Retail investors get some questions answered.
In a lot of ways, 2018 was a rollercoaster ride for Tesla. Everything from production hell, delivery issues,
taking not taking the company private melodrama, issues with Solar City and rumors about the Model Y were part of the previous 12 months. For Tesla, it was also a record year. For Q3, the U.S based carmaker made 83,500 deliveries: 55,840 Model 3, 14,470 Model S, and 13,190 Model X. To put this in perspective, in the Q3 alone Tesla delivered more than 80% of the vehicles than it did in all of 2017. To put things into further perspective, Tesla also delivered about twice as many Model 3 sedans as we did in all previous quarters combined.
A look back at Tesla's Q3 results
With deliveries ramping up, orders flowing in, Tesla share prices rose and fell significantly on several occasions. Furthermore, the increased deliveries of the Model 3, combined with the additional incentives the company made before their tax break set in, all made sure that Q4 would well be the best quarter in the history of the company. Throughout the later stages of 2018, it seemed Tesla was making strides in joining other legacy automakers as a fully-fledged peer.
The production hell is a long gone thing of the past, delivery hell is steadily falling off, and deliveries & sales are ever increasing and stabilizing. As always, after the letter to investors showcasing the company’s progress and detailing the financials went out, Musk and other top executives held a call with financial analysts. Here are the most important bits and pieces from the earnings call right below.
- The Q4 earnings call started with Martin Viega making the introduction towards the earnings call, giving us a short rundown of the nature of the call
- Elon Musk revealed how last year was the most challenging, but also, the most successful for the company. And a lot of this is attributed to the Tesla Model 3. Musk noted in his opening statement how the Model 3 captured an 85% market share in the United States, where all the other electric vehicles amounted to just 20% market share overall. He also revealed how Tesla doubled their fleet in 2018, producing more than double of what the company produced in all the other years before this
- Musk expects sales to be about 50% higher in 2019 than 2018 - if there's no global recession. And even with tough economic times, seeing a 50% growth is really impressive. He notes how Tesla is expecting a record-breaking year, with growth seldom seen within any industry, let alone the automotive one. Furthermore, Musk also notes how they are strengthening their logistics - all due to the pending penetration of Europe and China, especially with the Model 3
- An impressive increase in service locations, mobile service vehicles and the improvement of the customer service was one of the staples of the Q4 for the company. One of the items he noted is the ability of the customer to use the Tesla App to summon the service crew, allowing them to request the Tesla servicemen to pick up the vehicle, take it to a service centre and have it repaired there. This allows the customer to repair the vehicle without getting it to the service centre themselves, seriously improving the satisfaction from the customers. Elon Musk took time to explain how the recently (four weeks earlier) rolled out service option works, as he is seemingly very happy about the improvement in the customer relations department overall. One of the ideas for smaller issues is to have the vehicle repaired in 20 minutes or so, in order to avoid the bad customer satisfaction. Tesla also plans to stock the most warranted parts (probably based on previous experiences) and allow the fast turnaround times. This basically means that if you have a car with a
- The Tesla CEO is very optimistic about the Q1, but also, regarding all quarters going forward. He noted how the operating margin has been increased to that of over 5%, or to be exact (as revealed in the investor letter), to 5.7% and the operating cash flow less CapEx improved from Q3 to $910M in Q4. Furthermore, the Model 3 GAAP and non-GAAP gross margin remained stable at >20% in the same quarter as well
- Model Y crossover is coming. Musk noted how 60% of the parts for the Model 3 and Model Y are interchangeable, which will definitely improve their production and delivery rates ones the vehicle comes around. Musk revealed how Tesla aim to produce the Model Y at the Nevada Gigafactory 1 production facility, hitting volume production "likely" sometime next year. He notes how the SUV segment is the highest growth in the industry, and the company aims to take a big chunk of this segment with the Model Y - once it comes out
- Elon Musk noted how the Model S and Model X didn't share a lot of commonalities, just 30% parts interchangeable. He called the Model X the "Faberge Egg" of the vehicle world, noting all the advanced features the vehicles showcases. Furthermore, he once again noted how the Model Y and Model 3 are more mass market vehicles, where a lot of the parts will be easily interchanged between these two vehicles
- The Shanghai notes how they want to build several of the parts for the Model 3 at the Gigafactory over there, helping them hit the 10,000 units produced per week
- When asked by a listener about the overall market volume for the Model 3, Musk says that the Model 3 demand - in a strong economy - is about 600,000 - 800,000 units per year. With a weaker economy, Musk states that the company still looks at around 500,000 units per year for the Model 3 as a reasonable amount
- For the Model S and Model X, he states he expects to see a slight decline in overall vehicles sold, but the cash flow from both is expected to be similar to the current levels experienced by the company. It seems the aim is to make/sell fewer cars, but provide more options and amenities to the customers, increasing the margins and income for the company overall
- When asked about the advanced Summon feature, he notes how the feature will probably be available - depending on the regulators - by the end of the year, with most features dependant on that approval in various markets. He noted how they aim to make the feature completely safe before being rolled out to the public as well, something we feel is the most important aspect of the regulatory approval
- They have no plans to switch the Model S and X to 2170
- When asked when the Tesla Semi and Pickup are to be produced, the Tesla CEO responded that they aim to first use the Semi for their own services. While he didn't reveal an exact date, from the words Musk spoke, we might think that date might arrive rather soon, with deliveries to bigger customers coming soon after. The Tesla Pickup, on the other hand, labelled by Musk as "something unique" is set to be revealed this summer. We're pretty sure that will make a lot of people that need a fully electric workhorse, rather happy about that.
