What Drove Tesla’s Surprise Q3 Profits & Which Parts Are Sustainable?

Tesla (NASDAQ: TSLA) reported a surprise profit for Q3 2019, causing its stock to rally by close to 24% over the last week. In this analysis, we break down some of the key factors which drove the earnings surprise, which factors are sustainable, and which could be one-off items. We note that we are using GAAP numbers for the purpose of this analysis, as the company’s Non-GAAP figures only adjust for stock-based compensation, which has been relatively stable over the last few quarters.

View our interactive dashboard analysis Deep-Dive X-Ray: What Drove Tesla’s Q3 Profits & Which Parts Are Sustainable?

What Contributed To The Company’s Moving From A Net Loss Of $389 Million In Q2 2019 To A Profit Of $150 Million In Q3?

Tesla’s Net Income moved from ($389) Million In Q2 To $150 Million In Q3, marking an increase of $539 million. Below, we break down the key contributors to the quarter to quarter change:

The key positive contributors were:

• Lower Cost of Auto revenues (+$229 Million impact)
• A lack of Restructuring Charges (+$117 Million impact)
• Higher Other Income (+$111 Million)
• Lower Cost of Other Revenues (+ $88 Million)
• Lower Operating Expenses (+$41 Million)

However, this was offset by :

• Lower Auto Revenue (-$23 million impact)
• Lower Other Revenue (-$24 million impact)

Below we discuss each of the +ve and -ve contributors to the difference.

1. Lower Automotive Cost Of Revenues Were The Biggest Driver Earnings

Tesla’s Automotive Cost of sales saw a meaningful improvement over the quarter, with Automotive gross margins rising from 18.9% in Q2 to 22.8% in Q3. Per our estimates, this means that production cost per vehicle has fallen by ~$3k per unit, compared to its ASPs which fell by just $1.3k.

1.1 Improved Manufacturing Efficiencies

Tesla says that the Lower Cost of Sales was driven by improved volumes, which helped fixed cost absorption and lower labor hours per vehicle. However, this does not explain the full impact as deliveries rose only 2% sequentially.

Tesla’s D&A expenses (part of which are recognized under Cost of Revenues ) also saw a decline and this likely aided overall profitability.
The company also saw sequentially higher sales of regulatory credits ($134 million vs. $111 million), which have no real impact on costs, but boost revenues.

2. Other Income And A The Absence Of Restructuring Charges

• In Q2’19, Tesla recognized Restructuring charges to the tune of $117 million, resulting in a larger than expected loss.
  However, the company did not recognize any restructuring charges over this quarter, leading to a meaningful sequential improvement in profit.
• Tesla also benefited from some Forex and other gains, which were recorded under Other Income.

3. Lower Operating Expenses

• For more information on how Tesla’s Operating Expenses impacted Q3 profits, view our interactive dashboard analysis.

4. Tesla’s Revenues Contracted Both Sequentially & YoY

• Tesla saw its revenues fall to about $6.3 billion, compared to about $6.4 billion in the prior quarter, on account of lower average selling prices on its vehicles.

Conclusion: Is The Improvement Sustainable?

• Overall, much of Tesla’s turnaround this quarter was driven by a meaningful improvement in its manufacturing processes and lower operating costs.
• While the company did benefit from one-off items over the quarter, the results could give investors hope that there is a path toward sustainable profitability, if it continues to realize manufacturing improvements while scaling up production, with vehicles such as the upcoming Model Y.

And, for more Trefis analysis, view our interactive dashboard analysis on Are Tesla Investors Overlooking Some Key Trends In Q3 Earnings?

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