Tesla reveals future production plans in its 3Q19 results

Tesla revealed that compared to Q3 of 2018, the percentage of leased vehicles has tripled and alone has impacted revenue by the majority of the YoY decrease in Q3 2019.

Model 3 mix has increased while the company has taken actions leading to the reduction of the ASP of our products. These ASP reductions are particularly impacted by the launch of the Standard Range trims of Model 3 and pricing actions earlier in the year.

The automaker is positioned to accelerate its growth further through Gigafactory Shanghai, Model Y and also through increasing build rates on existing production lines. These capacity increases will allow for higher total vehicle deliveries and associated revenue. Tesla expects to gradually release nearly $500 million of accumulated deferred revenue tied to Autopilot and Full Self Driving features.

GAAP Automotive gross margin improved by 393bp QoQ to 22.8% (improved by 366bp QoQ excluding regulatory credits). Margin was impacted in part due to fundamental improvements in our operating efficiency, including higher fixed cost absorption, reductions in manufacturing and material costs and continued improvements in vehicle quality and in part due to Smart Summon-related deferred revenue recognition, FX and other non-recurring items. Improved gross profit combined with a decline in operating expenses resulted in material improvement of GAAP net income.

Quarter end cash and cash equivalents increased to $5.3 billion, driven by positive free cash flow of $371 million. The operating cash flows are negatively impacted by increased automotive leasing mix. Draws against working capital facilities, including leases awaiting securitisation, are included in financing cash flows. Capex increased sequentially due to investments in Gigafactory Shanghai and Model Y preparations in Fremont.

Model Y equipment installation is underway in Fremont ahead of the planned launch next year. Tesla are moving faster than initially planned, using learnings and efficiencies gained from the Gigafactory Shanghai factory design. Capex per unit of capacity is forecasted to be about 50% lower than our current Model 3 production system in the United States.

The American automaker is already producing full vehicles on a trial basis, from body, to paint and to general assembly, at Gigafactory Shanghai. Tesla has cleared initial milestones toward manufacturing license and is working towards finalising the license and meeting other governmental requirements before they begin ramping production and delivery of vehicles from Shanghai. China is by far the largest market for mid-sized premium sedans. With Model 3 priced on par with gasoline powered mid-sized sedans (even before gas savings and other benefits), the EV maker believes that China could become the biggest market for Model 3.

Tesla also revealed that it is in the final stages of the site selection process for its Gigafactory in Europe. The European Gigafactory is expected to produce both Model 3 and Model Y.

The company believes that deliveries should increase sequentially and annually, with some expected fluctuations from seasonality. They are highly confident in exceeding 360,000 deliveries this year.

Positive quarterly free cash flow is expected going forward, with possible temporary exceptions, particularly around the launch and ramp of new products. The company continues to believe that their business has grown to the point of being self-funding. Positive GAAP net income going forward, with possible temporary exceptions, particularly around the launch and ramp of new products. Continuous volume growth, capacity expansion, and cash generation remain the main focus.

Trial production of Model 3 in Shanghai has begun, ahead of schedule. The company is also ahead of schedule to produce Model Y and now expects it to launch by summer 2020. They are planning to produce limited volumes of Tesla Semi in 2020 and are hoping to announce soon the location of our European Gigafactory for production in 2021.