Tesla's third quarter was the first to show volume deliveries of two models - Model S and Model X

Tesla's third quarter was the first to show volume deliveries of two models - Model S and Model X

Every quarter we diligently report on the quarter that was for Tesla Motors, and usually the story goes 'total sales are going up, total profit (or rather the lack thereof) going down'.

However this quarter was a little different.

Elon Musk tipped off Q3 earnings

Elon Musk tipped off Q3 earnings "surprise" to investors earlier this Summer, which made the results today...not a surprise

With a pre-announcement of record sales in early October, we knew that much higher year-over-year revenue was already baked into this report.

But thanks to an odd email from Tesla CEO Elon Musk to company workers on August 29th (read here) urging them to help assist the company to  "show investors that Tesla can be at least slightly positive cash flow and profitable before the Model 3 reaches full production", we knew that at least on paper this would be Tesla's most successful quarter to date heading into the report.

To that end, Tesla did not disappoint, posting a $21.9 million profit (GAAP no less) or 14 cents per share.  Non-GAAP EPS was a fairly amazing 71 cents per share/$111 million, that was versus estimates for a 55 cent loss.

There was an expectation for only an adjusted earnings of a penny or two,  so Q3 was a thorough beat over the street (we could not find one analyst who overshot) , and as one might expect TSLA traded up immediately on the news (about 5% at time of press) - real time quote can be found here.

On the revenue side, Tesla report $2.3 billion (GAAP), pretty much exactly as expected, but still up 145% over a year ago.

Now before we get too excited, we really have to note that Tesla seemingly stored up some serious ZEV credits to sell in Q3 to make this happen - $138.5 million worth (much high than any other result of late - and eating up the demand for any credits in Q4 as the company expects them to be "negligible").

So if one is looking for a dark cloud in the report, that is probably it.  On the other side of the coin:  selling ZEV credits is a legitimate part of Tesla's business plan...and they have been doing it for years (and will continue to do so).

Tesla had a gross margin of 25% in Q3 (before credits), well ahead of analysts expectations of 22%

Tesla had a gross margin of 25% in Q3 (before credits), well ahead of analysts expectations of 22%

On the flip side, it was also expected that Q3 would be a "one and done" profit quarter, and Tesla has said 'not so', the profitability will (hopefully) continue - although it is difficult to see how without more ZEV credit revenue recognition in Q4.

So there is a little something in there for both the Bull and Bear positions.

Per Tesla:

"The Tesla third quarter results reflect strong company-wide execution in many areas. Furthermore, we expect this to continue into Q4 and project positive GAAP net income (excluding non-cash stock-based compensation) despite ZEV credit sales in Q4 likely being negligible.

We set new records for vehicle production, deliveries and revenue, which led to GAAP profitability and positive free cash flow (cash flows from operations less capital expenditures). At the same time, GAAP total automotive gross margin and gross profit per car increased substantially."

Update From the conference call:  CEO Musk says Q3 was the best ever and that Q4 will be "great as well", while re-iterating feelings that Q4 will be profitable even including non cash stock based expenses.   Musk also isn't a big fan of ZEV revenue questions on call, saying it is "wholly misunderstood", and revenue timing is at the whim of the market - noting that some quarters there is no market at all for them, and at other times they get 50 cents on the dollar - whatever that means.

The driver of profitability for Q3 (and into the future) certainly came via gross margins, as Tesla well outperformed the market's expectation of around 22%, by coming in at 25% (and that is before any fancy 'credit math' - added in, automotive gross margin would have been 29.4%).

Tesla's cash and cash equivalents ended Q3 at $3.1 billion at quarter end, down from $3.2 billion at the end of Q2, but we should note that during the quarter Tesla paid down ~$600 million in debts:  $127 million on its borrowing facilities, and settled $422 million worth of conversions on its 2018 convertible notes.

As a result, it appears Tesla will not need to further access the market for capital in 2016 as CEO Musk had earlier stated.

From conference call: CFO Jason Wheeler says GAAP revenue growing faster now than than GAAP operating expenses, which is how the company demonstrated a profit in Q3, and will do so in the future.

From conference call: CEO Elon Musk furthers adds to note on raising new capital, saying things are looking good at the moment, and it likely will also not be needed in Q1 (although he won't go on record saying that 'for sure').  

Musk stresses often Tesla now does not need to raise capital (even for the Model 3), but they also don't want to cut it too close either, so more capital would be in order to create a pad, or "de-risk" the business moving forward to allow for any unexpected events.  Our takeaway on this is statement is; if the money is there for the taking, Tesla is going to go ahead and get some at some point next year, for the greater benefit/future-proofing of the business.

