Back in February during Tesla Motors [NASDAQ:TSLA] Q4 2015 earnings call, a buoyant Tesla CEO Elon Musk told the world that despite recording a record loss of $320 million using the GAAP method of accounting, Tesla would turn a profit by the end of this year.
That prediction, based on Tesla’s highest production quarter to date as well as a plan to increase Tesla’s yearly production volume to half a million cars per year by 2020, seemed plausible, if a little optimistic. Indeed, with Tesla positively hemorrhaging cash to fund construction of the Gigafactory just outside Reno, NV., — not to mention continued expenditure on Model X, Model 3, Autopilot development and Tesla’s recently-launched Tesla Energy products — some even viewed Elon Musk’s predictions as impossible.
Today however, via Tesla’s Q1 2016 earnings report, we have learned that Tesla has taken the first tentative steps toward making Musk’s prediction a reality, thanks to another record-breaking quarter in terms of production and delivery, as well as a far tighter operating budget that has resulted in a leaner, more efficient company.
As always, Tesla’s quarterly shareholder letter lays out some of the firm’s key moments of the past quarter, promotes some of its goals for the future, and some aspirations for the mid and long-term. It tells of Tesla’s plans to speed up production to reach a half-million units per year by 2018 rather than 2020 as stated in the previous quarter, a 45 percent increase in Tesla Model S orders year on year, and a cash balance that has risen by $245 million sequentially (inclusive of asset-based lending and exclusive of Tesla Model 3 reservation revenue).
If all goes according to plan, Tesla says, this means that we’ll see Tesla produce between 80,000 and 90,000 electric cars this year, resulting in an increase in its gross margin for both Model S and Model X, but a slightly higher capital expenditure than previously predicted due to a change in production ramp up plans.
As always, the following report has been written using information provided by Tesla in its official Q1 2016 Shareholders Letter, which you can read on Tesla’s shareholder site, as well as information divulged during Tesla’s Q1 2016 earnings call.
Everything Tesla is in demand
Interestingly, while news sites and fans might be focusing on Model 3 right now and the massive number of $1,000 pre-reservations it has commanded to date, figures from Tesla’s Q1 earnings call remind us that it’s not just Model 3 that is in demand right now: pretty much every Tesla product is.
According to Tesla, Model S net orders rose 45 percent in Q1 2016 when compared with Q1 2015, and rose faster than Q4 2015. This was in part driven by an increased number of orders placed in North American and European markets, as well as a big increase in orders from Asia when compared to the previous year. Consequently, Model S still sits at the top of the premium sedan market in North America and Europe, while gradually gaining market share elsewhere.
To meet growing demand, Tesla says it has rapidly grown its sales, service and supercharger locations worldwide. In total, it says it should open more than 70 new retail locations this year, as well as continue to introduce more service center locations as well as supercharger and destination charger sites. By the end of the quarter, Tesla claims 3,600 Superchargers and 3,700 high-power destination chargers are switched on around the world.
It’s not just cars either: Tesla’s Q1 2016 earnings report contains healthy figures for its Tesla Energy products. In the first quarter alone, Tesla said it delivered over 2,500 Powerwall and 100 Powerpacks across North America, Asia, Europe and Africa, enough to store 25 Megawatt-hours of storage.
Production increases (again)
During Q4 2015, Tesla broke its record for electric car production, managing to produce a total of 14,037 cars during the quarter. While it was only a small increase on the previous quarter, it helped make 2015 the best year to date for Tesla in terms of vehicle production.
For Q1 2016, Tesla increased that figure to 15,510 vehicles, 10 percent higher than the figure recorded in Q4 2015. But while Tesla was able to meet its Q1 production goals for Model S — producing 12,851 examples during the first three months of the year — it fell short of its Model X production goal, with just 2,659 examples of its flagship SUV rolling off the production line.
This meant that Tesla did not meet its projected delivery levels for Model X, delaying some customer’s cars a little and leading to some consternation online among those who have been waiting upwards of four years for their car to arrive. The reason? Quality control concerns with early Model X cars, which Tesla executives have been trying to address by personally checking over cars as they come off the production line.
