Major takeaways from Tesla's Q3 2018 Earnings Report

Mayur Thaker
31 Oct 201828:44

Summary

TLDRTesla's Q3 earnings report revealed impressive financials, including a reported net income of $312 million and a significant operating cash flow of $1.4 billion, with only 10% from working capital. The Model 3's gross margin exceeded 20%, and operating leverage led to a substantial decrease in SG&A expenses as a percentage of revenue. Tesla's valuation became more tangible, with metrics like P/E and price-to-free cash flow becoming comparable to tech and automotive sector peers. The company's intention to pay down debt with cash flow rather than raising capital signals a shift towards deleveraging, which could significantly enhance shareholder value.

Takeaways

  • 🚀 Tesla reported a Q3 net income of $312 million and a non-GAAP net income of $516 million, significantly exceeding expectations.
  • 💰 The company's operating cash flow reached $1.4 billion, with only 10% coming from working capital changes, indicating strong operational performance.
  • 📈 Free cash flow was $881 million, and Tesla's cash reserves increased by $731 million to approximately $3 billion.
  • 🚗 The Model 3 gross margin was over 20%, reflecting improved efficiency and cost controls in production.
  • 🔧 Labor hours per Model 3 decreased by more than 30%, demonstrating significant productivity improvements.
  • 🔋 Less than 20% of the original 455,000 Model 3 reservations reported in August 2017 have been canceled, showing strong customer commitment.
  • ☀️ Tesla expects to ramp up solar roof production more quickly in the first half of 2019, indicating a focus on the energy division.
  • 📊 The company reaffirmed its guidance for positive GAAP net income and free cash flow in Q4, despite plans to pay $230 million of convertible notes in cash.
  • 📈 Tesla's valuation metrics, such as P/E, price to cash flow, and price to free cash flow, now compare favorably to other tech and automotive companies, suggesting a more reasonable valuation.
  • 💼 Elon Musk indicated that Tesla's intention is to pay off debts rather than refinance them, aiming to reduce the company's overall leverage.

Q & A

  • What was Tesla's reported GAAP net income in Q3?

    -Tesla's reported GAAP net income in Q3 was $312 million.

  • How much was Tesla's non-GAAP net income in Q3?

    -The non-GAAP net income was $516 million.

  • What was the significance of Tesla's operating cash flow in Q3?

    -The operating cash flow was $1.4 billion, with only 10% coming from working capital changes, indicating strong operational performance.

  • What was the free cash flow reported by Tesla in Q3?

    -The free cash flow was $881 million.

  • How much did Tesla's cash reserves increase in Q3?

    -Tesla's cash reserves increased by $731 million to about $3 billion.

  • What was the gross margin for the Model 3 in Q3?

    -The Model 3 gross margin was greater than 20%.

  • What was the notable decrease in Tesla's SG&A expenses as a percentage of revenues?

    -SG&A expenses decreased from 18.7% in Q2 to 10.6% in Q3.

  • What percentage of Tesla's Model 3 reservations reported in August 2017 have not been cancelled?

    -Less than 20% of the reported 455,000 net reservations in August 2017 have been cancelled.

  • What did Tesla expect in terms of solar roof production in the first half of 2019?

    -Tesla expected to ramp up production of the solar roof more quickly during the first half of 2019.

  • What was Tesla's guidance for Q4 regarding GAAP net income and free cash flow?

    -Tesla reaffirmed its prior guidance to achieve positive GAAP net income and free cash flow in Q4.

  • How did Tesla's valuation metrics change after Q3 earnings, particularly in terms of P/E ratio?

    -Tesla's P/E ratio, based on the most recent quarter multiplied by four, was 45.7x, making it more reasonable and comparable to other tech companies.

  • What was the significance of Tesla's intention to pay off debts rather than refinance them?

    -Paying off debts with internally generated cash flow builds book value and is a form of returning capital to shareholders without triggering a tax event.

  • What was the potential implication of Tesla's Q3 results for future financial performance?

    -The Q3 results indicated that Tesla might be at an inflection point where it may never post a GAAP loss again, barring unforeseen economic issues.

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Tesla EarningsQ3 ResultsFinancial AnalysisModel 3 MarginsOperating LeverageCash FlowDebt ReductionAuto IndustryInvestor InsightsMarket Potential
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