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Tesla Inc.'s Q1 Loss Widens Amid Model 3 Production Ramp-Up

By Daniel Sparks - May 3, 2018 at 10:36AM

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With over $1 billion of negative free cash flow, investors are watching Tesla's Model 3 production ramp-up closely.

After reporting its worst-ever quarter loss in the fourth quarter of 2017, electric-car company Tesla (TSLA -0.32%) was under pressure going into its first quarter. Investors expected another big loss and were hoping the automaker's ramp-up of its important Model 3 was on track. Sure enough, this is how things played out. Model 3 production jumped, but Tesla still managed to report a net loss of $710 million.

Looking ahead, of course, Tesla investors are hoping Model 3 production can increase to a level that supports profitable sales volume. But this remains nothing more than an optimistic forecast for now.

Tesla Model 3 interior.

Model 3. Image source: Tesla.

Here's a look at the most important takeaways from Tesla's first quarter.

First-quarter results: The raw numbers

Metric

Q1 2018

Q1 2017

Change

Vehicle deliveries

29,997

25,055

20%

Revenue

$3.4 billion

$2.7 billion

26%

Non-GAAP EPS

($3.35)

($1.33)

N/A

GAAP EPS

($4.19)

($2.04)

N/A

Data source: Tesla first-quarter shareholder letter. Table by author.

Tesla's first-quarter revenue increased 26% year over year, driven primarily by Model 3 deliveries and higher energy storage sales. 

First-quarter vehicle deliveries increased 20% year over year to 29,997. Of these deliveries, 21,815 were Model S and X vehicles and 8,182 were Model 3. Since Tesla didn't start delivering Model 3 until the second half of 2017, Model 3 accounted for all of Tesla's year-over-year growth in vehicle deliveries.

Tesla's wider loss per share compared to the year-ago quarter was driven primarily by a lower automotive gross profit margin. Its automotive gross margin in its first quarter of 2018 was 19.7%, down from 27.4% in the year-ago quarter. This was because Model 3's gross margin remained negative during the quarter "due to temporary underutilization of our manufacturing capacity." In other words, Tesla needs Model 3 production to increase significantly before per-unit costs come down to reasonable levels.

First-quarter highlights

  • Tesla's GAAP and non-GAAP automotive gross profit margins increased 80 and 500 basis points sequentially, respectively.
  • Model 3 reservations, including configured orders that are not delivered yet, continued to exceed 450,000 by the end of the quarter.
  • Model 3 was on display in less than 20 stores.
  • Orders for Model S and X vehicles were at an all-time first-quarter high.
  • Tesla's energy generation and storage revenue increased 38% sequentially and 92% year over year, primarily driven by higher energy storage deployments.
  • Before temporarily shutting down its factory for upgrades, weekly Model 3 production exceeded 2,000 units for three weeks straight. This is up from 1,542 total Model 3 deliveries during the company's entire fourth quarter of 2017.
  • Tesla's free cash flow was negative $1.05 billion, highlighting the company's need for its Model 3 production ramp-up to go smoothly.

Looking ahead

Tesla maintained its guidance to achieve a weekly production rate for Model 3 of 5,000 units per week in "about two months." But management warned that "prior experience has demonstrated the difficulty of accurately forecasting specific production rates at specific points in time because of the exponential nature of the ramp."

Importantly, Tesla said it expects its gross profit to grow at a much more rapid rate than its non-GAAP operating expenses in the coming quarters, positioning Tesla to "at least be profitable in Q3 and Q4 excluding non-cash stock based compensation," management said. But Tesla also said it ultimately expects to achieve GAAP profitability in both of these quarters, too. To do this, however, Tesla will need to hit its target Model 3 production rate of 5,000 units per week in about two months.

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