Tesla publishes breakthrough Q3 results
Things looked bleak for Tesla and Elon Musk last month. The short sellers were mounting a charge and then the SEC came knocking, demanding that Musk step aside from his position as chairman of the board. Shares in the company tumbled to below $250 as the wolves began circling. Some people began wondering who would come along to buy the company if it and Elon were finally driven off a cliff. Apple? Amazon? Google?
Today, Tesla released its Q3 earnings letter. Did it bring good news? Let’s put it this way: shares in Tesla were up dramatically after the letter was released. Everyone who believes in Tesla is heaving a huge sigh of relief this afternoon.
Alright, we have kept you in suspense long enough. Was Tesla profitable in the third quarter as Elon Musk promised? The answer is a resounding “Yes!” Gross profit margins on the Model 3 were above 20% and the company had GAAP earnings of $311.5 million, or $1.75 a share, on revenue of $6.8 billion. The consensus among analysts was a loss of 5 cents per share. Even CleanTechnica’s supposedly bullish estimate was too soft.
Here are the major bits of good news from Tesla’s third quarter earnings letter regarding its automobiles. Vijay will be updating you separately on the financial aspects in today’s announcements and Carolyn is zeroing in on the good news from the energy side of the business. Meanwhile, Kyle and much of the CleanTechnica team liveblogged the conference call as Zach waited in line to ask some questions (which he actually never got to ask due to the long line and expansive answers).
The bullet-point highlights are as follows:
- GAAP net income of $312M, non-GAAP net income of $516M
- Operating income of $417M and operating margin of 6.1%
- Free cash flow of $881M supported by operating cash flow of $1.4B
- $3.0B of cash and cash equivalents at Q3-end, increased by $731M in Q3
- Model 3 GAAP and non-GAAP gross margin > 20% in Q3
- Reaffirm expectation of continued GAAP net income and free cash flow in Q4
Tesla delivered 56,065 Model 3 sedans in the third quarter. That’s a strong number, but what is even better news is that many of the cars traded in on those Model 3s originally sold for less than $35,000. That means the Model 3 — which had a base selling price of $49,000 during Q3 — is pulling customers from more than just the ranks of premium car buyers. A significant number of buyers are mainstream shoppers who are reaching higher because they believe the Model 3 is well worth the extra money — there isn’t even a leasing option yet.
“This leads us to believe that the total market potential for Model 3 is larger than just the premium sedan market,” the company says. “Additionally, we are working hard to bring down the price of Model 3 to $35,000. We have taken a step forward by recently introducing a medium range version that has a 260-mile EPA estimated range and a starting price of $46,000. Better than expected Model 3 cost reduction is allowing us to bring more affordable options to the market sooner.”
Tesla is justifiably proud of how energy efficient the Model 3 is. While the competition’s electric cars can go up to 2.8 miles per kilowatt-hour, the Model 3 is capable of 4.1 EPA miles per kilowatt-hour. That efficiency allows the car to offer competitive range with a smaller and less expensive battery pack. The company claims the Model 3 in its long-range, rear-wheel-drive configuration weighs only 3% more than a gasoline-powered equivalent.
Tesla is ready to begin overseas deliveries in the near future. “The mid-sized premium sedan market in Europe is more than twice as big as the same segment in the US. This is why we are excited to bring Model 3 to Europe early next year. The reception at the Paris Auto Show as well as the Goodwood Festival of Speed was very strong. We expect to start taking orders in Europe and China for Model 3 before the end of this year.
“In order to significantly increase the affordability of Model 3, we have decided to accelerate our manufacturing timeline in China. We are aiming to bring portions of Model 3 production to China during 2019 and to progressively increase the level of localization through local sourcing and manufacturing. Production in China will be designated only for local customers,” the company says.
Profitability is strongly affected by the number of hours it takes to manufacture each car. In Q3, those hours for the Model 3 fell below those needed to produce the Model S and Model X for the first time. Tesla successfully navigated challenges getting all its newly manufactured cars delivered to customers in Q3 but solved most of the problem by having company employees deliver cars directly to customers at their home or place of business.
Model S & Model X
Tesla continues to improve the profitability of its Model S and Model X vehicles while delivering 27,710 of them. Demand in China was weakened by new import tariffs, but the company was able to increase sales in other markets to offset the loss of sales in China.
Tesla Stores & Supercharger Network
Tesla opened four new store and service locations in the third quarter, bringing the worldwide total to 351. It also added 44 new Supercharger locations for a total of 1,352 stations with over 11,000 charging points. There are also more than 20,000 Destination Chargers now in operation.
There are more than 373 service vehicles on the road and the company has started opening its own dedicated body shops in high-density locations, with more on the way.
For a while during the past three months, it really did feel like Tesla was teetering on the edge of a precipice. But now, the extent of the disruption it is causing in the automotive world is becoming clear — even to longtime shorts. As we have noted often here at CleanTechnica, the Model 3 is outselling and outgrossing many of the mainstream cars in the American market. The company made money in Q3 and Elon says he expects the next quarter to be profitable as well.
As much as legacy automakers may hope something will slow Tesla down and give them a chance to catch up, it appears the upstart from Silicon Valley is pushing just as hard as ever to achieve its goals. As for the short sellers who would like nothing better than to see Tesla fail, October 24, 2018, will be a dark day for them as they realize their big bets against Elon Musk have turned to ashes.
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