Amid reports of a liquidity shortage following reports of cash back demands from suppliers, questions about Model 3 production problems and the “tent” as well as growing concerns about slumping demand, not to mention CEO Elon Musk’s bizarre behavior, and – of course – a gargantuan cash burn, it is safe to say that Tesla’s earnings were the most hotly expected numbers of the week, if not the quarter.
So, here is what Tesla reported moments ago:
- Q2 Revenue $4.00 billion, Exp. $3.97BN
- Q2 Adjusted loss per share: $3.06, Exp. $2.90
- Q2 Adjusted automotive gross margin 21%, Exp. 16%
- Q2 Cash Burn: $739.5 Million
Incidentally, the company’s GAAP Net Loss was $717.5MM, an all time quarterly high.
This is what revenue looks like:
And earnings, both adjusted and GAAP:
On the income statement side, the company said that GAAP operating expenses increased to $1.24BN, an increase driven by a $103MM restructuring cost.
As regards to auto deliveries, we already knew what Q2 looked like: Tesla reported that it produced 53,339 vehicles in Q2 and delivered 22,319 Model S and Model X vehicles and 18,449 Model 3 vehicles, totaling 40,768 deliveries.
… So it was all about the forecast and in its release, the company said that during the month of July, it have “repeated weekly” production of approximately 5,000 Model 3 cars multiple times while also producing 2,000 Model S and X per week. Having achieved its 5,000 per week milestone, Tesla says it will now continue to increase that further, with an aim being to produce 6,000 Model 3 vehicles per week by late August.
The company then expect to increase production over the next few quarters beyond 6,000 per week, “while keeping additional capex limited.”
Why are these numbers notable? Because as Musk notes, “a total vehicle output of 7,000 vehicles per week, or 350,000 per year, should enable Tesla to become sustainably profitable for the first time in our history – and we expect to grow our production rate further in Q3.”
Eventually, Tesla aims to increase production to 10,000 Model 3s per week “as fast as we can”. Tesla added that the majority of Tesla’s production lines “will be ready to produce at this rate by end of this year,” but “will still have to increase capacity in certain places” and “will need our suppliers to meet this as well. As a result, we expect to hit this rate sometime next year.”
Looking at just Q3, Tesla said it expects to produce 50,000 to 55,000 Model 3 vehicles “which will represent an increase of 75% to 92% from the prior quarter.”
Which is somewhat strange, because Bloomberg’s Model 3 Tracker suggests the company hasn’t been able to sustain its end-of-quarter burst rate of 5,000 a week. According to the model, which estimates production using two datasets of vehicle identification numbers (VINs), the average weekly rate since July 1 has fallen just short of 4,000 of the sedans.
What about demand? According to the release, demand for Model S and Model X vehicles remains high, with Q2 2018 being our highest ever Q2 for Model S and Model X orders.
Musk also discussed the recent production bottlenecks, explaining what went wrong in the factory. As Musk has mentioned before, he went overboard with the robots. It was so complicated, he had to build an extra production line in a tent, using humans, and says that “last quarter, it became clear that GA3, our main general assembly line… was designed to work with hundreds of robotic lifters that bring components to the line.”
However, “due to the density of the line and the relatively high downtime of the lifters, ramping GA3 became substantially more complicated than we had anticipated. That said, significant progress has been made in the last few months, and GA3 is now expected to reach a production rate of 5,000 per week very soon”
Tesla also touched on the Shanghai Gigafactory, saying that “construction is expected to start within the next few quarters, though our initial investment will not start in any significant way until 2019, with much of it expected to be funded through local debt.”
One key aspect that investors were looking at as noted above, was Tesla’s cash burn, which in Q2 came in at $739.5 million, better than the estimated $900 loss, however this was largely the result of another decline in CapEx, which shrank to $610MM in Q2 from $655MM last quarter and $959MM a year ago.
Commenting on its cash burn, the company said cash outflow from operating activities in Q2 2018 was $130 million, “which was significantly better than outflows of $398 million in Q1.”
This improvement occurred despite a substantial increase in finished goods vehicle inventory of $579 million as a result of the timing of deliveries.
And a key fact that may explain why the stock is higher in the after hours right now, Tesla reported that “Model 3 gross profit excluding non-cash items shifted from negative in Q1 to positive in Q2, driving significant improvement in cash profitability.”
In other words, Tesla again expects to be “sustainably profitable and cash-flow positive” beginning in the second half of this year; and as Bloomberg notes, that “sustainably” is new and would be a surprise to analysts, who on average don’t expect that to happen until late 2019.
Tesla also revealed when it will exhaust its EV credits: “In July 2018, we delivered our 200,000th vehicle in the US, which means that our US customers will have access to the full $7,500 federal tax credit until the end of 2018, at which point it will phase out over the course of 2019.”
Telsa also reported that customer deposits decreased compared to Q1 to $942 million, however it notes that “this does not reflect the incremental deposits we received once we opened the Model 3 configurator for orders in early Q3 2018.”
Now the outlook:
As noted above, Tesla expects to produce 50,000 to 55,000 Model 3 vehicles in Q3, and notes that deliveries should outpace production in Q3 “as our delivery system stabilizes.”
The company expects Model 3 gross margin should grow significantly to approximately 15% in Q3 and to approximately 20% in Q4 predominantly due to continued reduction in manufacturing costs and to some extent an improving mix, which is curious considering production is largely taking place inside a tent.
Those hoping for a chearper Model 3 will have to wait as average selling price will remain high for several quarters “as we expect a richer mix in the initial wave of Model 3 deliveries to Europe and APAC.”
But what happens to margins when the “cheap” Model 3 rolls out? “We believe future Model 3 cost savings will more than offset the normalization of the Model 3 average selling price in the second half of 2019, resulting in improving gross margins and stable gross profit per vehicle.”
The company repeats that its target of delivering 100,000 Model S and Model X vehicles this year remains unchanged.
Meanwhile, “used car sales in particular are growing rapidly and are becoming more profitable” and additionally, “a vast majority of our customers coming off lease are either obtaining a new Tesla or keeping their existing car” an assertion which we doubt the market will easily swallow.
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The market reaction was chaotic, and while the stock initially slumped, it is now well over 5% higher in the after market, surging as a result of what appears to be better than expected cash burn, a strong Model 3 production pipeline, no concerns about liquidity and a generally upbeat perspective on the stock.
And as we now turn our attention to Tesla’s conference call, which if last quarter was any indication should be anything but “boring”, here is a Bingo suggestion for the call.
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