Earnings Preview: Tesla’s Efficiency Under The Scanner

Tesla Motors (NYSE:TSLA) is scheduled to announce its Q3 earnings on November 5. Investors will be keenly watching the guidance and updates on business operations given out by the company during the earnings call. In Q2 the company had issued the following guidance:

• The company said that it would produce 9,000 vehicles over the quarter, implying a production rate of nearly 750 vehicles per week.
• The company said that it would deliver roughly 7,800 vehicles over the quarter, implying a time lag of roughly 4 weeks between production and delivery.
• Leasing of nearly 300 vehicles.
• Marginal non-GAAP profitability for the quarter, despite a 20% increase in R&D costs and a 15% increase in S,G&A expenses. ^[1]

These are the figures, we will be watching out for when the company releases its figures for the quarter. We have a price estimate of $150 for Tesla, which is about 40% below the current market price.

See Our Complete Analysis For Tesla Motors Here

Production Targets

Tesla has announced that it expects sales to grow from 22,500 in 2013 to 35,000 in 2014. ^[2] To meet that target, the company has set itself ambitious production targets for the year, and issued guidance for 7,800 deliveries on 9,000 cars produced for this quarter. For the fourth quarter, the target is even more ambitious, as the company will need to make about 13,000 deliveries over the quarter in order to meet its sales target, which would require a 63% growth in deliveries between the third and fourth quarters. ^[1]

The second quarter’s 8,763 vehicles produced means that Tesla has upped its average weekly production rate to 730 and the full-year guidance of 35,000 corresponds to a weekly production rate of ~700. Meanwhile, the company has also been working on making its assembly line efficient enough to be able to improve the production rate to 1,000 vehicles a week. ^[3] Tesla plans on producing 9,000 vehicles in the third quarter, representing an increase of 2-3% over the second quarter. The Silicon Valley based company increased its production rate by about 16% over the second quarter but will not be able to continue accelerating at the same rate because of a planned two-week shutdown of its factory to allow the transition of the manufacturing process to a new assembly line. According to the company, without the shutdown, it would have been able to forecast a production rate of 11,000 vehicles for the quarter.

Without the retooling, the company said it would have been able to forecast 9,500 deliveries for the quarter. Since, just under 1,200 cars produced in the second quarter are only expected to be delivered by the beginning of the third quarter, this means that of the 9,000 cars produced in the next quarter, the company expects only 6,600 to be produced in time to be delivered in the consequent quarter. The company said that it expects the quarterly gap between vehicles produced and vehicles delivered to decline in the future quarters. This is important as some customers, especially in China, have expressed disappointment at the time lag between time of order and time of delivery. ^[4]

Margin Expansion

The automaker achieved its stated target of 25% gross margins in the fourth quarter of fiscal year 2013, excluding any benefits from the sale of ZEV credits. Tesla’s gross margins improved from 17.1% in the first quarter of 2013 to 25.2% in the fourth quarter, helped by higher volumes and operational efficiency. What was surprising was that the company thinks there is room to further improve margins. Tesla is now targeting gross margins of 28% by Q4 2014. ^[5] Company management cited economies of scale arising from increased production and increased efficiency in production as the reasons behind the revised expectation in gross margins. Thus, updates on the progress of the assembly line will be critical here, too. Auto companies, in their definition of cost of goods, usually include some fixed cost components such as labor costs and plant operational expenses. Therefore, as volumes increase, the additional revenues often result in improved gross margins.

However, Tesla also cautioned that administrative and capital expenses will rise significantly as the automaker continues to expand into new markets and builds its Supercharger network. Superchargers are charging stations installed by Tesla for its customers to charge their car batteries for free. As of now, there are only 76 Superchargers in North America, but by the end of 2014, more than 80% of the population in the U.S. will be covered by the network. ^[6] Similarly, the automaker will also build a pan-European network of chargers that aims to provide a charging point within 200 miles of every person. In addition, the Supercharger network of stations will also be built in China. Although the capital expense might increase in absolute terms, we estimate there will be a drastic reduction in operating and capital expenses, when expressed as a percentage of revenues.

In the long run, Tesla’s gross margins could face a downward pressure. While achieving 28% gross margins for luxury cars may not be difficult, the real challenge for the automaker would be to sustain the figure when it introduces the Gen III within the next 2-3 years. Due to its lower price (expected price ~$35,000-40,000), the model should see higher volumes than the Model S. Since luxury cars generally have higher margins than mid-price cars, and thus a greater proportion of Gen III sales could erode some of the profitability. Mainstream automakers such as GM or Ford have gross margins in the range of 18-20% compared to ~25% margins for a luxury automaker such as Daimler.

1. Tesla Releases Second Quarter 2014 Financial Results, Tesla Motors, July 2014 [↩] [↩]
2. Tesla Hits All Time High, Wants To Deliver 35,000 Model S In 2014, Forbes, February 2014 [↩]
3. Tesla 8-K, Tesla Investor Relations [↩]
4. Tesla Motors Investor Relations [↩]
5. Tesla Motors CEO Discusses Q4 2013 Results, Seeking Alpha, February 2014 [↩]
6. Teslamotors.com [↩]