Tesla Q3 Conference Call: Ride Real-Time With Us On Profit Wave

OCT 24 2018 BY DOMENICK YONEY 59

Profit secured.

The Tesla 2018 Q3 earnings report is in, and as CEO Elon Musk had predicted, the company recorded a profit. And, at $2.90 a share, not a tiny one either. So now, with Tesla bulls ebullient and bears barely able to lift the goal posts they seem to so often be moving, we turn our attention to the quarterly financial call with analysts. Like last time, we will listen live and fill you in on the most notable bits, crossing our fingers for information about what to expect from the company with regards to progress and products.

In a change from past presentations, the financial call this time around begins at 6:30 Eastern time. Hopefully, we’ll get some details about the company’s new timeline for the China Gigafactory, which is already in the early stages of construction, and which was just confirmed to produce both the Model 3 and Model Y. We can’t help but wonder, too, if the Gigafactory 1 will be home to Model Y and Semi production. Typically, they avoid making explicit product announcements during these calls, but sometimes they do give us some strong hints.

We also look forward to hearing about other efforts Tesla is involved in: energy storage, along with solar panels and roofs. While we understand the solar roof seems to be stuck in a lengthy “product validation” period, we wonder how the regular panel sales and installation business is doing.

Here, now, is our takeaways from the call:

  • Elon opens the call with opening remarks about safety and other issues. Delivered more cars in Q3 than 2017.
  • Best quarter ever for solar.
  • Expect to see positive cash flow in Q4 and other quarters going forward.
  • Elon chokes up talking about customers pitching in to help with deliveries, and thanks them.
  • Vehicle safety: Todd Maron speaking, says electric architecture gives advantages over traditional cars. Model 3 scores above 943 other vehicles in tests. Is number 1. Not finished, either. Will continue improving. They discuss how they try not to just pass the various tests, but how to improve safety in any condition.
  • Stuart Bowers: Navigate on Autopilot coming. Future version will allow car to pass without driver tapping turn signal, but manual for now.
  • Can still order full self-driving, just off-menu. Was creating confusion between enhanced autopilot and full self-driving.
  • Andrej Karpathy: Team is excited about upgraded computer. Have neural networks greatly improved, but waiting on new hardware to make them more functional. The improvement should be dramatic.
  • Talking about factory safety now. Aiming to be safest company in the world.
  • Elon talks about claims they were under-reporting injuries, but have been cleared by CAL OSHA. Laurie Shelby, VP of Environmental, Health, Wellness, and Safety says injuries are a fraction of what they were when plant was NUMMI. Most injuries are muscle strain and sprains. This quarter saw 15,000 safety improvements. Opened new improved health clinic, overseen by leading orthopedic doctor. She lists an impressive number of efforts to be proactive in improving.
  • Dan Galves, Wolf Research asks about cell supply. JB Straubel answers: Supply is tight, but they have other partners to lean on besides Panasonic. Started another cell production line with Panasonic with two more coming soon.
  • Plans for cell supply in China? Long-term will be China, short term, they are not sure yet.
  • Pierre Ferragu from New Street Research asks about improved Model 3 margins. (20% instead of expected 15%) 15 % was a conservative guidance.
  • Asks about Medium Range Model 3, why now?
  • Elon: Expect to begin production of the Model 3 for Europe in January, begin deliveries there around end of February. Asia Pacific deliveries may only begin in Q2.
  • Romit Shah of Nomura Securities: where do you expect to see weekly production. Elon says global demand is 500,000 to a million per year. Want to have production be able to supply that. China production will help with some of that next year (2019). Mentions European factory needed as well, but not for Model S or Model X.
  • George Galliers of Evercore asks what capex (capital expenditure) is needed to achieve Model 3 production level. Elon says can reach 7,000 with minimal additional capex. Reaching 10,000 will take more effort to reconfigure lines at Fremont.
  • Expectations of product mix in Europe? Elon says they’ve given that zero thought. Have to first sell car to see what demand is.
  • In response to question from Maynard Um of Macquarie, Elon says of Model Y that he just approved prototype to go into production, but Elon is most excited about Pickup.
  • Regarding ridesharing, Tesla will compete directly with Uber and Lyft and offer ride-hailing service. Customers can also add their car to fleet.
  • Adam Jonas, Morgan Stanley asks about top models being traded in. Martin Viecha says it’s all across the board, but mostly lower than $35,000 price. No apparent pattern. A lot of people trading up.
  • He also asks if Q3 is a milestone where company becomes self-funding and not need outside funding. Elon says plan, for now, is to pay off debt and be self-financing.
  • Elon goes own about effort to reduce time to get car from factory to customer. Was 30 days, improved to 20. Will aim for fewer than 10 days next. (hence, cars sitting in parking lots getting their picture taken by shorts) This measure will save the company a lot of money. Eventual target is under 7 days worldwide. Will greatly improve capital efficiency.
  • Tony Sacconaghi asks Deepak Ahuja about operating expenses being seemingly high. Deepak says it has decreased 5%. Says opex will increase in future, but slowly.
  • Also asks about Model 3 gross margins. Now, he calculates a $35,000 Model 3 would have zero margin. Elon says the situation is rapidly changing. They will get to a $30,000, but aiming for less than $30,000. Overall costs will continue to fall with further scale.
  • Regarding battery costs, Elon says safe to say they have the lowest cost in the industry but won’t give a number.
  • Phil LeBeau of CNBC asks about the Federal tax credit. What kind of impact could that have on sales? Elon says he expects demand to sustain in the U.S.
  • Elon claims Model 3 is most efficient EV and has lowest cost. Talks about competitors, says they need to invest more than they have and make bigger effort. Because they didn’t, Tesla has a strong competitive advantage.

