5 Key Takeaways from Tesla’s Q3 Earnings Call

It was Elon Musk’s last earnings report as company chairman after an SEC settlement, at least for the next three years.

6 min read

Tesla today released an earnings report that made shares soar — and Wall Street analysts scratch their heads.

Earnings came out to $2.90 a share versus expected losses of close to 20 cents per share. The company’s net income, $311.5 million, is a far cry from its losses of $619.4 million this time last year. And quarterly revenue topped that of a year ago by more than 70 percent.

This was Tesla’s third profitable quarter, as well as CEO Elon Musk’s last full quarter, for the time being, as chairman of the company he founded 15 years ago. As part of a $20 million SEC settlement (with another $20 million being paid out by Tesla itself), Musk agreed to step down as Tesla’s chairman of the board within 45 days, with plans to be replaced by an independent chairman. He will be unable to seek re-election for three years, though he plans to stay on as CEO. The SEC fraud charges originally sought to bar Musk from serving as an officer or director of any public company in the U.S.

“I’ve never heard of a case where the company’s customers actually cared about the future of the company so much that they volunteered their time to help the company succeed,” Musk said on the Wednesday earnings call. “That’s amazing. You don’t see that anywhere. That chokes me up, actually.”

Here are five key takeaways from the car company’s Q3 results.

1. Profitability

Musk said he’d prioritized proving that Tesla could be sustainably profitable this quarter and that he’s excited for what lies ahead. Tesla’s net income for the quarter was a reported $300 million, and the company increased its cash equivalent by $731 million. The gross margin for the Model 3 was greater than 20 percent, and Musk also mentioned the higher-than-expected revenues and profitability in Tesla’s energy business, saying it may have been the company’s best quarter ever for solar.

In Q4, Tesla expects to report another positive net income and, aspirationally, for all quarters moving forward — barring quarters where a significant debt repayment is due. But even for those — like Q1 of 2019, for example — Musk said he expects the company will likely be “flat in cash flow” by the end of the quarter.

2. Model 3 production

Model 3 production stabilized this quarter, and Musk said the company delivered more cars this quarter than in all of 2016. The new model became the bestselling car in the country in terms of revenue — and the fifth in terms of volume.

Next year, Tesla will bring the Model 3 to Europe and China, and Musk said those regions’ mid-size sedan markets may be double that of the U.S. Musk was hesitant to speak to weekly unit production goals for the next three months, but he said it would take minimal capital expenditures to reach 7,000 units a week. Above that, he said it’s more difficult to predict quarterly, but his long-term Model 3 production goal — a “guess,” he clarified — is 7,000 to 10,000 units a week in the U.S. (and 5,000 to 8,000 units a week in the rest of the world).

3. Vehicle safety

Tesla said the Model 3 received a five-star rating in every category and subcategory when it came to government safety standards, as well as the lowest probability of injury for any car ever tested by the National Highway Traffic Safety Administration (NHTSA). The company is especially proud of the extended crumple zone for all three of its models. In the case of a head-on collision, the car’s hood will dent in further than usual — meaning a potentially less high-impact experience for both passengers in the Tesla and passengers in the other car.

“Some companies game the system,” Musk said, adding that he believes some car companies make a point to strengthen sections of a car they know will be tested and neglect others. Tesla, he said, did the opposite and tested the weakest points of its cars. “We anti-game the system,” he said. “A lot of people think safety is boring, but not at Tesla.”

4. Autopilot and AI

Tesla will soon roll out its “most advanced autopilot feature ever,” which will launch a new set of AI neural networks to provide an enhanced view of everything happening around any given Tesla vehicle. It should allow for faster-functioning, larger and more expensive neural networks, and industry experts say that the larger a network — and the more neurons added to it — the more accurate its predictions. Tesla’s director of AI, Andrej Karpathy, said Tesla has already trained networks of that size but couldn’t deploy them until now due to computational constraints. That will change, he said, in the autopilot feature’s next iteration, which will also roll out automatic lane changes, better capacity to handle forks in a road and an advanced capability for taking complicated exits. Future versions of the feature will allow customers to waive the mandatory human permission before making a lane change.

5. Future outlook

Musk pointed to a long-term economic model where a number of autonomous cars will be dedicated solely to ride-hailing, but consumers will also be able to share their cars with others at will — resembling a combination of Uber, Lyft and Airbnb. “We absolutely see the future as sort of a shared electric autonomy,” he said.

Since Tesla will eventually have “millions of cars in the field” with the capability of full autonomy, Musk predicts that the company will be in the strongest position for the long term among its competitors. “No one else will have that,” he said.

The company also is on a “mission” to create a $35,000 car, Musk said, and that could be a reality in as soon as six months. Another of his goals: Reduce the average time it takes for a car to reach a customer from the factory to less than 10 days. The problem now, he said, is that 10 days equals about $750 million in capital for the company — and since the bank loans Tesla can access account for just about 85 percent of vehicle manufacturing costs (or 70 percent of the sticker price), local factories will be vital for capital efficiency. Musk said he eventually aims to reduce the timeframe to less than seven days worldwide.

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