Actual Tesla deliveries in Q3 even higher than earlier company estimates

Actual Tesla deliveries in Q3 even higher than earlier company estimates

Tesla vehicle sales and guidance:

As for the actual sales in the quarter, Tesla adjusted earlier estimated guidance of ~24,500 Model S and Model X vehicles deliveries up by as much as it ever had in the past.  The Q3 finally delivery tally stands at 24,821, while production stood at 25,185 vehicles (up 92%).

Tesla's Fremont factory produced more than 25,000 vehicles for the first time in Q3

Tesla's Fremont factory produced more than 25,000 vehicles for the first time in Q3

Current tally of Tesla sales in 2016:

Q1: 14,810 Q2: 14,402 Q3: 24,821

Total:  54,033

Of the Q3 numbers specifically - sales of the Model S finished at 16,047 units (vs 15,800 earlier guidance), while the Model X stood at 8,774 (vs 8,700).

Tesla once against re-confirmed its forecast for 50,000 new deliveries for the second half of 2016, with a fourth-quarter estimate of just over 25,000 deliveries...which would basically allow the company to hit the lower end of its full year delivery guidance of 80,000 vehicles sold.

With the addition of a new 60 kWh trim level for the Model S, the average transaction price on the car decreased during Q3 by 6.5%.  Tesla noted that if new production of the new 100 kWh (and much pricier) trim level Model S sedans had not started so late in Q3 that the new top-of-the-line model would have "otherwise have balanced that out."

Update from conference call:  Musk says that orders/demand for the new 100 kWh options is high (without being specific), is heading there now after the Q&A

Tesla did note that 2% of the decline came via "price adjustments that were made for inventory cars that already had mileage on them, showroom cars with wear, and cars that were built before product transitions, such as those with the original fascia."

As for the Model X pricing, it was mostly flat, but down 1.2% sequentially because earlier Q2 comps included the original/premium Signature Model X build out.

Update from conference call:  Tesla CEO Elon Musk got well in front of any discussion of a new policy of discounting at Tesla, says that notion is "absolutely false" while pointing to profitability increases per vehicle during Q3.  Adds that overall there was very few discounts, but even at that they were shutdown down completely when discovered.

Tesla Store/Service Center In Dublin, California

Tesla Store/Service Center In Dublin, California

On Demand & Infrastructure:

Without getting into specific numbers (as the company is not want to do), Tesla said new orders grew by 68% over a year ago, while the total store count grew to 250 locations around the world by adding 17 new boutiques in the third quarter

"In Q3, combined net orders for new Model S and Model X vehicles grew 68%, compared with the same period last year."

As for the headcount on Supercharger locations, that now stands at 715; while the individual Supercharging, uh...charge points now total 4,461.  The total number of destination charger locations reached 3,222 spots, with 5,547 connection points.

Tesla put its charging network into some easier to understand context:

"97% of the population in the continental U.S. and 86% of western Europeans are now within 150 miles of a Supercharger. High population areas in China, Japan and Australia will soon reach similar coverage levels."

Supercharger location count expanded to 715 locations worldwide by the end of Q3 2016

Supercharger location count expanded to 715 locations worldwide by the end of Q3 2016

Market Share:

Tesla Model S Q3 sales in US (click to enlarge)

Tesla Model S Q3 sales in US (click to enlarge)

Tesla continues to have a love affair with comparing the Model S with the "large luxury" sedan category in the US (which actually isn't a vehicle class at all), saying that all-electric S has a 32% share of the top 12 on the list thanks to the car's 60% year-over-year sales gain in the US.

As for the Model X, Tesla has some more numbers for us:

"Despite still ramping production, Model X is also gaining market share, already growing to 6% of the U.S. large luxury SUV market in Q3, or #8 in the large luxury SUV category, edging out the Porsche Macan and Cayenne, the Land Rover R-R Sport and the Infiniti QX80. The large luxury SUV category is three times the size of the large luxury sedan category in the U.S., and represents a huge opportunity to further increase Model X sales."

Tesla Model 3 continues to be the main investor focus going forward for the company

Tesla Model 3 continues to be the main investor focus going forward for the company

Tesla Model 3 and Gigafactory Progress

Like we have seen for the past few quarters, Tesla continues to guide Model 3 start of production (and volume production at that) to the latter part of next year.

"Gigafactory construction and Model 3 development both remain on plan to support volume Model 3 production and deliveries in the second half of 2017.

For Model 3, we have completed production line layouts and will soon begin installation of new body welding and final assembly lines. We have established a world class team of suppliers for Model 3 production equipment and components and critical long lead time equipment and components have been sourced."