Well, that wraps up this quarter’s call. Let us know what you think in Comments, or come join our discussion on our Tesla Financial Mega Thread at the InsideEVs Forum.

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59 Comments on "Tesla Q3 Conference Call: Ride Real-Time With Us On Profit Wave"

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Get Real

Excellent choice of words Domenick on ….”the bears barely able to lift the goal posts…” to try and keep moving them!

Like I have always said, with high volume production and sales of exceptional products comes profits.

Get Real

Simply, the Model 3 is the breakthrough in the market that we in the EV community have been hoping for!

Big Show

I’m calling it. The official end of the ICE age is October 24, 2018.

William

I’d say, along with a host of other Tesla EVangelicals, you have put the nail square in the center, of the end of the ICE age.

Now, just like a piñata party, let the swinging begin!

That beautiful rectangular chunk, of the Larson C Ice Shelf, will be the party cake for EVeryone!

Larson B sure to get a piece, before it melts, and the party’s oEVr!

https://goo.gl/images/vjVFBQ

DAVID

Great to see confirmation of Tesla owned fleet for ride sharing, along with Model Y production sign-off.

I still stand by my expectation that Model Y will begin to ship with 6 months of public revel.

William

That will make EVeryone, including myself, feel absolutely Teslariffic about currently being a “Y waiter”!!!

antrik

That would be in direct contradiction to what they said themselves: unveil around March 2019; (mass) production in 2020.

CPO

Tesla needs a place to build it first. As far as we know they haven’t broken ground on a new factory. Or started renovating an older building yet in the US.

Bernhard

They have broken ground just recently in China. Even if the won’t export from China (like other Californian high-tech companies), it will relief the Fremont production lines.

Nix

There is no reason why the Model Y can’t be built on the same assembly line as the Model 3.

Viking79

Space and throughput, as volume of Model 3 will persist. Most likely Gigafactory or some other building.

The benefit is they have figured out what works and doesn’t so it is pretty much spending the money to build another line for the Y, setting it up and configuring it will be easier than Model 3 ramp.

antrik

It’s not a simple as that, since Model Y is supposed to have major changes, enabling higher automation — so they might encounter new problems… Though at least supposedly they learned the lesson to start with less automation and only increase over time 🙂

Nix

Musk has repeatedly now said that 7K/week Model 3’s is easily done without much more investment.

On the other hand, Tesla has said they are going to have to make a significant investment to get to 10K/week.

Taken with overlap and news with what is happening, the huge construction permits pulled at Fremont, greenlighting the production Y prot. and what is known to be going on inside the factory, an MEB style refactoring of 3/Y to a common 20k/week baseline.

antrik

A common platform allows sharing components, such as drivetrain, some electronics etc. The Body is different though, and thus also marriage, general assembly etc. In other words, the battery and drive unit production in Nevada will likely be shared — but actual vehicle production will be completely different.

jeffhre

So, less automation than they originally planned, which will actually be more than has ever been tried before, which they will also try to increase over time.

Pushmi-Pullyu

“There is no reason why the Model Y can’t be built on the same assembly line as the Model 3.”

