Insights

70% Up in Revenue and Achieved Positive Free Cash Flow: Q3 Earnings Review of Tesla

02 November 2018  |  NEWS

Summary:

  1. Model 3 Car selling volume increased 3 times
  2. Tesla Production Ramped Up in 2018
  3. Revenue doubled while operating expenses declined
  4. Bring Model 3 to Europe and China early next year

Tesla (NASDAQ:TSLA) grabbed great attention from market after their beat the expectation Q3 earnings announcement.


70% Up in Revenue than Last Quarter


Income from operation also turned positive and jumped to $417 million in this quarter.


The most surprising news is Tesla’s free cash flow turned into black. Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. If free cash flow is negative, the company has to continue funding for business operations, on the other hand, if free cash flow is positive, it means the company will profit more as the business goes on.


As the chart above showed, it has been a long time that Tesla reported negative free cash flow until this big jump into positive this quarter.

q3_tesla_twitter

In early April, Elon Musk twitted that Tesla would be profitable and positive free cash flow. We would like to see in details about the Q3 earnings and business progress about Tesla.

Model 3 Car selling volume increased 3 times

First of all, we would like to see the breakdown of Tesla’s revenue.


We can see Automobile sales contributed 86% to the total revenue in Q3, which is assumed to be the most important factor to the incremental revenue. Automotive leasing and Energy generation and storage and other revenue contributed $946 million, and it is 4.4% up than the same period last year.

Model 3 sales surged 3 times in volume from last quarter. Based on trade-ins received from customers, more than half of those trade-in vehicles were priced lower than $35,000 when new, which means the revenue increased from Model 3 was supposed to be $1,330 million. But the actual increase of automotive revenue was $2,760 million. It is clear that the average selling price of Model 3 sold was much higher than $35,000. Q3 starting price of a Model 3 was $49,000, which is 40% higher than $35,000. Tesla said they are working hard to bring down the price of Model 3 to $35,000.


Chart: Original purchase price of Model 3 trade-ins

Tesla Production Ramped Up in 2018

In August 2017, the company announced there were 455,000 net reservations of Model 3 vehicles and less than 20% have cancelled due to their changing to direct order system. Tesla had delivered about 82,000 vehicles in 2018, which means there are still 280,000 vehicles need to be delivered as soon as possible. Production rate was always the most-worried problem with Tesla, and is a bottle-neck for the company as it could not catch up with the reservations.

Tesla’s production hit record with more than 5,000 vehicles/week from June, and it is targeting to produce 10,000 vehicles/week.

Revenue doubled while operating expenses declined

Q3 earnings showed unexpectedly high gross margin result for Model 3. The sales cost ratio decreased to 77.7% from Q2’s 85%. Operating expenses to revenue ratio (including research and development and selling, general administrative expenses) declined half than 6 months ago. The rock-solid operating performance will roll out of the goal of remaining profitable in Q4, and hopefully in 2019 as well.

Bring Model 3 to Europe and China early next year

The company said they would continue to increase produce and deliver Model 3 in Q4. The goal of delivering 100,000 Model S and X vehicles remains unchanged and achievable.Tesla expects gross margin for Model 3 to remain stable in Q4, and FCF will also keep positive, although additional tariffs in Q4 on parts sourced from China will impact the company’s gross profit negatively by roughly $50 million. The company said earlier this month that its factory in Shanghai would help it minimize the impact of tariffs.

Tesla sees the mid-sized premium sedan market in Europe is more than twice as big as the same segment in the US. The company expects to start taking orders in Europe and China for Model 3 before the end of this year.


This report was published by Stockclip, Inc. on 26/10/2018.

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