Amid reports of a slowing ramp up in Model 3 production, and the company’s own warning last quarter 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”, investors were looking ahead with trepidation to today’s Tesla Q4 earnings report, especially with Elon Musk’s attention recently seemingly more focused on outer space than dominating the terrestrial auto sector, despite the stock rising in recent days on hopes that the company will be able to get to its new, reduced target of 5,000 cars per week.
Well, this time around, there was no immediate bad news, when Tesla reported a Q4 loss of $771 million, or an adjusted EPS of ($3.04), better than the $3.20 expected, if more than 4 times greater than the $0.69 loss one year ago.
There was more good news hiding in Tesla’s top line: the company reported revenue of $3.29bn, just above the $3.28 billion expected, which however was offset by the decline in gross margin which was 13.8%, far below the 14.8% estimate.
But the biggest surprise was in Tesla’s cash burn which unexpectedly plunged from a record $1.4 billion in Q3 to just $276.8 million in Q4, far below the $900 million expected. Altogether, Tesla burned $3.475 billion in cash in 2017. Looking ahead, Tesla warned that “capital expenditures in 2018 are projected to be slightly more than 2017.”
Then we get to the all important auto deliveries: here we learn that in Q4, Tesla delivered 1,542 Model 3 cars to eagerly waiting customers, which however as Bloomberg notes, means that some 400,000 are still waiting. But most importantly, and in light with the recently reduced guidance, Tesla still sees Model 3 weekly production target of 2,500 by the end of Q1 and 5,000 by the end of Q2, and sees overall 2018 revenue growth significantly exceeding 2017, which of course was to be expected.
Tesla also reported a record number of Model S and X deliveries in Q4, or 28,425. Combined Model S and Model X deliveries in Q4 grew 10% globally compared to the company’s prior record in Q3, and grew 28% compared to Q4 2016. Overall, Telsa now sees Model S, X Deliveries About 100,000 in 2018, which however means that the company’s which is expected to ramp up production in the coming years will post flat Model S and X deliveries this year “constrained by the supply of cells with the old 18650 form factor.”
Some more good news: customer deposits for future deliveries surged in Q4 from $686 million to a record $854 million, the highest yet and offsetting the decline observed at the start of the year. This is largely the result of November’s debut of the Semi and Roadster, and represents what Bloomberg dubbed “unconventional fundraising”
However, in one potential red flags, Musk said that “in order to incorporate our learnings and be capital efficient, we intend to start adding enough capacity to get to a 10,000 unit weekly rate for Model 3 once we have first hit the 5,000 per week milestone.” Which would suggest that the “capacity” – and tools – are not there at this point, which means even more CapEx will be spent in the next few weeks, which may explain the sharp drop in Q4 cash burn.
Commenting on the company’s endless bottlenecks, Musk said that “what we can say with confidence is that we are taking many actions to systematically address bottlenecks and add capacity in places like the battery module line where we have experienced constraints, and these actions should result in our production rate significantly increasing during the rest of Q1 and through Q2.“
Away from its auto business, Tesla said it had installed only 87 megawatts of solar-power systems in the fourth quarter: this was the company’s most disappointing report on the solar side yet since buying SolarCity for $2 billion in 2016.
To be sure, Tesla acknowledged the decline, noting installations of “20% less than Q3 2017” which it attributed to its “decision to close certain sales channels” and a short supply of Powerwalls for home customers who wanted to combine it with solar. The alternative – there is just not enough demand for the product – was not discussed.
What is notable is that even as cash burn slowed, total long-term debt soared to $9.5 billion from just under $6 billion at the end of 2016.
Some more on Tesla’s outlook, from the release:
We expect Model S and Model X deliveries to be approximately 100,000 in total, constrained by the supply of cells with the old 18650 form factor. As our sales network continues to expand to new markets in 2018, we believe orders should continue to grow. With demand outpacing production, we plan to optimize the options mix in order to maximize gross margin. As stated above, we continue to target a weekly Model 3 production rate of 2,500 by the end of Q1 and 5,000 by the end of Q2. Also, we are focused on achieving our target of 25% gross margin for Model 3 after our production stabilizes at 5,000 cars per week.
We expect energy storage products to experience significant growth, with our aim to at least triple our sales this year. We expect energy generation and storage gross margin to improve significantly in 2018 as we enter the year with a backlog of higher-margin commercial solar projects and a more profitable energy storage business due to manufacturing efficiencies from scaling.
Service and Other gross margin should improve in each subsequent quarter in 2018. This will be achieved mainly through improved service productivity via Mobile Service and better remote diagnostics for Model 3. Diagnostics architecture has been substantially redesigned for Model 3 in order to reduce physical service visits by more than 50%. Additionally, Superchargers will start generating revenue in 2018 with pay per use charging primarily by Model 3 customers.
Capital expenditures in 2018 are projected to be slightly more than 2017. The majority of the spending will be to support increases in production capacity at Gigafactory 1 and Fremont, and for building stores, service centers, and Superchargers.
Musk closed optimistically: “2018 will be a transformative year for Tesla,” he wrote in the shareholder letter. “This is the year when we believe we can achieve true cost parity — producing a premium EV like the Model 3 will be no more expensive than producing an ICE vehicle, something that many believe is not yet possible.”
So with the benefit of no further cuts in the delivery calendar, the modest top and bottom line beats, the slowing cash burn, and the rising customer deposits, the company’s stock after dropping lower initially is now modestly higher.
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