Tesla CEO Elon Musk just led the quarterly earnings call in a "pivotal year" with continued profits, stable margins, improved cash-on-hand and an optimistic outlook for 2019.
Musk called it the "most successful year in Tesla history" with the firm claiming an "80 percent market share of all electric vehicles in the U.S." He expects Tesla's "nutty" growth rate to continue in 2019 with a 50 percent improvement over 2018.
Here are some highlights:
- Fourth-quarter GAAP net income was $139 million.
- Cash and cash equivalents were $3.7 billion at year-end, an increase of $718 million.
- Automotive gross margin decreased slightly to 24.3 percent in Q4 from 25.8 percent in Q3. Model 3 gross margin remained above 20 percent.
- Automotive revenue in Q4 increased by 4 percent sequentially over Q3 and by 134 percent compared to Q4 2017.
- Customer deposits decreased by $113 million to $793 million in Q4 as Model 3 backlog is being met.
The company's fourth-quarter earnings fell short of expectations. Tesla delivered adjusted earnings of $1.93 per share in Q4, falling below consensus estimates of $2.14 per share, according to Bloomberg data. However, Tesla exceeded expectations on Q4 revenue at $7.23 billion, ahead of the $7.07 billion estimated.
In yesterday's earnings preview, we asked some questions about how Tesla's business was evolving. Today, Tesla answered most of them.
What's the demand for Model 3?
Tesla should be allowed to brag a bit, declaring that with nearly 140,000 units sold, Model 3 was "the best-selling premium vehicle (including SUVs) in the U.S. for 2018 — the first time in decades an American carmaker has been able to secure the top spot."
But Tesla pulled out all the stops to deliver a record 90,700 cars last quarter — and the first quarter of 2019 could suffer from the hangover of that delivery pull-in. Tesla has begun its Model 3 delivery efforts in Europe and China, but faces the headwinds of transport, homologation, new distribution networks, and tariffs.
"While the number of Model 3 vehicles produced should increase sequentially in Q1, deliveries in North America during Q1 will be lower than the prior quarter as we start delivering cars in Europe and China for the first time. As a result of the start of Model 3 expansion into Europe and China, deliveries will be lower than production by about 10,000 units due to vehicle transit times to these markets," according to the company's earnings letter.
Musk expects Model 3 production volumes in Fremont to grow throughout 2019 and reach "a sustained rate of 7,000 units per week by the end of the year," adding to any Model 3 production at the Shanghai Gigafactory.
As for the Model Y, Tesla will start tooling for a new crossover, targeting volume production by the end of 2020, "most likely at Gigafactory 1," Musk said.
He added that "the market opportunity for the Model 3 in Europe and China exceeds North America."
How is Tesla going to pay for its new products?
Tesla's cash position allows it the room to settle its $920 million March bond.
The Shanghai Gigafactory is expected to "go up like lightning," according to Musk, with local Chinese financing and an estimated cost of $500 million. Tesla notes that the "acquisition of land in China is a 50-year lease from the Chinese government."
Capital expenditures, including the China land-acquisition payment, were $2.24 billion in 2018. Tesla expects 2019 capex to be about $2.5 billion and sufficient to fund "Gigafactory Shanghai, Model Y and Tesla Semi, as well as for the further expansion of our Supercharger, service and retail networks," the earnings letter states.
Because the Model Y will be built on the Model 3 platform, it has about 75 percent of its components in common with the Model 3. As such, "the cost of the Model Y production line should be substantially lower than the Model 3 line in Fremont, and the production ramp should also be faster."
Service and autopilot update
Tesla continues to make bold claims about its autopilot capabilities and its “Navigate on Autopilot” feature. Musk spoke of the "profound" experience that permits: "On most controlled-access roads such as highways, any Tesla vehicle with Enhanced Autopilot [can] change lanes, transition from one highway to another, and ultimately exit the highway when approaching the final destination."
During Q4, Tesla opened 27 new store and service locations, for a total of 378 locations worldwide. Musk named improved customer service as one of his top priorities.
Energy and solar businesses
Tesla's energy storage business built one of the world's largest batteries in 2018, while deploying a total of 1.04 gigawatt-hours of energy storage, an impressive tripling of its 2017 figure. Tesla's letter claims that "a better supply of cells and new manufacturing equipment" will grow storage deployments to "over 2 gigawatt-hours in 2019" with growing profitability.
Energy generation and storage revenue dropped in Q4 by 7 percent over Q3 and margin dropped significantly "due to the typical seasonal decline in solar energy production and correspondingly lower lease revenue in the winter months, Solar Roof ramp cost, and a higher mix of lower-margin energy storage business."
Tesla deployed 73 megawatts of solar panels last quarter, 21 percent down from the previous quarter, capping a 38 percent plummet in 2018 to 326 megawatts. According to data from Wood Mackenzie Power & Renewables, Tesla’s residential solar installation market share has dropped from 33.5 percent a few years ago to 9.1 percent, allowing Sunrun to clinch the title of market leader.
But Tesla seems to be arguing that this is part of the plan, a result of its new, more selective storefront sales strategy and the improved financials of cash and loan sales, which made up 75 percent of residential deployments in Q4. Last year, Tesla reduced the pricing of its solar panel installations by $3,000 to $5,000 per roof — a result, Tesla claims, of its improved channel efficiencies.
The Solar Roof product is still on a slow roll. Two years after its introduction, and after having received deposits from interested homeowners, Tesla has connected just a dozen or so solar-integrated roofs to the grid. Tesla plans to ramp up the production of the Solar Roof with "significantly improved manufacturing capabilities during 2019" — roughly three years after its unveiling.
Elon's sunny outlook
Elon Musk is optimistic. He's optimistic about being profitable in the current quarter "and all quarters going forward." He expects Model Y volume eventually to be higher than Model 3. He believes that Tesla's "growth opportunities are massive."
Here's some guidance for 2019:
- Energy generation and storage revenue and margin are expected to increase significantly in 2019, driven by the storage side. Solar deployments in Q1 will be slightly lower than Q4.
- Operating expenses will grow by less than 10 percent this year, "creating massive leverage given the top-line growth in 2019."
- The target is to reach "a very small GAAP net income in Q1," but that will require execution "on many fronts including handling, logistics and delivery challenges in Europe and China."
- Tesla looks to deliver 360,000 to 400,000 vehicles in 2019, up 45 percent to 65 percent over last year, along with positive GAAP net income and positive free cash flow "in every quarter beyond Q1 2019."
Tesla's last announcement on the call was that CFO Deepak Ahuja is retiring, to be replaced by Zachary Kirkhorn, who previously served as the company’s vice president of finance.
All in all, this was another strong quarter for the automaker, along with a cautiously optimistic outlook for 2019. Tesla shares are down 5 percent on the good news.