Tesla Vows Sustainable Profitability As Quarterly Loss Blows Past Expectations

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Eight years into life as a public company Tesla remains every bit as volatile as it’s ever been, concluding an unusually woolly quarter with a loss per share that was worse than analysts expected, record production, plans for a Chinese plant and a promise that sustainable profitability is fast approaching

Photo: © Depositphotos.com/huettenhoelscher

Tesla bulls liked what they heard and helped the stock rise as much as 11% in after-market trading.

"Our goal is to be profitable and cash flow positive for every quarter going forward," CEO Elon Musk said on a call with analysts. The company said gross margin on its critical new Model 3 was "slightly positive" in the quarter, but should reach 15% in the third quarter. Tesla said its overall automotive gross margin was 21% in the quarter.

Musk’s clean transportation and solar power company reported revenue of $4 billion that was a bit better than consensus expectations that Bloomberg put at $3.97 billion, but its loss per share was $3.06, well above a consensus estimate of $2.90. Along with the better revenue figure, the company reassured investors that hitting a goal of making 5,000 Model 3 sedans a week at the end of June wasn’t a fluke and that it managed to build approximately that number “multiple times” in July.

“Having achieved our 5,000 per week milestone, we will now continue to increase that further, with our aim being to produce 6,000 Model 3 vehicles per week by late August,” Musk and Tesla CFO Deepak Ahuja said in a letter to shareholders. “We then expect to increase production over the next few quarters beyond 6,000 per week, while keeping additional capex limited.”

Hitting that level of production is a key accomplishment for Tesla, yet Musk’s impulsive behavior during the quarter, including attacks on the media, investors who short the stock and a British diver who criticized his effort to aid the rescue of stranded Thai soccer players, were a distraction. Musk on Wednesday sought to make amends for one bit of erratic behavior: declining to take questions from analysts on the first-quarter results call that he'd deemed unworthy in favor of chatting with a Tesla fan.

"I'd like to apologize," he told Sanford C. Bernstein & Co. analyst Antonio Sacconaghi, who he'd cut off during the call in May for asking "boring bonehead questions."

"There’s really no excuse for bad manners," he told Sacconaghi.

The company pushed to cut costs during the quarter, notably with a 9% reduction in headcount, saw a steady outflow of veteran executives and apparently sought refunds from some suppliers to help ensure it achieves profitability in the second half. But Tesla bears still question its long-term viability.

“We wonder whether surge production techniques to support self- congratulatory tweets are economically efficient ways of ramping production, or whether customers will be happy with the quality of a car rushed through production to prove a point to short sellers,” fund manager David Einhorn said in Greenlight Capital’s letter to investors, prior to Tesla results. The fund lost 5.4% in the quarter in part because of its short position in Tesla.

“We also wonder whether the company’s lack of capital and its determination to show positive cash flow is delaying investments in additional manufacturing capacity and infrastructure necessary to fulfill the bulls’ long-term growth expectations.”

Still, Musk and Ahuja suggested that Tesla has turned a corner with the just-concluded quarter.

“It took 15 years to execute on our initial goal to produce an affordable, long-range electric vehicle that can also be highly profitable. In the second half of 2018, we expect, for the first time in our history, to become both sustainably profitable and cash flow positive.”

Third-quarter production of Model 3s, nominally priced from $35,000 but currently selling for more than $50,000, should be between 50,000 and 55,000, the company said.

“While Tesla hit the revenue number analysts predicted, its losses widened beyond expectations," said Michelle Krebs, executive analyst for Autotrader. "It’s hard to see how Tesla can keep its promise to finally be profitable in the second half and sustain profitability.”

The company also confirmed plans to move ahead with a $5 billion Chinese Gigafactory that will initially have capacity to make 250,000 Tesla vehicles and battery packs when it opens in about three years.

“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,” Musk and Ahuja said in the letter.

"For China, our plan would be to essentially use a loan from local banks in China and fund the Gigafactory in Shanghai with local debt," Musk said on the call.

Tesla appears to have a nearly insatiable desire for capital as, aside from ongoing investment in its Nevada Gigafactory and Fremont assembly plant, it’s also looking at adding a Gigafactory in Europe that will undoubtedly also costs billions of dollars. At the same time, it's bearing all the costs of building and maintaining an expanding global charging network, retail stores and service centers, the combined cost of which could surpass $20 billion by 2025, according to an estimate by UBS equity analyst Colin Langan.

Should Tesla hit its second-half profitability target, look for a new round of fundraising to kick in, Langan said in a recent research note. 

Musk dismissed such speculation on the results call.

"We will not be raising any equity at any point," he said. But after a bit more consideration he added, "we certainly could raise money, but I think we do not need to."

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