In that it should be physically possible, sure. But it would make no sense. With the Fremont assembly plant at saturation level production, Tesla can only make Model Y’s there by reducing the output of Model 3’s. Why start production of a new car, with all the problems and delays associated with putting a new model into production, when they are struggling to produce enough Model 3’s to satisfy demand?

My prediction is that we won’t see Model Y mass production at the Fremont plant. They may make the pre-production units there, but actual mass production will be done on some new assembly lines somewhere. Maybe first at new automotive assembly lines at Gigafactory 1; maybe at the Chinese Gigafactory site, on a production-line-in-a-tent.

antrik

I have very serious doubts that Model Y production in China will start before US… I’m pretty sure they will want to work out production issues “at home” before going abroad.

Pushmi-Pullyu

Yeah, you’re almost certainly right. Thanks!

Nix

Fremont factory isn’t a static entity. It is under rapid expansion.

Current limitations will not be limitations in the future.

Pushmi-Pullyu

Yes, but clearly the expansion isn’t rapid enough to keep pace. If it was, then Tesla wouldn’t have needed to put partial assembly lines under tents outside the factory.

antrik

There is actually a reason, and a very fundamental one at it: Model Y is supposed to be further streamlined for automation, which means making it on the same line as the less streamlined Model 3 makes no sense.

Nix

The answer to the conundrum is right in your own post…..

The Model 3 itself has not been static either.

antrik

No — but I don’t consider it likely they will fundamentally redesign the car just when they worked out production of the original design, and while they have another model to bring up. Maybe *after* Model Y is in full production, they might consider applying some of the improvements to the older model.

Mike

It would have been cool if someone asked about whether the Y would be more or less a reformat of the 3 or if it would be fundamentally different. At some point the 12 volt system will be replaced, but I think this was shelved for later designs. It sounds like the next iteration of computer hardware will be an addition.

I am also curious about the effect of tariffs on profit margins for the 3 cars.

antrik

There has been some back-and-forth regarding Model Y being based on Model 3 or completely new design — but AIUI getting rid of 12 V battery is planned regardless.

Nix

combine the two

Pushmi-Pullyu

Yup. Some parts for the Model 3 will be used in the Model Y. But many won’t.

It’s possible that the Model Y (TMY) will wind up being like the Model X, which was originally conceived as merely a variant on the Model S, but wound up being rather different. With the recent talk about making the battery pack in a different way, I’m now leaning toward the Model Y being fundamentally different from the Model 3. If they’re going to use a different battery pack, then that suggests an entirely new design from the ground up.

With the Model S/X, at least they use the same battery pack. But now it looks like the Model 3 will wind up using the battery pack designed for the Model Y.

CPO

Different battery pack same motors similar suspension with some differences. Upper body will be biggest difference. Especially the rear doors and the addition of a hatch similar to the Model X but lighter. Tesla needs to learn from the boondoggle that the Model 3 trunk is.

antrik

Talk of a different battery pack was actually for standard-range Model 3… This doesn’t in any way preclude sharing between Model 3 and Model Y.

(A recent Bloomberg article interprets the Q2 earning call remarks about lighter, simpler, cheaper, safer in the context of the body — which was criticised by Munro — rather than the battery pack… Which would mean that many people — including myself — misheard what was said on the call. Yet I’m very willing to believe it, since it makes much more sense in the context of body rather than battery pack.)

ffbj

I guess all it takes for Elon to be nice to analysts is a great quarter, and vice versa.
Let’s hope this continues as I think we need less drama in our lives, not more.

Vexar

I’m wondering where this puts Tesla today in the “first they laugh at you, then they…” adage.
Helmsman: speed to maximum STOMPING and set course for the future.

Pushmi-Pullyu

“First they ignore you, then they laugh at you, then they fight you, then you win.” — misattributed to Mahatma Gandhi

Ignoring the question of where the quote actually originated… I’d say that insofar as the legacy auto industry goes, Tesla is at the “Then they fight you” sage. I don’t think they’re laughing at Tesla anymore! I’d say that insofar as the industry/financial analysts go, we’re seeing the very beginning of the transition to the “Then you win” stage.

