Tesla’s Earnings: Why It Costs So Much Money to Be Successful

Tesla Model S P85D
Source: Tesla

Losses doubled to $75 million and revenue fell short of expectations, its gross margin deflated over the previous quarter and deliveries came up a hair short of the company’s projections, but Tesla Motors — which released its third quarter report on Wednesday evening after the bell — is okay with that.

Ordinarily, those factors would spell trouble with investors, but Tesla’s stock remained strong in after-hours trading and pre-market on Thursday morning because the company was able to show that demand for its Model S sedan — notably in North America — remains strong as many believed that it would taper, which would have serious repercussions since it’s the only product available from the company at the moment.

But despite shutting production at its Fremont, Calif., factory for a few weeks to re-tool for the Model X SUV and increase Model S production, Tesla managed to deliver 7,785 Model S cars around the world during the third quarter, just 15 units off the company guidance of 7,800. Tesla is still adamant that it will reach its goal of producing 35,000 global Model S sedans for the full year, and delivering 33,000.

Again, as it has with quarters past, Tesla reiterated that it’s capacity constraints — not a lack of demand — that is holding the company back. In order to boost production to meet the demand worldwide, as well as prepare for the Model X production and deliveries, Tesla has been investing heavily in increasing its output. This, in turn doesn’t reflect well on Tesla’s financial profile from a profit point of view, but all signs are indicating that the underlying business fundamentals are remaining strong.

Source: Tesla

“In contrast to Q3, actions to further increase capacity have been designed to be less disruptive, thus enabling us to increase output at a steadier and more predictable pace,” Tesla said in its letter to shareholders. “For example, our Model X body center will initially be independent from our Model S body center, allowing us to start building Model X bodies without impacting Model S production. We have started to upgrade our second paint shop with state-of-the-art paint application technology and a level of automation that will also have the capacity to cover Model 3 needs,” the company continued.

Despite all the re-tooling, Tesla surpassed analyst expectations for earnings with $0.02 per share, when it was predicted that the company would post a loss of $0.01 per share. Revenues surged to $852 million on a GAAP basis for the quarter, shy of the anticipated $892 million. The company made $93 million in the period from selling its zero-emissions credits, and another $31 million from powertrain sales to other automakers.

Overall, the company’s loss widened to nearly $75 million, but it was quick to point out that it’s also rapidly expanding its Supercharger networks around the world, while constructing a $5 billion battery factory in Nevada (which, it pointed out, is actually moving ahead of schedule). With so many capital-intensive projects, it’s not surprising that the company hasn’t yet turned a profit.

One concern, though, was the company’s decision to push back the delivery date of the Model X — again. On one hand, this is an industry where taking more time to get it right is paramount. But the longer Tesla postpones the SUV, the longer it has to rely on the Model S to generate revenue on its own.

Source: Justin Lloyd-Miller/Autos Cheat Sheet

Tesla emphasized that its outlook for 2015 remains unchanged, and the introduction of the Dual Motor and autopilot features should only help boost demand, especially in northern climates. By next year, Tesla says the complexities and hiccups incurred by incorporating those new features to the assembly line should be ironed out by the end of the fourth quarter.

Tesla also didn’t shy away from noting that it has no plans to slow its pace of investment. “We plan to spend about $350 million in capital expenditures in Q4 as we continue to invest in even more production capacity, accelerate the pace of Gigafactory construction, and continue vehicle development and our global expansion,” it said. “In anticipation of this effort, we now expect Model X deliveries to start in Q3 of 2015, a few months later than previously expected. This also is a legitimate criticism of Tesla – we prefer to forgo revenue, rather than bring a product to market that does not delight customers.

“Doing so negatively affects the short term, but positively affects the long term. There are many other companies that do not follow this philosophy that may be a more attractive home for investor capital. Tesla is not going to change.”

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