- When asked by autonomous vehicles, Musk noted how Tesla has the biggest test fleet out there. And this is increasing by the day, giving them a large load of data. He noted how 12 months down the line, they will have over 1,000,000 vehicles on the road. And every time the customers drive their vehicles, more data & information is being collected. And according to Musk, that makes Tesla the company with the most firepower under the hood in the autonomous vehicle race
- When asked about the market share of the entry-level sedans (like the Model 3) in "other markets" - which basically mean RHD (Right Hand Drive) vehicle models, slated for countries that drive on the left - Musk noted how their expectation is a volume of about 500,000 vehicles for those markets (didn't clearly differentiate per year or overall)
- When asked about the slow down of demand for the mid-range Model 3, he revealed that there's a lot of seasonality with the car buying public. Musk expects the demand to pick up in March, April and May, even with the loss of the tax credit. Furthermore, he noted how the customers are extremely happy with the Model 3 and the demand is still strong, propping his argument with the fact that most Model 3 owners aren't willing to part ways, and sell their Model 3s at all! His guess is that the average price of the Model 3 at the level of 800,000 vehicle market will be at around $42,000
- When asked about the China factory and the issue with the battery suppliers in China, Musk revealed they will be making the batteries themselves where they can use any 2170 cell chemistry - which is produced in Nevada, Japan and also, China. He sees no problem in hitting the targetted volume number for the China production facility regarding a possible battery related bottleneck discussed here
- When asked by a Deutsche Bank representative about the margins on the Model 3, and hitting the 20% margins even with the introduction of the standard range Model 3, he noted how the company plans to hit that number somewhere in the year. He notes how the company is getting smarter in how they are spending money, so the cautious outlook by investors might not be warranted, especially about this item. The labour hours per Model 3 vehicle declined yet again by roughly 20% compared to Q3 and by about 65% in the second half of 2018 alone
- In order to meet the 500,000 mark for the Model 3 per the year, the company needs to put the Shanghai factory online. Musk noted how Tesla, regarding China, as their biggest market, they were never eligible for the local tax breaks or EV incentives. He notes how they need the Shanghai factory to achieve the 10,000 mark for the Model 3 per week, which will help them to make the Model 3 more affordable in the long run. From what we hear, Musk is really keen on bringing their entry-level vehicle to the customers that might not have the money to buy right now, meaning that cutting production costs will help them push the cheaper version of the Model 3 to the market a lot faster overall
- Musk wants to make the Model 3 better, even despite the aim of cutting costs for the vehicle. He basically wants to make the production of the Model 3 sustainable, but also, bring an affordable, rather well-built, environmentally friendly vehicle to the market. Something, if we're being honest here, really was the goal with the Model 3 from the start
- When asked by David Tambourino from Goldman Sachs about the order profile in Europe and China, regarding the Model 3, Musk replied that the order profile looks really good. According to Musk, demand is not an issue. It's how they are going to get the cars there. According to the call, the volume for Europe is around 20,000 and in single thousands for China. Musk also noted how the factory is now only making vehicles for Europe and China, aiming to get as much Model 3s to customers as fast as possible. Furthermore, they are racing to deliver as many vehicles to China before any bigger changes in the trade war between the United States and China, where once again, he notes that demand is not the issue
- When asked about the $35,000 entry-level Model 3, the reservations and other items, Tesla representative responded rather vaguely. However, Musk took the mic and responded how the reservations are considered as preorders, where he believes that they still expect around half a million of the entry-level Model 3 to be ordered/reserved even after all of these vehicles get delivered
- Elon Musk, while replying to a caller question, responded how the company is aiming to simplify the build process, pushing vehicles faster in North America, all the while cutting costs for the production and delivery process
- When asked about China, Elon noted how he plans on doing several trips to China this year. He values the Chinese production plant and the Gigafactory being built there really a lot, where he also commended the support of the local Shanghai and Chinese government officials as well
- When asked about the rollout of the mid-range and standard-range Model 3, and what will be the tradeoff when delivering these vehicles, whether the company will deliver more vehicles in terms of volume, or concentrate more on selling and producing better margin vehicles, Musk noted how this will (pretty logically) be a mixture of both, resulting in satisfying both worlds
- When asked about a potential U.S. lease product, Elon Musk replied how the company is reluctant to provide leasing for the Model 3, but the company might introduce it to improve demand. However, leasing is not something they want to introduce right away, as that might hurt their financial outlook. In the end, Musk noted how they plan on introducing the leasing option for the Model 3 somewhere later in the year
- Musk revealed how the company is solving a lot of logistical problems they're having, where the ultimate goal is, once again, to cut cost and speed up the production and delivery of vehicles
- Elon Musk notes how their aim is to make affordable cars, and how Tesla, even if the recession hits, will come out stronger once it ends
- For a closing remark, Elon noted how Deepak Ahuja, the Tesla CFO, is retiring (again) from Tesla. Elon thanked him for his services and noted how his former CFO will be held within an advisory role with Tesla for years to come. Zach Kirkhorn, the current Vice President of Tesla, will be taking over Deepak's role within the company as the Chief Financial Officer going forward. When addressing the investors during the call, Deepak thanked everyone who made sure that the cashflow issues were resolved, that Tesla has a great financial foundation, and noted how Zach is a great choice to continue having Tesla as such a successful company in the following years. Zach noted how the company has enough cash reserves to continue with the research and production, but also, continue with the momentum in every aspect from cutting costs, vehicle deliveries and the expansion of the company