If you think that equates to a few spot checks here and there, think again: on the earnings call following the release of the Q1 financials, Tesla CEO Elon Musk said that he is currently working from a desk at the end of the Tesla Model X production line. Indeed, it’s a place he frequents so much that he told those on the call he often sleeps there, making use of a sleeping bag located by his desk to ensure he’s always on hand.
Despite the pressure on the production line, Tesla reports it is making significant progress in making its Fremont factory as streamlined and efficient as possible, meaning a ramp-up in production volumes should happen for both Model S and Model X well before the end of the year. Some of these improvements have come from equipment installed during Q3 and Q4, while other improvements and cost-savings come from the introduction of better parts in the revised Tesla Model S, which debuted at the end of Q1 but which Tesla had been quietly producing before the end of the quarter.
But most importantly, it is the overwhelming demand for Model 3 which has resulted in a noticeable shift of priorities and goals at Tesla.
Tesla says while its Gigafactory production plans are continuing as planned, with the first battery cells due to be produced on site by the end of the year, it is shifting its automotive production plans up a gear, shifting its goal of producing half a million cars annually from 2020 to 2018. Assuming Tesla Model S and Model X production continues to increase along the trends set in previous quarters, we feel at this point that it’s pertinent to note that not all of Tesla’s half-million cars in 2018 will be Model 3, although it’s likely that Tesla will put emphasis on Model 3 production at least initially to clear the massive waiting list for the affordable electric sedan.
That theory is backed up by Musk, who told reporters during the Q1 earnings call that Tesla has set a July 1, 2017 deadline for Model 3 parts with suppliers. Described by Musk as something of an “impossible date,” the July 1, 2016 deadline won’t mean that we’ll see Model 3 cars rolling off the production line earlier than expected however. That’s because Tesla will need to spend several months in pre-production runs before it can shift into building customer’s cars.
When that does happen — some time toward the end of next year — Musk said he was confident that Tesla should be able to produce between 100,000 and 200,000 Model 3 before the end of the year. As always, customers in the U.S. can look forward to getting their cars first.
Thanks to careful management, losses narrow
Unlike Q4 2015, which saw widening losses, Tesla managed to make use of leaner management and processes during Q1 2016, resulting in a 3 percent drop in non-GAAP operating expenses on the previous quarter. Indeed, Q1 2016 is the first time in three years that Tesla has been able to reduce operating expenses, something which should make investors happy.
While Tesla’s non-GAAP operating expenses were $417 million, GAAP operating expenses were $501 million, including $83 million of non-cash stock based compensation. While Tesla prefers to use the non-GAAP method of accounting — since it allows the inclusion of future income from cars leased by customers — GAAP method accounting is the accounting system generally accepted by Wall Street.
But while Tesla managed to reduce its operating expenses by an impressive 3 percent during the quarter, it was its capital expenditure which saw the biggest cost savings. By using improved budgeting methods, Tesla says it reduced capital expenditures by 47 percent from Q4 to $217 million, something it says it was able to do without compromising its future growth and Gigafactory, Model 3 or other big projects.
And while Tesla increased its cash and cash equivalents to $1.44 billion at the end of Q1 by improving its cash management and drawing down an additional $430 million against its asset-based credit line, it notes that Model 3 reservation funds have made little impact on its financials, primarily because reservations recorded before the end of the quarter are mostly listed as ‘receivables’. That’s because the majority of Model 3 reservation holders placed their reservations down using credit cards and Tesla had not yet received the funds at quarter end.
It does note however that reservation deposits received after the quarter end during the start of April allowed it to pay back $350 million of its asset-based credit line.
Combined with Q1 Services and other revenue of $121 million, plus $1.03 billion in GAAP Automotive revenue, Tesla’s non-GAAP net loss decreased by 34 percent over Q4 to $75 million, equivalent to $0.57 loss per basic share. Q1 GAAP net loss was recorded as $282 million or $2.13 per basic share.
With the full impact of Model 3 reservations due to be quantified in the Q2 earning call and Tesla operating a leaner, meaner ship, Elon Musk’s predictions of profitability could very well come true in the coming year. However, with Tesla still struggling with build quality on Model X — and the costs associated with its recent Model X third-row seat recall — it will need to tackle more than just money management to make sure it hits its lofty targets.
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