Tesla Quarterly Earnings – Revenue Up, Losses Widen, and Elon Musk Apologizes – Stock Soars 9%

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Tesla (NASDAQ:TSLA) released its first quarter 2018 results today and it posted a mild beat on revenue and miss on earnings (losses) per share. Tesla offered generally positive guidance, including its forecast to be cash flow positive, for the second half of the year, and share prices spiked 9 percent in after-hours trading.

  • Q2 2018 (Automotive) revenue of $4 billion ($3.92 expected) up 47% from $2.29 billion a year ago
  • Q2 2018 (Automotive) loss of -$717.5 million for the quarter
  • Cash balance of $2.2 billion at the end of the second quarter, down $300 million
  • Earnings per share miss, loss of $3.06 vs $2.88 expected
  • Model 3 production sustained 5,000/week in July
  • Expecting positive GAAP net income and positive cash flow in Q3 and Q4 2018

Elon Musk Apologizes, Wall Street Responds

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Today's Tesla earnings call comes at a time where the automaker finds itself at a crossroads of sorts. They're taking larger than ever losses, battling reports of quality problems and bleeding cash, yet they've just completed some major restructuring, continue to hit production milestones, and revenue continues to soar.

Elon Musk didn't help things last May during the first quarter earnings call when he called one analyst "boneheaded" and "boring" for asking hard questions about the finances of Tesla.

Today the CEO apologized not once, but twice to the same analysts on the call. "I hope you'll accept my apology," he said directly RBC Capital caller Joseph Spak. Musk cited stress and a lack of sleep for his breach of manners:

I'd like to apologize for being impolite on the prior call. Honestly, I really think there's no excuse for bad manners, and I was kind of violating my own rule in that regard. There are reasons for it in that I had gotten no sleep, had been working 110 hour, 120 hour weeks, but nonetheless, there's still no excuse.

-Elon Musk On Q2 Investor Call 8/1/2018

The analysts reciprocated their acceptance of his apology at certain points. This brought a bit of lighthearted awkwardness that one rarely hears on large corporate earnings calls.

But the move may have been more than ceremonial. Elon is still seen as the key to the company's long-term success by many investors and restored faith in the found of Tesla is vital to its performance on Wall Street, something Mr. Musk is probably all too aware of.

Tesla stock soared in after-hours trading, climbing briefly to a full 11 percent gain before relaxing to a bit over 9 percent, at $329, up from $300.84 at the close of regular trading hours. The automaker first breached $329 per share in April 2017 and is off a ways from its high of $384 in July of that same year.

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Model 3 Production Saga: 10,000 Units Per Week By End of This Year

Elon Musk with the Model 3

Model 3 production woes have been almost legendary at Tesla. All eyes are on the company to churn these bread-and-butter sub $40k sedans out in order to see the automaker become truly successful.

We reported on what was perhaps the most bizarre twist in all the saga, the overnight installation of a massive production tent located on the factory's parking lot overnight installation of a massive production tent located on the factory's parking.

Then the Palo Alto-based automaker was hit with reported quality woes involving Model 3 sedans. It seemed the quarter was destined to only contain bad news until..

Tesla announced they hit 5,000 units per week early last month. This was a major milestone laid out by Musk and Tesla specified that this level of production was sustained, not burst.

Just as important, Tesla started to see real improvement with Model 3 margins. Margins went from almost flat to 15 percent, still a ways off the 25 percent mark that CEO Elon Musk has called for. We'll touch on cost reductions in a moment.

6,000 Model 3's made per week by September was laid out on the call. Ultimately, the electric car manufacturer wants to see its factories churning out 10,000 units per week by the end of this year, doubling the current rate of production.

Tesla said it made 53,339 vehicles in the second quarter and delivered 18,449 Model 3's, totaling 40,768 vehicles. The rest was made up of 22,319 Model X and Model S.

Tesla expects to product 50,000 Model 3s in the third quarter.

Tesla Outlook for the Remainder of 2018, Cutting costs and Profitability

Tesla to have its gearboxes and electric motors manufactured at the Gigafactory in Nevada.

As Tesla looks to real profitability in the coming quarters and years, controlling costs is extremely crucial in the automotive business. Revenue is massive in this business and margins are unforgiving. Tesla recently completed some major cost restructuring and this past June the automaker announced layoffs totaling more than 3,000 jobs.

"From an operating plant standpoint, from[sic] onwards I really want to emphasize our goal is to be profitable and cash flow positive for every quarter going forward," Musk said.

The company ended the quarter down $300 million in cash to a total of $2.2 billion. Cash burn has been a problem for them in the past and there have been quarters where cash burn has approached a billion. Tesla must shore up cash flow and operate with a positive cash flow, which Musk touched on:

"From an operating plant standpoint, from onwards I really want to emphasize our goal is to be profitable and cash flow positive for every quarter going forward," Musk said

And it seems like Tesla will be able to do it. Automotive gross margin increased to 20.6% GAAP up from 19.7% in the previous quarter which means Tesla makes more money from every car it sells than it did before.

Beyond operating costs, Tesla has paired down an initial $3.4 billion capital expenditure estimate for the year to a slimmer $2.7 billion. We believe its because the company has scaled down its level of ambitions for expensive and exotic automation production-aids.

All of the cost reduction initiatives seem to be working, although we've reported on some strange measures that the company is deploying. If it works, it works?

If Tesla can continue to vastly ramp up Model 3 while improving margins at the same time then there are sunny days ahead for the young automaker.


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