Earnings Preview: What To Expect From Tesla’s Q3 Earnings Report

Tesla Motors (NASDAQ: TSLA) is set to report results for the third quarter of fiscal year 2016 on Wednesday, October 26th. The Silicon Valley based auto maker is juggling a lot of balls in the air right now:

1. It is trying to grow the sales of its flagship Model S sedan in the U.S., China and key European markets,
2. It is trying to ramp up production of the Model X SUV in order to meet the pre-order backlog it had received before the vehicle’s launch. The company has had some trouble in getting the production process for the vehicle rolling and securing suppliers for key components of the vehicle.
3. It has just started production of lithium ion batteries at its Giga factory in Nevada. The factory is perhaps the most important venture for the company as its success depends not only on how fast the company can scale up the production of lithium ion batteries, but also on how quickly costs of energy storage in those batteries fall with the increase in production.
4. It is trying to set up the assembly line and production process for the Model 3, the component of its business on which close to half its value rests, according to our estimates.
5. The company is also in the process of acquiring Solar City, a financier and soon-to-be manufacturer of solar panels. Tesla plans to create a one-stop shop for consumer’s solar needs by combining Solar City’s business with Tesla’s storage products and show rooms.
6. Additionally, the company has announced that henceforth all of its vehicles will include the hardware needed for full self-driving capability. The imaging and sensors systems are vastly enhances as is the compute power used to process the data.  Yet the hardware will only be enabled as its achieves verification. Moreover, no new pricing level was specified to cover the additional cost of the hardware, which will only increase the cash burn of the company. Just in May, the company held a public offering worth $ 1.7 billion to secure cash for its demands.

All of these moving parts have their own involved nuances and complexities. Importantly, all of these are future concerns with uncertain expected value that are taking cash out of Tesla’s current operations, which involve the sale of two vehicles, the Model S and Model X, via Tesla’s own show rooms and supported by Tesla’s super charger network. To support that business, Tesla requires significant expenditure, not only to expand its distribution network by opening more show rooms, but also to support the after sales experience of customers who purchase these vehicles, through the build-out of charging stations and service stations. Given Tesla’s vertical integration, not only does the company handle the end-to-end manufacturing of the vehicle, from the sheet metal and welding process involved in the manufacture of the vehicle’s body-in-white, but also the after sales process that is typically handled by dealerships in the auto industry. This results in considerably higher capital expenditure than the norm for auto companies.

Since, so much of the company’s fate hinges on events that are still quite far in the future, the importance of quarterly sales numbers isn’t quite so significant. On that front, the company seems to be doing quite well. Its Model S is the highest selling electric vehicle in the U.S. so far this year, despite being much more expensive compared to competition. In the third quarter, the vehicle sold over 15,000 units, a 50% increase over the previous quarter’s delivery number. The Model X SUV is the third highest selling electric vehicle in the U.S. so far this year, having sold around 12,000 units. Through the first two quarters, the company had produced around 33,000 vehicles and delivered close to 26,000. Some 5,000 units were still in transit by the end of the quarter and this quarter’s sales numbers might have been boosted as a result. Still, the production rate that the company has achieved will be a key number that we will be watching in its earnings. The company plans to expand production by close to 60%-80% for the full year compared to just over 50,000 units in 2015, and 3x-4x over the next 2-3 years in order to meet the pre-order demand for the Model 3.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Tesla Motors

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