Forecasting Tesla's Q3 Performance: $6.99B In Revenue, $85M In Operating Profit

Summary

• On Tuesday, I took a look at estimating the upcoming Q2 earnings and exploring what Q3 might look like.
• Today, I start by comparing where things matched up and where they went wide.
• I then use new information from today's earnings calls to make an early forecast for the Q3 figures.

Tuesday, I took a look at what Q2 earnings might look like and what the important drivers of profitability would be. My top-line and bottom-line figures were $4.15B and -$718M (losses before tax) vs. Tesla's actual figures today of $4.02B and -$728M respectively. A quick run-down of where things matched up and where they were off:

	Q2 ($K)	Actual ($K)
Auto Revenue	$3,192,407	$3,117,865
Costs	$2,636,330	$2,529,739
Margin	17.42%	18.86%
Gross profit	$556,077	$588,126
Lease Revenue	$182,108	$239,816
Costs	$113,456	$136,915
Margin	37.70%	43.00%
Gross Profit	$68,652	$102,901
Energy Revenue	$487,053	$374,408
Costs	$436,142	$330,273
Margin	10.45%	11.79%
Gross Profit	$50,911	$44,135
Services Revenue	$289,753	$270,142
Costs	$431,667	$386,374
Margin	-48.98%	-43.03%
Gross Profit	-$141,914	-$116,232
Total revenue	$4,151,321	$4,002,231
Costs	$3,617,595	$3,383,301
Gross Margin	12.86%	15.46%
Gross Profit	$533,725	$618,930
R&D	367096	$386,129
SG&A	$703,564	$854,193
Total OPEX	$1,070,660	$1,240,322
Operations profit (loss)	-$536,935	-$621,392
Net interest and other expense	-$182,048	-$107,607
Loss before taxes	-$718,983	-$728,999

Click to enlarge

Bottom-line figure is probably as close as I'll ever hope to get. A slightly larger proportion of S/X units went to lease rather than sales, explaining the difference there. My Services revenue figures were more pessimistic than reality (this was somewhat intentional, as I was aiming for these to be conservative), while my SG&A costs (inclusive of restructuring charges) was unintentionally short of the real total. Unexpected other income for Tesla helped offset its operating losses being worse than anticipated.

Disaster averted, suspense preserved

Elon Musk appeared to earn himself major brownie points with analysts today just by politely answering the questions ask of him. No drama, no long-winded tangents by retail investors (softball questions were saved for the final 5 minutes of the call, thankfully). What a concept.

Tesla reiterated its assertion it will be profitable and cash flow positive beginning Q3. We'll get to unpacking that in just a moment. But what was also notable today was the disclosure that the Shanghai facility would be financed predominantly with "local loans" (i.e., from the Shanghai government and/or private investors). On the call, Musk framed the new project in such a way that a) the upfront investment would appear smaller than originally anticipated (with initial capacity targeted at 200K-250K cars per year) and b) relatively little financing outside said loans would be required, which makes financing the balance from operations plausible, if all goes according to plan. It's a rare site to see a company miss on earnings and watch its stock price melt up 9% after hours (interestingly, right in line with the value of short-term call options as of Wednesday), but that's what Tesla achieved today. A minor revenue beat is not that much to be excited about, but I suspect a) the news that an equity raise genuinely may not be required this year or beginning of next, and b) Tesla's better-than-expected cash position (north of $2B) combined to provide the stock with such positive momentum.

The other major piece of information was on the 3's margins: slightly positive in Q2, with 15% margins expected in Q3. This is mixed news; the positive margins, however slight, in Q2 is a welcome development, but the estimated margins of 15% in Q3 (when Tesla disclosed approximately half of orders placed are AWD or above, at least for the short term) mean profitability in Q3 will be that much more difficult to attain, as it will be the 3 that ultimately powers Tesla into the black (or not).

