Tesla: Disaster Averted For Now

Summary

• Top line beat as expected, but bottom line missed estimates.
• Capital expenditures forecast slashed again.
• Company continuing to walk financial tightrope.

After the bell on Wednesday, we received second quarter results from Tesla (NASDAQ:TSLA), detailed in this shareholder letter. The electric vehicle maker has been one of the most talked about stocks this year as it looks to ramp Model 3 production, but it has continued to fall short of expectations and the financial situation has deteriorated. In the end, Tesla remains in a tricky situation, with high hopes for the remainder of the year.

As I mentioned in my earnings preview article, the street continued to cut its Q2 forecasts almost daily into this report as seen the charts below. That set up the eighth-straight quarterly revenue beat, with Tesla coming in just more than $4 billion. However, the non-GAAP loss of $3.06 was worse than street expectations by about 15 cents.

(Source: Yahoo Finance analyst estimates page)

Overall, Tesla's automotive sales came in a little less than I expected, but lease revenues were about 20% more than my forecast. The main reason that Tesla missed my forecast for $4.057 billion was a big miss on energy revenues, about $55 million, as energy deployments declined significantly from Q1 levels. Tesla service and other revenues also came in lighter than I expected by about $30 million, not showing much progress from Q1 despite the massive increase in deliveries during the quarter.

On the cost site, Tesla's gross margins where better than expected in all segments except service and other. Tesla got to positive gross margins for the Model 3 in Q2 and expects to get to around 15% this quarter. In the Q1 shareholder letter, management said that losses in the service/other category would significantly improve in the coming quarters, but the chart below shows a much different story so far.

Tesla took a bath on the operating line. Not only did R&D plus SG&A come in a bit higher than my estimate and up significantly from Q1, but a restructuring charge of more than $103 million was taken. While the overall net loss shrunk from Q1, the net loss attributable to shareholders actually increased because the net loss attributable to minority interests shrunk considerably.

As expected, the balance sheet took a hit, although probably not as bad as most expected. First, Tesla again cut its capital expenditure forecast for 2018, this time by half a billion dollars, putting into question future products like the Tesla Semi, Model Y, Roadster, etc. There was no mention of the Model Y, Semi, Autopilot, or self-driving in the investor letter. Also, the shareholder letter says vehicles in the new China factory will roll off the line in about three years, despite a previous statement for roughly two years.

Cash burned in operations was $130 million, capex was $610 million, and $67 million was spent on solar systems. The two charts below show Tesla's net cash and working capital positions are both headed in the wrong direction.

Things probably could have been even worse. Tesla reduced accounts receivable by more than $90 million, while accounts payable and accrued liabilities also rose by more than $340 million. The company also brought in more money from non-controlling interests, more than $120 million, and total debt also increased. Management expects to be cash flow positive in the second half of the year, but its forecasts have been quite wrong in the past.

When it comes to guidance, the company is calling for 50,000 to 55,000 Model 3 units to be produced in Q3, with deliveries outpacing production. Progress needs to be made, considering InsideEvs estimated only 14,250 deliveries were made in July. Also, while Model S/X guidance for the year was maintained at 100,000 vehicles, the first half of the year only saw about 44,000. Tesla has fallen even further behind recently, with July US sales estimated to be down several hundred units over July 2017 and Norway down another 100 units.

In the end, there were relatively few surprises with Tesla's Q2 report, but management still has to navigate through the conference call. So far, as my earnings preview article was titled ("Avoiding Disaster"), Tesla has done quite well, but there's significant pressure from a weak balance sheet and high expectations for the back half of the year. Shares are up about 5% in the after hours as disaster has been averted for now, but that could quickly change depending on what happens on the call.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in TSLA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.