricing. While operating cash flows increased sequentially, so did our CapEx, resulting in $146 million of free cash flow.
We continue to make investments in various aspects of manufacturing, like the Cybercab, Semi lines, and other manufacturing spend, and the expansion of our AI initiatives. Our latest expectation for the year in terms of CapEx is in excess of $9 billion. To summarize, we have near-term challenges in our business due to the negative impacts of the bill and tariffs. However, the investments that we have made for AI, robotics, and our lead in energy set us up for a bright future. I would like to thank the whole Tesla team, our customers, our investors, and supporters for their continued belief in us.