Tesla may have gone through a "hell of production" to build Model 3, but the car has helped the company set a new record: $ 4 billion in revenue in the second quarter of 2018, according to a report of earnings published on Wednesday. It also reached another milestone: Model 3 is finally starting to make some money for Tesla. The plan to sell the most expensive versions of Tesla's mass market car so that the company does not "die" is working.
The gross margins of Model 3, a measure of the company's retained earnings after costs associated with production, became "slightly positive" in the second quarter, according to the company. That in spite of the fact that production was still increasing and that Tesla still had to ship any of the expensive performance versions of the all-wheel-drive car. "This was a significant achievement in the Model 3 ramp," the company concludes in a letter to investors published with the report.
Until recently, Tesla had been losing money on each Model 3 it sent. Tesla says the gross margin of Model 3 "should grow significantly" to approximately 15 percent in the third quarter and 20 percent in the fourth quarter, thanks to "the continued reduction in manufacturing costs and to some extent an improved combination " From here on out, CEO Elon said during a call with analysts Wednesday afternoon, "the goal is to be profitable and positive cash flow every quarter onwards."
Tesla says it expects to manufacture 50,000 to 55,000 Model 3 vehicles in Q3, which would represent a 75 to 92 percent increase over its second quarter numbers. The company also says that "deliveries should outperform production in the third quarter as our delivery system stabilizes," a sign that the many finished models that are currently in the parking lots are ready to move.
Tesla says he continues to produce "approximately" 5,000 models 3 a week, a goal he achieved for the first time at the end of June. The company says it is still on track to reach 6,000 cars a week by the end of August, and now aims for a weekly production rate of 10,000 by early 2019. Cumulatively, Tesla made 28,578 models 3 and delivered 18,449 of them alone in the second quarter. .
The company's problems in increasing the production of Model 3 were well documented, something that Tesla admitted in the first line of the letter. "[N] or the production ramp of any other product has been as watched and debated as that of Model 3," write Musk and CFO Deepak Ahuja. To meet that often delayed target of 5,000 models 3 per week, Tesla launched a new production line in a tent in front of its Fremont, California, factory in June, allegedly borrowed workers from other parts of the company and produced the model 3 24/7.
Tesla's overall profitability search continues, as it reported a loss of $ 743 million in the quarter, its third largest quarterly loss. (The company reported losses of $ 770 million and $ 785 million in the two previous quarters). But, buffeted by the sales of Model 3, Tesla increased its revenues for the sixth consecutive quarter despite a slight drop in money from its power generation and storage business. It also came up with $ 2.2 billion in cash and cash equivalents, which should help Musk keep arguing that the company will not need to raise new funds in the next quarter.
That said, there are great projects ahead for Tesla that will require much more capital than it currently has at hand. The company is planning at least two new cars, the Y model and the second generation Roadster, and a fully electric semi truck. Musk also reached an agreement in July to build a third Gigafactory in China. In the letter published on Wednesday, Tesla said production at the Chinese factory is scheduled to start in three years, not two as originally said. According to reports, the company is also in talks to build a fourth Gigafactory in Europe.
Some analysts expect those factories to cost as much, if not more, than the $ 5 billion price tag for the first Gigafactory in Nevada. But in the earnings call, Musk said he is confident that Tesla could build a China Gigafactory for "much less" than that. "Just a guess," said Musk, but the cost could be closer to $ 2 billion. As for where that money will come from, Musk said the company is likely to raise debt financing locally in China.
Regardless of how some of these initiatives work, Musk and company sounded happy to look forward to the analyst's call. Because beyond the infernal ramp of Model 3, they have been manic in recent months.
Beginning with the previous quarterly earnings call, which occurred amidst what appeared to be the darkest days of the Model 3 ramp, Musk exploded to analysts for asking "boring, absurd" questions and instead turned to A YouTuber for a large part of the call. Two weeks later, a report emerged that Tesla had chosen not to include driver monitoring technology in their cars, which could have prevented some of the more high-profile accidents involving autopilot.
Then, Consumer Reports discovered that the braking distance of Model 3 was worse than that of a Ford F-150. (Tesla rushed to a software update that solved the problem). In June, Tesla left thousands of workers, and Musk disagreed with the "Russian nesting doll" of contractors that the company trusted. Days later, Musk warned his company of alleged "sabotage" within its ranks, and shortly thereafter filed a lawsuit accusing former Gigafactory employee Martin Tripp for hacking and disseminating business secrets.
Then there was the tent, the commercial war, and the news that the eligibility of Model 3 for the EV federal tax credit is officially closing. One of the company's best engineers left, and Tripp responded with a counterclaim of his own. And there was a complete saga about Musk's attempt to develop a solution to help rescue a football team trapped in a cave in Thailand, which resulted in Musk calling one of the divers "fart" (and finally returning the claim).
On Wednesday's call, Musk sounded exhausted. The last months "burned many neurons," he said. "[The] the mental scar tissue is, like the next level." But he apologized to analysts for his actions on the last earnings call, and brought in more than half a dozen executives and senior executives from Tesla so he could talk about other efforts that he felt had recently been lost in the mix. "I've never really been more excited about the future of Tesla," he said.