Perhaps the amazing and perhaps shocking contrast between Sandy Munro’s first “Model 3 teardown” video, and his second, was an early “canary in the coal mine” indicator that those who have real understanding of the automotive industry now see that Tesla is leading the way to the future, and see that the legacy auto makers (by strongly digging in their heels against the transition) are aiding and abetting Tesla in widening the gap; a gap which those legacy auto makers will eventually have to bridge, if they aren’t going to be left in the dustbin of history as the EV revolution accelerates and expands.

antrik

Less drama? Media consumption suggests the opposite… 🙂

“Also asks about Model 3 gross margins. Now, he calculates a $35,000 Model 3 would have zero margin. Elon says the situation is rapidly changing. They will get to a $30,000, but aiming for less than $30,000. Overall costs will continue to fall with further scale.”

I think we are looking at the difference between 5k, 7k and 10k weekly Model 3 production in price.

Sure a $base $35k Model 3 will have low margin, but are many really going to buy a base Model 3 without any options? And I think the $35k Model 3 launches with the 7k weekly production increase so there is a good margin to start with.

Now question…still want to know if it’s possible to add AWD as an upgrade a year or so later. It seems to be a bolt and plug in proposition. That would be a nice way to make your Model 3 new again after 2 years or so.

Robert Weekley

Drive Trains by Tesla, are a “Order It When You Buy It” proposition! Enhanced Autopilot: THAT Can be ordered after delivery!

Drivetrains are like a Green or Yellow Paint: You need a great after market shop, to add paint, but an Incredibly Sharp one to add a 2nd Drive train, make the Wiring Harness (it is likely different), and have the Computer recocnize and control it (probably additional code for the 2nd motor!).

So, no, not a thing likely supported by Tesla, either!

Pushmi-Pullyu

So far as I am aware, no Tesla spokesman has ever suggested, even as a “Wouldn’t it be nice?” sort of flight of fancy, that anyone would be able to upgrade a single-motor Tesla car to a dual-motor one.

I think that kind of retrofit would require such a substantial rebuild of the entire car that it wouldn’t be worth it. Likely it would cost less just to buy a new dual motor car.

Just bolt the new motor in place? No, it’s not just a second motor; it’s an entire 2nd drive unit, which includes motor, inverter, PEM (Power Electronics Module) and gearbox. Then, you’d need new power cables from the battery pack to the (now two) drive units. Also, there is fitting the new drive unit physically into the drivetrain… how many parts would that require replacing?

Regen from the added front motor might well require a different BMS (Battery Management System), or at least different software installed into that.

I’m sure there are a lot of changes which would have to be made; changes which I can’t even think of.

antrik

The drive unit contains motor, inverter (which *is* the power electronics), and gearbox all in one integral housing. That part is trivial. And adding the extra cable to the battery pack should be no big issue either. Updating software (or rather, just flipping a software switch to enable functionality that is shipped with every car) is trivial as well. Biggest change is actually replacing some front suspension components.

TomArt

Don’t forget coolant – all in all, it’s complicated, and not a reasonable expectation for a while (if ever).

antrik

Right, that too…

Still, I think it should all be doable with a couple hours of labour.

(Which doesn’t mean Tesla will see much point in doing it, though… After all, there will probably always be enough people willing to just buy the used RWD cars, and people wanting to upgrade can just trade them in while getting a brand new AWD…)

Pushmi-Pullyu

“…inverter (which *is* the power electronics)”

No, the inverter is just part of the PEM — the Power Electronics Module. Certainly the largest (and I think by far the most expensive) part, but still only part.

Quoting from the Tesla Motors Club forum:

Power Electronics Module. It controls the power to, and regeneration from, the motor, converting DC from the battery to the AC needed for the induction motor. It also converts AC to DC to charge the battery.

https://teslamotorsclub.com/tmc/threads/what-is-the-pem.11388/

antrik

In case you haven’t noticed, that thread is about the original Roadster — where the PEM was apparently a separate box, and also doubled as the charger. All newer models have the inverter as part of the drive unit, and the charger separate.

(During regenerative breaking, the inverter is reconfigured to work as a rectifier instead — but it’s the same piece of hardware.)

CPO

To pull that off you also need firmware changes and sufficient extra motors attached to suspension and wheels.

Bob Wilson

I need to replay it but Elon mentioned how inefficient the dealer network is with two, time-delay queues. The first from factory-to-dealer and the second dealer-to-customer. This floating inventory represents a substantial amount of capital, completed cars, that can not be booked as sales.

Unlike traditional dealers, Tesla is able to tune the whole system from factory-to-customer. In contrast, dealers and traditional manufactures have loosely coupled business relationships. It is nearly impossible to tune the whole system of product delivery.

