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Expectations were high from Tesla's (NASDAQ:TSLA) Q1 earnings results after the electric car maker raised its guidance at the start of April to reveal that the company had achieved GAAP and non-GAAP profitability for the first time. With the stock price up more than 40% after the amended guidance, many investors felt the sentiment was stretched to the upside. However, in my earnings preview, I had warned investors that Tesla still carried a very high short interest and the recent short squeeze could just be the tip of the iceberg if the company reported better-than-expected results. And that's exactly what happened: Tesla reported Q1 EPS of $0.12 vs. $0.04 consensus, on revenue of $562 million vs. $492 million consensus. What's more, as I had suspected, Tesla raised its Model S sales guidance to 21,000 units vs. prior guidance of 20,000 units which will cause more pain to the short sellers. Here's an initial look at some of the highlights from the earnings release.

Improved Gross Margin

I had said in my earnings preview that gross margin would be an important metric to monitor. Tesla Motors reported a gross margin of 17%, up from 8% in the previous quarter and on the higher side of the company's initial expectations of a gross margin in the mid-teens. The improved gross margin was driven by high fixed cost absorption, as Tesla's production rate exceeded expectations. Tesla delivered 4,900 Model S vehicles, exceeding its initial guidance of 4,500 units. In fact, Tesla was able to produce 5,000 Model S units; the discrepancy between units produced and sold is due to the highly stringent revenue recognition standards. Manufacturing efficiencies, part cost reductions and regulatory credit sales also contributed to an improved gross margin; Tesla said that it was able to reduce the time needed to build a car by almost 40% which is quite impressive.

Excellent Demand

Tesla reported that the global demand for the Model S remains quite strong; Tesla is currently receiving orders at a rate of more than 20,000 cars per year worldwide, silencing critics who said that the Model S would fail to gain traction. "Importantly, we are seeing orders in a particular region increase proportionate to the number of deliveries," Tesla said in its shareholder letter, implying that the Model S is gaining traction through more visibility and word of mouth marketing. Such a buzz is considered to be a strong sign for any product, and indicates that demand would increase further as Tesla gains more visibility creating a self-sustaining marketing circle. Indeed, Tesla expects the U.S demand to exceed 15,000 cars per year, and global demand to cross 30,000 units per year.

Outlook Looks Bright

As if the earnings results themselves were not enough to hurt the shorts, Tesla's management dealt another blow to its critics by raising its full-year guidance to more than 21,000 cars per year which exceeds its initial outlook of 20,000 vehicles per year. This is an excellent sign; we already knew that Tesla's sales were constrained from the production side rather than the demand side, and this was confirmed again in the latest shareholder letter. That Tesla has raised its guidance shows that the company is moving in the right direction to remove its production constraints and improve its manufacturing efficiencies and supply chain management. For Q2, Tesla expects to produce 5,000 vehicles and deliver of 4,500 of these in North America. The remainder is meant for Europe and will be recognized later. Tesla expects to continue to achieve further cost efficiencies which would drive its gross margin to the high teens in Q2. For the full year, Tesla maintained its gross margin guidance at 25% assuming no contribution from ZEV credits.

Conclusion

With its Q1 2013 results, Tesla has demonstrated to its critics that its business model is profitable. Although it is too early to say whether Tesla can revolutionize the auto industry the same way that Apple (NASDAQ:AAPL) revolutionized the mobile phone industry, Tesla is definitely moving in the right direction and is proving to be too hot for the short sellers to handle.

Source: Tesla Motors' Electrifying Q1 Results Will Shock The Short Sellers