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Tesla surprises with $312M profit for Q3 as Model 3 margins soar past 20%

Tesla's Fremont factory, where all Model 3s are produced. (Tesla)

Tesla’s third-quarter earnings for 2018 saw the California-based carmaker beat Wall Street revenue estimates after posting $6.8 billion in revenue and beating earnings estimates with a GAAP profit of $312 million.

The results, which were posted in an Update Letter to investors after the closing bell on Wednesday, October 24, showed third-quarter earnings of $1.75 per share on a GAAP-basis, shattering analyst estimates of -$.19 per share. Revenue was $6.82 billion versus an estimate of $6.33 billion. The company reported an adjusted non-GAAP profit of $512M or $2.90 per share. 

Profitability

Tesla posted a profit of $312 million, attaining the ambitious target set by CEO Elon Musk earlier this year. The electric car maker went through great lengths to reach profitability, from a 9% layoff across the company back in June to a massive delivery blitz in the third quarter that was augmented by volunteer owners who helped deliver vehicles to reservation holders.

“With average weekly Model 3 production through the quarter (excluding planned shutdowns) of roughly 4,300 units per week, we achieved GAAP net income of $312 million. We also delivered on our internal cost efficiency targets, leading to GAAP Model 3 gross margin of more than 20%, which exceeded our guidance,” Tesla stated in the update letter. 

This is the company’s first profitable quarter since Q1 2013, when the company posted a minor profit. The company also saw its free cash flow rise to $739M, versus a net loss of $436M last quarter.

Revenue

The company’s revenue for the third quarter consisted of $6.09B in automotive revenue and $399M from the energy and battery storage division. Automotive revenue saw an increase of 82% compared to the previous quarter. The energy and battery storage division saw an increase of 6.6% compared to the previous quarter. Overall, total revenue was up  70.5% compared to Q2 and up 229% year-on-year.

The drastic increase in automotive revenue was mainly driven from the company’s Model 3 sales, which rose to over 56,000 deliveries in the quarter. Tesla deployed 93 MW of energy generation and 239 MWh of energy storage products in the third quarter as well, both of which grew over the previous quarter.

Model 3

Elon Musk once noted that the Model 3 was a “bet-the-company” vehicle — a car whose success or failure would determine Tesla’s future. The challenges that Tesla faced with the Model 3 ramp are well-documented, with Elon Musk describing the ordeal as one of the most painful periods of his career. The third-quarter proved to be a breakthrough for Tesla, though, as the company was able to make headway in both the number of vehicles produced and delivered.

The Model 3 had a gross margin exceeding 20% in the quarter. Tesla continues to expect this to rise to 25%, excluding any ZEV credits.

“Model 3 mix was strong in Q3 due to the launch of AWD and Performance variants. While the average selling price will gradually decline as we introduce lower priced variants, we are not expecting this to impact profitability. Model S and X Performance mix declined roughly 4-fold since 2015, yet Model S and X gross margin (excluding ZEV credits) continued to improve by roughly 600 basis points over the same period of time. Margin growth was caused by gradual cost improvements driven by lowering labor hours per vehicle, reduced cost of raw materials, and various other cost efficiencies. We continue to target a 25% gross margin ex-ZEV credits on Model 3.” – Tesla’s Q3 Letter

Today’s trading session ended with TSLA down 1.92% at $288.50. After-hours, the stock was trading up  8.3% to $312.45.

Tesla’s full Q3 2018 Update Letter can be accessed here.

Tesla surprises with $312M profit for Q3 as Model 3 margins soar past 20%
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