Now for the math

With the disclosures Tesla has made, we can back our way into the ASP and margin of the S/X for Q2 with an estimate on the 3 ASP (which is necessarily a fairly narrow range) since we know the total Automotive gross profit (it is the same method as used in one of my previous posts). Below is a sensitivity table, showing the resulting S/X ASPs and gross margins under different 3 ASP assumptions (note that Tesla disclosed the proportion of lease-accounted deliveries to be 6% of all vehicles for Q2, allowing us to back out the number of sold S/X units):

3 ASP	3 Revenue	S/X Revenue	S/X ASP	3 Gross profit	S/X Gross profit	S/X margin
$50.5	$931,675	$2,186,191	$110	$23,292	$564,834	25.84%
$51.5	$950,124	$2,167,742	$109	$23,753	$564,373	26.04%
$52.5	$968,573	$2,149,293	$108	$24,214	$563,912	26.24%
$53.5	$987,022	$2,130,844	$107	$24,676	$563,450	26.44%
$54.5	$1,005,471	$2,112,395	$106	$25,137	$562,989	26.65%

Click to enlarge

For the remainder of the analysis, I'll be assuming S/X ASP to have been $108K (slightly lower ASP but higher margin vs. Q1, supportive of Tesla's claims that it achieved some cost reductions to boost margins) and 26% GM, though the higher options may be fair assumptions, too.

With this in hand, I modeled total S/X deliveries at 28K for Q3, about half of what Tesla needs to hit its 100K guidance. However, such a volume increase will likely require promotions and a corresponding margin decline, which I modeled at $105K and ~23% GM, closer to the margins we saw in the second half of last year when Tesla was more aggressively pushing product.

In the call and earnings statement, Tesla guided to 50-55K units produced and more delivered for Q3, which tracks well with the Inside EV US deliveries for July. For this analysis, I modeled delivered units at 55K for the 3. As for ASP, while Tesla stated that on the short term 50% of orders are for AWD of some form, I went slightly conservative relative to that figure, at 60/40 LR vs. AWD (5% for the performance version). The end result is an ASP of approximately $61.5K.

Q3 estimates	S/X sold	3
Volume	25,554	55,000
ASP	$105	61.5
Gross margin est.	23.14%	15%
Revenue	$2,680,792	$3,382,500
Cost	$2,060,341	$2,875,125
GP	$620,451	$507,375

Click to enlarge

We're sitting at about $6B in revenue just from the sold automotive revenue, so you can begin to see just how little the other segments of the business matter. Tesla has guided for stable OPEX costs and Energy revenue, as well as narrowing Services loses. I modeled OPEX at a 5% increase as a result, with Services at a -35% GM ("narrowed" losses is a rather ambiguous word, after all). Below is the result of Tesla's guidance and my computations:

You'll perhaps note that Tesla did not use ZEV credits this past quarter. Looking at the figures above, it's clear why: at 15% GM for the M3, it has very little wiggle room to clear the profitability target. ZEVs and other one-off items will be crucial to achieving this goal.

As mentioned in the last article, ZEVs of course are not the only tool at Tesla's disposal. One-time revenue items such as recognizing a portion of AV deferred revenue following a software release (Musk suggested a "breakthrough stuff" in "about a month or so"), pushing some repairs into Q4, and temporarily throttling OPEX could in total boost profit by $100M, which would be necessary to achieve net profitability under the assumptions above.

Summary

Tesla beat revenues but missed on earnings on Wednesday. Despite the miss on profit, the stock price rose over 9% after hours, potentially on the news that the Shanghai expansion would be done primarily through debt raised in China and Tesla's better-than-expected cash position. Musk and Co. reiterated the goal of Q3 profitability and cash generation. After analysis and use of specific points of guidance, such a goal is achievable, but leaves little margin for error.

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Analyst’s Disclosure: I am/we are short TSLA. 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.

I am/we are short via long-dated options, in conjunction with long positions as part of a straddle investment. Readers are discouraged from engaging in options and other more advanced positions unless they have significant investing experience with such investment strategies.