Tesla (NASDAQ:TSLA) stock slid on Friday after the company announced plans for a 7% reduction to its full-time workforce. The move came as Tesla faces "an extremely difficult challenge," said CEO Elon Musk in a letter to employees about the reduction. As the company's production volume increases, it's important for Tesla to make its cars, batteries, and solar products more cost-competitive with established products from competitors, Musk explained in the letter.
This letter comes at a critical time for the electric-car company. The cost-cutting measure follows a big hiring spree in 2018 and a massive increase in the company's vehicle production volume. In addition to detailing plans to reduce the company's workforce, the letter gives investors insight into its fourth-quarter profitability, expectations for its first quarter, and more. Here's a look at some of the key takeaways from the letter.
1. Expect a smaller fourth-quarter profit
Included in the letter was a preview of what to expect for Tesla's recently ended fourth quarter.
"In Q4, preliminary, unaudited results indicate that we again made a GAAP profit, but less than Q3," Musk said. With Tesla's third-quarter profit coming in at $1.75 per share, investors can expect the fourth-quarter result to be below this amount. Far from a perfect comparison but still notable, analysts were already expecting Tesla's non-GAAP profit to be slightly lower in Q4 than in Q3. On average, analysts expected the company to report non-GAAP EPS of $2.26, down from $2.90 in the third quarter of 2018.
2. Tesla is aiming for a "tiny" first-quarter profit
For Tesla's current quarter, a profit isn't as sure of an outcome.
"This quarter, as with Q3, shipment of higher priced Model 3 variants (this time to Europe and Asia) will hopefully allow us, with great difficulty, effort and some luck, to target a tiny profit," Musk said in the letter.
3. Tesla must bring to market lower-cost Model 3 variants
To continue scaling its business, Tesla says it's necessary for the company to make progress toward producing and selling its promised $35,000 version of the Model 3. Currently, the cheapest Model 3 available is its mid-range version, starting at $44,000.
"[S]tarting around May, we will need to deliver at least the mid-range Model 3 variant in all markets," Musk explained, "as we need to reach more customers who can afford our vehicles. Moreover, we need to continue making progress toward lower priced variants of Model 3."
4. Tesla faces big challenges
Citing the upcoming $1,875 reduction on July 1 of the federal tax credit for qualifying Tesla buyers and the company's need to reach a wider global market with a lower-priced Model 3 variant, Musk warned employees of tough times.
"[T]he road ahead is very difficult," Musk said.
This is not new for us -- we have always faced significant challenges -- but it is the reality we face. ... Attempting to build affordable clean energy products at scale necessarily requires extreme effort and relentless creativity, but succeeding in our mission is essential to ensure that the future is good, so we must do everything we can to advance the cause.
5. Improvement in economies of scale is necessary
Bringing to market lower-cost versions of Model 3 will require a colossal effort, Musk implied in the letter. In addition to cutting 7% of its full-time headcount, the company needs to increase Model 3 production and make "many manufacturing engineering improvements in the coming months."
The CEO added:
Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range (220 mile), standard interior Model 3 at $35k and still be a viable company. There isn't any other way.
6. The product road map is promising
On a more optimistic note, Musk is particularly excited about the company's pipeline, noting he believes Tesla has "the most exciting product roadmap of any consumer product company in the world," including full self-driving capabilities, Model Y, a semi-truck, a pick-up truck, a new version of its Roadster, its solar roof, and its energy storage products. These products "are only the start," Musk said.
Having led Tesla through the recession and the launch of four major vehicles, including Tesla's Roadster, Model S, Model X, and Model 3, Musk has faced big challenges before. And 2019 will pose yet another challenge as the company attempts to go from a niche electric-car maker to a mass-market player.