Amid reports of a slowing ramp up in Model 3 production, and Elon Musk’s own repeated warnings that manufacturing challenges during a production ramp such as this “makes it difficult to predict exactly how long it will take for all bottlenecks to be cleared or when new ones will appear” and that his overreliance on automation meant he himself is now back on the factory floor…
… in addition to numerous other debacles, including Musk joke-tweeting about bankruptcy, or admitting he made a mistake in betting on “excessive automation'”, not to mention the departure of Tesla’s Autopilot chief last month, following a fatal crash in California in March, investors were looking ahead with borderline terror to today’s Tesla Q1 earnings report despite the stock rising in recent days on hopes that the company will finally be able to hit its new, reduced target of 5,000 cars per week as it is now reportedly making 2,000 Model 3s per week.
Well, they can all breathe a sigh of relief because contrary to growing skepticism, there was no immediate bad news, when Tesla reported a Q1 (non-GAAP) loss of $568 million, or an adjusted EPS of ($3.35) (and $4.19 on a GAAP basis), better than the $3.41 expected, if nearly 3 times more than the $1.33 loss one year ago.
There was more good news hiding in Tesla’s top line: the company reported revenue of $3.41bn, also magically just above the $3.32 billion expected, which was further boosted by an increase in the non-GAAP automotive gross margin which rose sequentially from 13.8% to 18.8%,well above the 14.3% estimate, if dropping from 27.8% one year ago (also, on a GAAP basis, consolidated gross profit was naturally far lower, at 13.4%). Meanwhile, GAAP automotive gross margins fell from a quarter a year ago to 19.7% from 27.4%
Echoing what Elon Musk said on the Q4 call, Tesla said it will reach full GAAP profitability in Q3 and Q4. That said, there was a major caveat, with Tesla warning that it would do so only if it “execute according to our plans.” What are the plans?
This is primarily based on our ability to reach Model 3 production volume of 5,000 units per week and to grow Model 3 gross margin from slightly negative in Q1 2018 to close to breakeven in Q2 and then to highly positive in Q3 and Q4.
Well, good luck with those 5,000 units per week.
But once again the biggest (non) surprise was in Tesla’s cash burn which after plunging from a record $1.4 billion in Q3 to just $276.8 million in Q4, far below the $900 million expected, is baaaack, and soared to $1.05 billion in Q1, or roughly $12 million per day. This means that Musk’s plan of being cash flow positive by the second half is pretty much scrapped.
Also amusing: with everyone now suddenly talking about Tesla’s cash burn, the company pulled the oldest trick in the book, and declined to include a line item on free cash flow this quarter, something it has regularly done int he past, which means algos have to do the math on their own to calculate the $1.05 billion cash burn.
What is also notable is that in its outlook, Tesla said it has “significantly cut back its capex projections by focusing on the critical near-term needs that benefit us primarily in the next couple of years” and that at this stage it is “expecting total 2018 capex to be slightly below $3 billion, which is below the total 2017 level of $3.4 billion.”
Unfortunately, as Bloomberg’s David Welch notes, it is unclear “how Tesla will pull back on capex while building capacity for another 5,000 of the Model 3 a week, developing the new roadster, the semi and Model Y sport utility. Perhaps we wil get more detail on the call.“
More importantly, it is now clear that cash burn is certainly becoming a concern for both Elon Musk, and his shareholders.
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Then we get to the all important auto deliveries: here, we learn that Tesla just delivered its highest-ever number Models S and X. As Tesla notes, in Q1, it produced 24,728 Model S and X and 9,766 Model 3 vehicles, and delivered 21,815 Model S and Model X vehicles. More importantly, Tesla delivered 8,182 Model 3 vehicles, totaling 29,997 deliveries for the quarter.
Musk also proudly informed investors that prior to a planned shutdown in mid-April to further increase production, “we produced more than 2,000 Model 3 vehicles for three straight weeks, and we hit 2,270 in the last of those weeks.”
Looking ahead, Tesla says it continues to target Model 3 production of 5,000 per week in about two months, although notes that prior experience has shown the difficulty of accurately forecasting specific production rates because of the “exponential nature” of the ramp.
Tesla also said it will begin offering new options such as all-wheel-drive and the base model with a standard-sized battery pack, after achieving a production rate of 5,000 per week.
The company also unveiled that Model 3 net reservations, including configured orders that had not yet been delivered, continued to exceed 450,000 at the end of 1Q. During 2Q, Tesla expects to shut down production for about 10 days, which includes the shutdown taken in April, to address bottlenecks across the lines and increase production to new levels.
There is a problem however: according to Musk, short-term operational and logistical issues once again led to an increase in the number of Model S and Model X vehicles in transit to customers at the end of Q1.
