Tesla finally turned a profit, posting net income attributable to shareholders of approximately $311.5 million. The Q3 results come after many quarters of losses, and Tesla shares are up 12 percent in after-hours trading as of this writing.
The company's results are also closely tied to the success of the Tesla Model 3. Tesla struggled to achieve production goals early in the year, but it has largely made the production strides it has promised since Q1. In Q3, Tesla produced 4,300 Model 3 vehicles per week, producing a total of 83,500 vehicles throughout the whole quarter, with 56,065 being Model 3s, according to the company's shareholder letter.
The company also disclosed free cash flow of $881 million, dispelling fears that the company might struggle to pay the roughly $900 million in debt that's slated to come due for Tesla early next year.
On the financial earnings call this afternoon, Tesla CEO Elon Musk said "I believe we can have positive cash flow for all quarters going forward," adding that exceptions would exist during quarters where significant repayments have to be made. Musk cited Q1 2019 as one quarter where Tesla might not be cashflow positive.
The Model 3 is the most closely-watched Tesla product because it was intended to be a truly affordable, mass-market car, but it's hit many snags in its development and production. Musk had originally promised a $35,000 Model 3, but more than a year after its development, the starting price for a Model 3 has been $49,000 until last week, when Tesla announced a $46,000 vehicle.
In its shareholder letter, Tesla attributed much of that price decrease to an internal cost decrease. "Better than expected Model 3 cost reduction is allowing us to bring more affordable options to the market sooner," Tesla wrote. "Labor hours per Model 3 decreased by more than 30 percent from Q2 to Q3, falling for the first time below the level for Model S and X. In Q4, we will focus even further on cost improvements while continuing to increase our production rate."
The company also shared this interesting tidbit about the comparative efficiency of the Model 3's battery pack:
By 2016, Model X energy efficiency was 3.1 miles of EPA range per kWh. This is an extremely important metric as it allows an EV to reach a long EPA range even when using a relatively small, inexpensive battery pack. With Model 3, energy efficiency improved dramatically to 4.1 EPA miles per kWh, the highest efficiency for any all-wheel drive EV. To put this in context, our current or upcoming AWD (2019) competition is expected to achieve 2.4 to 2.8 miles of EPA range per kWh. Model 3 has far better energy efficiency while also providing the quickest acceleration (0-60 mph in as little as 3.3 seconds) and the highest top speed (155 mph). Additionally, the curb weight of Model 3 long range RWD is only 3 percent heavier than its gas powered equivalents.
Tesla's CTO JB Straubel touched on the battery development part of the company as well. He said that, except for a short period, Model 3 production wasn't constrained significantly by battery availability. Powerwall and Powerpack development, however, were constrained still, Straubel said. One executive on the call also added that in the third quarter of 2018, all electric vehicles around the world constituted 20 or 19 gigawatt-hours (GWh) of vehicle batteries produced, and Tesla's production at the Gigafactory was about the same. (that is, Tesla claims that its Nevada battery factory is producing half of the world's electric vehicle batteries.)
One analyst on the call asked about Tesla's earlier claim that it would hit 10,000 Model 3 vehicles by early 2019. Musk said that he was "not prepared to speak" about 10,000 units a week in the next three months, but he added that getting to 10,000 would be much cheaper than it was for Tesla to reach production of 5,000 vehicles a week. "7,000 a week could be done for minimal additional capex," Musk said, later adding that "above 7,000 [it would be] a little harder."
Finally, Tesla touched on demographics of their customers as gleaned from trade-in vehicles, "for most people this is the most expensive car they've ever bought," Musk said.
Another question involved the demand in the US as the Federal Tax Incentive phases out. "Yes the tax incentive in the US drops in half at the end of this quarter, but then we also start shipping to Europe and then we're shipping to Asia," Musk said. "I think as we're able to offer lower-cost versions of the car," demand will sustain itself, the CEO added.
Later in the call, Musk said that customers would "probably see the smaller battery pack [referring to a lower-cost Model 3] on the order of March or maybe February."
Musk only made a small reference to Tesla's in-development vehicles. Of the Model Y, he said, "I approved the prototype to go into production, it'll be 2020 before it hits volume production." He also added that Tesla has made progress on the Semi and the Roadster, without going into more detail.
Musk dedicated the bulk of the prepared statement time on the earnings call to safety. The CEO opened by claiming that other car companies "game the system" by applying federally-required tests at the strongest point of the car. Musk said that Tesla does the opposite.
"We ask, what is the weakest point in the car, let us test it at that position…we anti-game the system."
Musk continued, "Safety extends not only to the people in the car, but to pedestrians," adding that the "hood can dent so far in, it ends up being like a trampoline…you don't have a rock underneath it," he said, referring to the fact that Tesla vehicles don't have an engine block under the hood.
Tesla executives said that the company would soon begin to roll out "Navigate on Autopilot," a feature that will allow the car to make automatic lane changes with approval from the driver. Eventually, Tesla hopes to be able to allow customers to waive the confirmation requirements if they want to.
Peter Bannon, director of computer hardware at Tesla, said on the call that Tesla's custom-built chipsets were still on track to be ready to go by the end of Q1 2019. Another Tesla executive, environment, health, and safety vice president Laurie Shelby also jumped on the call to say that Tesla had not been under-reporting injuries at its Fremont factory, as some reports have stated, pointing to the closure of a four-month-long OSHA investigation that resulted in no significant findings.
Finally, Musk repeatedly mentioned that he hoped to create a network where people could rent out their Teslas like they rent out their homes on Airbnb. Tesla's own ride-hailing service would "compete directly with Uber and Lyft," Musk said, "and allow customers to add or subtract their car to be lent out at will."
"This may have been the best quarter ever for solar," Musk said on today's call, although that only reflects the time since Tesla bought SolarCity in 2016 (SolarCity has been losing market share since it was purchased by Tesla.) After several quarters of lackluster growth in standalone battery packs and an apparent stand-still in solar tile installations, Tesla reported this month that it would be making progress…eventually.
"We increased Powerwall production so that we can continue to work through our order backlog," the company stated in its shareholder letter. "We also rolled out new software features for Powerwall, including Time Based Control and Storm Watch (full Powerwall recharge in case of a storm forecast), to continue to bring additional value to our customers."
Tesla also added that "Due to the complexity of Solar Roof, we continue to iterate on the design of the product via intensive reliability testing, and we also continue to refine the installation process. Accordingly, we expect to ramp production more quickly during the first half of 2019."
Musk said at the end of the call that the solar tile roof would hit "volume production next year," noting that the product had "quite a long development cycle."
"There's a minimum amount of time required" to test roof top tiles, Musk said, stating that his company was also concerned about figuring out how to put solar tiles on a roof in a way that is not labor intensive.