Tesla Earnings: Model 3 Production Is Ramping Up

Electric-car company Tesla's (TSLA -1.92%) third quarter marked an interesting combination of record revenue and the company's worst quarterly loss ever. But Tesla also importantly said it was still on track with its most recently stated production targets for Model 3 -- targets that are still aggressive despite being delayed twice.

Here's a close look at the quarter's results and what to expect from Tesla in 2018.

Image source: Tesla.

The raw numbers

Data source: Tesla quarterly shareholder letters.

Tesla's non-GAAP loss per share widened significantly year over year to a loss of $0.69 in Q4. In its third-quarter shareholder letter, Tesla management said it expected higher per-unit vehicle production costs, driven by low-volume early production Model 3 units, to continue to negatively impact the company's automotive gross profit margin. Specifically, management said it expected its non-GAAP automotive gross margin to fall from 18.7% in Q3 to about 15% in Q4.

Its automotive gross margin did fall, but to a worse degree than management anticipated. Tesla's non-GAAP automotive gross margin in Q4 was 13.8%, down significantly from its 22.2% gross margin in the year-ago quarter.

But an automotive gross margin below management's guidance was expected since Tesla delayed its Model 3 production targets after its third-quarter shareholder letter was published. "This is more than fully explained by the slower than expected ramp of Model 3," Tesla explained in its fourth-quarter shareholder letter. "Since Model 3 production was in the early stages of the ramp, allocation of full operating costs and depreciation made its gross margin negative." 

In short, Tesla's Model 3 is weighing on profitability -- and it will continue to do so until Model 3 production ramps up to higher-volume levels.

Fourth-quarter highlights

• Quarterly vehicle deliveries hit a record high of about 30,000 units, up about 30% year over year, primarily driven by Model S and X sales.
• Combined Model S and X deliveries in Q4 were up 28% year over year and 10% sequentially.
• Tesla deployed 143 megawatt-hours of energy storage products in Q4, up 45% year over year -- and this does not include Tesla's 129 megawatt-hour energy storage deployment in South Australia, which will be recognized in Q1.
• Tesla's energy generation and storage revenue was up 127% year over year.
• Energy generation and storage gross margin was 5.5%, up from 2.7% in the year-ago quarter.
• Tesla delivered 1,542 Model 3s during Q4, up from 222 in Q3.

Looking ahead

The big forward-looking news from the quarter was that Tesla maintained its aggressive target for achieving a Model 3 production rate of 2,500 units per week by the end of this quarter. Given that Tesla's first quarter ends in less than two months, management must have a high level of confidence in this target. Tesla also notably maintained its target for a Model 3 production rate of 5,000 units per week by the end of Q2.

Model 3. Image source: Tesla.

Acknowledging its inability to hit its previous Model 3 production targets -- management was initially forecasting to achieve a Model 3 production rate of 5,000 units per week by the end of 2017 -- Tesla explained why it believes it can achieve these revised targets this time around:

It is important to note that while these are the levels we are focused on hitting and we have plans in place to achieve them, our prior experience on the Model 3 ramp has demonstrated the difficulty of accurately forecasting specific production rates at specific points in time. 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.

For the full year of 2018, Tesla says it expects "hundreds of thousands" of people to switch to Tesla's electric vehicles as it ramps up Model 3 production. This will drive year-over-year revenue growth that will "significantly exceed" its 55% year-over-year revenue growth in 2017, Tesla said.

In addition, Tesla is targeting to "at least triple" its energy storage products sales this year.

Finally, Tesla says in 2018 it will demonstrate the profitability of affordable electric vehicles, aiming for an impressive 25% gross margin for the Model 3 after production stabilizes at 5,000.

"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," Tesla said.