Focusing on Model 3 production, the company said that its “Model 3 general assembly line consists of fewer than 50 steps, which is about 70% less than conventional assembly lines. All Model 3 vehicles use only one standard body frame, down from more than 80 for Model S, a wiring harness that has 50% less mass than average vehicles, and a fraction of the number of controllers, connectors and CPUs.”
Another problem emerges in terms of near term growth, with Tesla admitting that “in the medium term, we expect to achieve slightly lower margin due to higher labor content in certain areas of manufacturing where we have temporarily dialed back automation.“
Some more good news: customer deposits for future deliveries jumped once again in Q1 from $854 million to a record $984 million, the highest yet and is largely the result of November’s debut of the Semi and Roadster, and represents what Bloomberg dubbed “unconventional fundraising”
What is notable is that even as cash burn slowed, total long-term debt jumped to a nausea inducing – for a cash flow negative company – to $10.8 billion from just under $6 billion at the end of 2016.
Going back to the company’s all important cash burn, here is what Musk said:
- Cash outflow from operating activities in Q1 2018 was $398 million primarily due to an increase in inventory and accounts receivable balances as a result of the timing of deliveries. Higher number of Model S and Model X vehicles in transit at the end of Q1 2018 compared to Q4 2017 had a negative impact of about $120 million on our working capital. Additionally, due to a substantial increase in our deliveries in the last few days of the quarter, our accounts receivables negatively impacted our operating cash flow by $169 million in Q1. Both of these factors provided cash inflows during April.
- We received $112 million in net funding from our vehicle lease warehouse lines, automotive asset-backed notes, auto tax equity fund and collateralized lease borrowings. When combined with free cash flow, this is a better indicator of the cash consumed in the quarter.
- More than half of our capex in Q1 was related to completion of work for Model 3 production capacity at Fremont and Gigafactory 1 plus payments to suppliers for tooling.
Once again, taking it all togetgher, the company burned just over $1 billion this quarter. This is a problem because as Bloomberg notes, “Musk has to come through with his plans to be cash flow positive in the second half of the year.”
Some more on Tesla’s outlook, from the release:
During Q2, we expect to shut down production for about 10 days, which includes the shutdown we took in April, to address bottlenecks across the lines and increase production to new levels. Our goal is to produce approximately 5,000 Model 3 vehicles per week in about two months.
We are in the process of changing the quarterly production pattern of Model S and X vehicles for the various worldwide regions to ensure a more linear flow of deliveries through the quarter. We believe this will provide a better customer experience and reduce the stress on our delivery system. Consequently, Model S and X deliveries in Q2 will likely be similar to Q1 but should pick up considerably in Q3 to achieve our goal of 100,000 deliveries for the full year.
Our long-term gross margin target of 25% for Model 3 has not changed. In the medium term, we expect to achieve slightly lower margin due to higher labor content in certain areas of manufacturing where we have temporarily dialed back automation, as well as higher material costs from recently imposed tariffs, commodity price increases and a weaker US dollar. On the other hand, our average selling price is significantly higher than prior projections, so we expect to achieve higher gross profit per vehicle than we previously estimated.
Quarterly non-GAAP operating expenses should grow sequentially at approximately the same rate as in the past four quarters, with our gross profit expected to grow much faster than our operating expenses. Thus, provided that we hit the 5,000 unit milestone in our projected timeframe and execute to the rest of our plan, we will at least be profitable in Q3 and Q4 excluding non-cash stock based compensation and we expect to achieve full GAAP profitability in each of those quarters as well. Also, considering our capex targets, we expect to generate positive cash in Q3 and Q4, including the inflow of cash that we receive in the normal course of our business from financing activities on leased vehicle and solar products.
We have significantly cut back our capex projections by focusing on the critical near-term needs that benefit us primarily in the next couple of years. At this stage, we are expecting total 2018 capex to be slightly below $3 billion, which is below the total 2017 level of $3.4 billion. Ultimately, our capex guidance will develop in line with Model 3 production and profitability. We will be able to adjust our capital expenditures significantly depending on our operating cash generation.
Interest expenses in Q2 should amount to roughly $160 million and losses attributable to non-controlling interest should remain in line with the last quarter.
Musk closed optimistically: “We have good visibility of our path to fully ramp and stabilize Model 3 production this year. Model 3 is already the best-selling electric vehicle and, more importantly, on the cusp of becoming the best-selling premium sedan in the US. The path to an electrified revolution is not easy, but what we’re trying to achieve is worth fighting for.”
There is just one very big problem: as we showed earlier, the competition is coming.
So with the benefit of no further cuts in the delivery calendar, the modest top and bottom line beats, and rising customer deposits, offset by the surge surge in cash burn the company’s stock after dropping lower initially is now… largely unchanged.