Kbm3

I believe the manufacturer books the sale to the dealer and the dealer then has 60 days to pay.

Pushmi-Pullyu

The problem with what Elon said there is that the only way to cut out the middleman is to ship the car directly from the factory to the customer. That means Tesla would need at least hundreds, maybe thousands, of Tesla employees delivering cars every day.

The alternative is to use the Delivery Center business model, which Tesla is already doing in certain regions of California. Cars are shipped from the factory to a delivery center, where they are picked up by the customer. That way, the delivery center can run “classes” where a sizable group of customers are all given orientation, and the keys are handed over, at the same time. That allows one or two Tesla reps to handle a group of maybe 25-30 at once. Special cases, where someone can’t come to a Delivery Center at a scheduled time for one reason or another, can be handled on an individual basis… and maybe there should be a fee for that, unless the customer is disabled and can’t get out of the house.

Seems to me the most practical thing is for Tesla to expand its Delivery Center strategy.

antrik

I’m pretty sure they did the maths before claiming that direct deliveries would be cheaper in the end…

antrik
Bunch of clarifications and additions: * AIUI, “best quarter ever for solar” refers to profitability? * Elon said on the call that Q4 should be cash flow positive, while Q1 2019 should at least be flat, after the major bond repayment. (It should be noted that the shareholders letter talks about Q4 being more or less flat, not significantly positive, also because of a bond repayment — which isn’t quite as large as the Q1 one, though.) * On that note, they confirmed again that they want to repay bonds and other loans, rather than convert/refinance. (Don’t remember whether that was in the letter and/or the call…) * Regarding volunteers helping with deliveries, Elon remarked that he isn’t aware of such a thing ever happening before, where people volunteer to help a company succeed. (Neither am I. IMHO that point hasn’t gotten the attention it deserves: the incredible mindshare demonstrated there pretty much destroys the bear case based on the idea that established car makers will eat into Tesla’s share because of their brands…) * Regarding safety, Elon also points out that the test results don’t show the entire picture, since many car makers supposedly game the system by adding… Read more »
David

Thanks for the additional update.

Robert Weekley

Antrik, “Not sure what the statement about “Model Y prototype approved for production” actually means”, it is, I expect, a point in time, where a ‘Pencils Down’ moment occurs: no more major changes, sort out supply chain, fab planning, etc.

Pushmi-Pullyu

“Remark about external suppliers of course referred to energy products only (which are affected more by cell production shortage) — Model 3 only uses Panasonic cells from Gigafactory.”

Thank you for clarifying that. The citation in the article above is misleading. Tesla is definitely not using non-Panasonic cells in any of its cars! (Exception: I think the upgrade pack for the original Roadster uses non-Panasonic cells.)

As you say, the non-Panasonic cells are only used in Tesla Energy products: PowerWalls and PowerPacks.

* * * * *

“Not sure what the statement about ‘Model Y prototype approved for production’ actually means… But there was also mention that mass production will happen in 2020.”

I presume that “Model Y prototype approved for production” means they are ready to produce the “production prototype” units they need for testing, crash testing, and for the Reveal media event to publicize the new model. The Model 3 got something more than 200 pre-production units made, as I understand it; presumably the Model Y will get a similar number.

antrik

I think it’s too early for making production prototypes… Validation prototypes would be more likely at this point I’d say. But aside from that, yes, that’s *one* possible interpretation.

Another interpretation would be that existing prototypes were deemed OK to serve as the basis for preparing series production…

Pushmi-Pullyu

Okay, validation prototypes. I confess I’m not familiar with all the terms here. I seem to recall GM uses four stages of prototypes approaching actual production cars, and Tesla uses only two? Altho that didn’t work so well with the Model 3… maybe they’ll increase that to 3 or *gasp* even 4 stages, just like the Big Boys.

antrik

My own knowledge is mostly limited to recently watching a talk with Marc Tarpenning, where he described the process of creating the original Roadster 🙂 (Test mule -> engineering prototypes -> validation prototypes -> production prototypes.)

I suspect Tesla’s approach only differs from others in having fewer iterations of production prototypes…

Scott G

Hope my F150 can last till that Tesla pickup shows up 🙂
LOVING my Model 3D 🙂

johnny

Elon, pullllease don’t put the silly bat wing doors in the TMY! Think CONVENTIONAL .