Tesla Gigafactory construction/cell production still on track according to the company

Tesla Gigafactory construction/cell production still on track according to the company

Tesla also noted they are currently product testing the chassis and the high voltage drive systems on the Model 3, as well low voltage subsytems (HVAC, infotainment, lighting, etc). 

"As refinement of the Model 3 continues, we remain on plan for our timing, volume, vehicle capability, pricing,and margin targets."

Update from conference call:  Elon Musk is asked about change in reservation totals for Model 3 (stated at 373,000 about a month after order system open"not something we comment on".ed).  The CEO declines to answer saying that the current number is "not something we comment on".

Specific to the Gigafactory tool-up, Tesla says everything is A-OK there too:

"The Gigafactory remains on track to begin cell production later this year for use initially in our energy storage products and later to support volume production and deliveries of Model 3 in the second half of 2017. In addition, we continue to expand production capacity at our Fremont facility and are exploring additional production capacity in Asia and Europe."

Tesla Energy Powerpacks all wrapped up and ready to go at the company's Gigafactoy in Nevada

Tesla Energy Powerpacks all wrapped up and ready to go at the company's Gigafactoy in Nevada

Tesla Energy

While Tesla Energy is a part of Tesla Motors, we have to admit our interest is still pretty low at this early stage of the game. Nonetheless, Tesla still mentions its advancement (in the most generic way) for Q3... despite our feelings of malaise:

"Tesla’s energy storage business also continues to grow. Tesla is installing a 20 MW/80 MWh Powerpack system at the Southern California Edison Mira Loma substation to help reduce rolling blackouts. Upon completion, this system will be the largest lithium ion battery storage project in the world and will hold enough energy to power more than 2,500 households for a day or charge 1,000 Tesla vehicles."

Update from Conference call: Musk says that the solar roof "looks better" than a normal roof, exceeding his own expectations, and that the product is aimed specifically at new home builds and homes in need of roof replacement.

Tesla (and partner Panasonic) to debut its

Tesla (and partner Panasonic) to debut its "Solar Roof" later this week

SolarCity Acquisition

Tesla kept the focus on the good news for the quarter and the potential good news ahead with its pending acquisition of SolarCity (if all goes to CEO Musk's plan anyway).

"With the previously announced plan to acquire SolarCity, we look forward to making solar as compelling as electric vehicles. Acquiring SolarCity would leverage Tesla’s existing investments in the Gigafactory and the next-generation Powerwall and Powerpack to drive revenue growth.

In addition to the revenue growth associated with making solar more compelling, the combined company is expected to achieve over $150 million of direct cost synergies in the first full year post-close. Over the coming days,there will be a number of additional events relating to the SolarCity acquisition and our strategic plan for the combined company."

Tesla Solar Roof Event Details

Tesla Solar Roof Event Details

Here are those upcoming events:

October 28th: Product demonstration event to unveil an integrated solar roof with next-generation energy storage and EV charging.  (we will have livestream of the event from Universal Studios in California as it happens)

November 1st: Additional information to be released about the combined company.

November 17th: Stockholder meeting to tally the final vote on the acquisition.

Tesla Model X - Finding a spot and parking itself at Tesla HQ in Palo Alto, California

Tesla Model X - Finding a spot and parking itself at Tesla HQ in Palo Alto, California

Just to wrap things up, we should probably be mentioning something about Tesla's most recent announcement that all new Tesla vehicles in production today (and the Model 3 in the future) include enhanced hardware that will someday lead to fully self-driving/Level 5 autonomy (~2018ish).

But we are not, because nothing new was shared, and one can read about it all (and watch a demo) here.

Instead, we just have to highlight from the conference call that Mr. Musk chose to put the Tesla-Mobileye spat back into focus (pun intended), but saying that MobilEye was “issuing - bullshit” over autonomous driving systems (radar vs camera/operational abilities) after the two split up.

Musk stated, "I would separate what Tesla says from say (what) some supplier of ours is issuing - bullshit.  The blog that I wrote was very clear that radar is moving from a supplemental to also a primary sensor.  It's not to the exclusion of vision, but it is also a primary sensor...we feel highly confident that the 8-camera solution with 12 ultrasonics and a Ford radar, and the computing power that we now have onboard is capable of full autonomy...There are obviously skeptics out there. Well, I suggest that they do not bet against us."

We now look forward to more entertainment on this subject in the future between Tesla and the #1 autonomous driving chip supplier.


And if you want to know more about what is happening with Tesla's financials or more commentary/reaction to the company's Q3 earnings and conference call than we provided here...well, go watch CNBC, or read a business report or something;  we are a site dedicated to the adoption of plug-in vehicles and their infrastructure for Pete's sake.

Tesla's full shareholder Q3 letter can be found here if interested.