Just two days after it announced successful completion of merger negotiations between itself and solar panel company SolarCity, California-based Tesla [NASDAQ:TSLA] published its official Q2 2016 earnings report. And while Tesla managed to miss its earnings targets for the quarter with losses far larger than Wall Street had predicted, the company shows continued incredible growth as it rapidly undergoes metamorphosis from an automaker into a vertically-stacked energy company.
But while Tesla — still officially known as Tesla Motors Inc. — is working hard to bring about Elon Musk’s grand vision for the company, there are some more fundamental challenges that face the company in the near future, like “will it meet its delivery targets for 2016?”
The answer according to Tesla CEO Elon Musk, is an emphatic “yes.”
While Tesla managed to miss its original Q2 production figures, Tesla says in its shareholder letter that it ended the quarter “consistently producing nearly 2,000 vehicles per week,” which it claims will put it on track to meet a production target of 50,000 vehicles in the second half of the year, or just over 81,000 cars for the year. And although Tesla is continuing to burn through cash at an astonishing rate — making us wonder just how long it will be before the company needs to make another public offering to keep its coffers lined — Tesla is, as one commentator put it, still floating on “thin air”.
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 Q2 2016 earnings call.
Demand remains high
Despite what Tesla calls a “product transition” during the quarter in which it subtly changed the appearance of the Tesla Model S electric car to bring it more in line with the design of the Model X and upcoming Model 3, it reports demand for the Tesla Model S and Tesla Model X remaining high. While it admits it had no refreshed Model S electric cars on demonstration fleets at Tesla Stores across the world — and only a few Tesla Model X demonstration cars available for test drives, customers continued to show increasing demand for Tesla cars.
Delivering 14,402 cars in total during the quarter — slightly higher than the end-of-quarter unofficial estimate released at the start of July — Tesla said 9,764 new Model S and 4,638 Model X cars arrived with their new owners. While that’s lower than Tesla had originally hoped, there were, as we noted back in July, a large number of cars in-transit between Tesla’s California factory and customers in Europe and Asia. Since Tesla does not count a car as having been delivered until all necessary paperwork has been signed and the owner is driving it away, those vehicles could not be counted in Tesla’s end of quarter tally.
To meet continuing demand for its products, Tesla is also working to dramatically increase the number of retail locations it has around the world. At the moment, it reports an acceleration of Tesla Store launches in the coming few months, averaging a new retail location somewhere in the world every four days between now and the end of Q4. Focusing on high-population centers like Taipei, Seoul and Mexico City — where the brand is still reasonably new — Tesla says it is also working to expand sales and service in locations where Tesla is already very well established (and existing stores and service centers are struggling to keep up with demand).
Despite failing to reach its original production goals, Tesla’s production was up on the quarter, managing to produce a total of 18,345 vehicles during Q2. That’s an increase of 18 percent over Q1, 2016 and up 43 percent from Q2 2015. But while production at the start of the quarter was lower than Tesla had originally hoped, Musk said during the earnings call that Tesla was on target to achieve vehicle production volumes of around 2,200 cars per week by the end of Q3, thanks in part to improved efficiencies at Tesla’s Fremont facility.
Talking of production, Tesla said that with its Model 3 design phase now complete, it has been able to release Model 3 for tooling, production planning and validation. As a consequence, it is readying itself to expand its production line yet again to produce Model 3 at the Fremont facility. While the majority of Model 3 production facilities will be constructed later this year in the form of a new Model 3 body and general assembly center, Tesla says it already has some production equipment for Model 3 is in situ on its existing production lines.
While the Tesla Gigafactory is now officially open for business, cell production hasn’t yet started in earnest, but Tesla says in its earnings report that it has already accelerated construction on subsequent Gigafactory buildings to reach a rate of 35 Gigawatt-hours per year of cell production by 2018, dramatically increasing the capacity of cells it can produce for Model 3.
Revenue up, earnings target missed, losses larger than expected
With so much investment being made by Tesla right now on multiple fronts — including everything from its second-generation Autopilot hardware through to improvements to Model X and Model S, Model 3 validation and of course Tesla Energy products and Gigafactory preparation — Tesla is burning through an astonishingly large amount of cash right now.
Indeed, expenses were dramatically up, including a jump in non-GAAP operating expenses of $452 million, 8 percent higher than they were in Q1. And while Tesla’s revenue was up during the quarter to a total of $1.6 billion (a little higher than Wall Street’s prediction of $1.533 billion) its total earnings was far worse than predicted.
Wall Street analysts had expected Tesla to manage a non-GAAP loss of $0.53 per share for the quarter, but due to increased expenses, exchange rate fluctuations and other financial commitments Tesla had during the quarter, the actual non-GAAP losses were double Wall Street’s best guess at $1.06 per share, equivalent to $150 million in total.
Using the GAAP method of accounting — a system of accounting which Wall Street follows but which does not allow Tesla to factor in all of the revenue streams it has such as leasing arrangements — Tesla’s losses stood at $293 million, or $2.09 per basic share. This was all despite a tremendous rise in cash and cash equivalents during the quarter, driven by Tesla’s $1.7 billion secondary public offering and the receipt of many Tesla Model 3 deposits made in the tail end of Q1 but not processed by their respective Credit Card processing partners until the start of Q2.
But while Tesla remains upbeat, there’s now no mention of Tesla turning a profit toward the end of the year. Instead, it talks of modest 2-3 percent growth in its Automotive gross margins during Q3 and Q4, as well as a sequential increase in expenses during the latter half of the year, driven in part by a need to accelerate Model 3 development and production, as well as higher sales and service costs associated with expanding Tesla’s presence around the world.
Add in the planned acquisition of SolarCity and a predicted $2.25 billion investment in the second half of the year on capital expenditures related to Model 3 production, and it’s looking like Tesla’s losses may widen further before it can recoup the benefits of the mass-market, affordable, long-range car that the world is so eagerly anticipating.
As always though, you never know quite what Tesla has planned next, and that could change things very dramatically overnight, as Tesla has proven countless times before.
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