Tesla came in narrowly ahead of its guidance by delivering 7,759 vehicles in the second quarter but blew past Wall Street estimates, earning $0.11 per share, against a consensus forecast of $0.04. The company reported revenues of $858 million, up 55% from a year ago and saw gross margins rise to a record 26.8%, up sharply from the first quarter. Tesla reiterated it's on track to deliver 35,000 vehicles this year, despite a two-week shutdown of its Fremont, Calif. manufacturing plant as it gears up to produce the Model X SUV. It also confirmed a report brought to you here in Forbes that it broke ground for its $5 billion battery Gigafactory in Nevada last month. The company clarified, however, that a final site hasn't been chosen for the facility and it is continuing to hedge its bests with multiple locations in several states.
On a GAAP basis, Tesla's loss was $61.9 million, nearly double the year-ago number. EPS was negative $0.50. The discrepancy between GAAP and non-GAAP financials for Tesla relates mostly to the company's guaranteed resale value on cars purchased under its financing plan as well as those leased under more conventional leases. While non-GAAP measures should always be viewed cautiously, Tesla scrupulously discloses the nature and magnitude of the differential between the two sets of numbers and it has a reasonable argument that its non-GAAP data is a better reflection of the trajectory of its business.
Total production for the quarter was 8,763 vehicles. The difference, as usual, is accounted for vehicles in transit, mostly to Europe and Asia. Prior to the shutdown, Tesla says production was up to 800 vehicles per week, an annualized rate in excess of 40,000. It noted that Panasonic -- who has agreed to partner in the Gigafactory -- has begun sending it more batteries, which has helped ease constraints on Tesla's ability to build faster. The company plans on delivering 7,800 cars in the upcoming quarter, only slightly more than the Q2 due to the recent shutdown. It believes deliveries would otherwise have reached 9,000. If it hits that forecast, Tesla will need to deliver 13,000 vehicles in the fourth quarter -- a significant increase from current production levels.
As for the Gigafactory, the final location likely won't be chosen for months, the company says. It continues to evaluate sites beyond the one in Nevada in California, Texas, New Mexico and Arizona. Because Tesla cannot hope to achieve the battery volumes it needs for the forthcoming $35,000 Model 3 sedan -- due in 2017 -- it believes the Gigafactory project can't afford any delays. "Any potentially duplicative investments are minor compared to the revenue that could be lost if the launch of Model 3 were affected by any delays at our primary Gigafactory site," the company wrote in its shareholder letter.
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The conference call is underway.
5:35 pm: Musk is addressing a question about achieving a run rate of 100,000 cars by the end of 2015. He expects that to be split close to evenly between the Model S and the Model X. A lot of the forthcoming spending will be on service centers, including close to 100 in China alone by the end of next year. He's estimating, he says, but thinks it will be "north of 300 worldwide" by year end 2015.
Musk is talking up how he's looking to achieve customer "delight" -- 10/10 customer satisfaction -- and that figure is 70% in the U.S. right now. He also says service time is typically serviced in less than 1 day. Often times they can pick up car at your office and return it to you before the close of business. Service "like elves," Musk says, whose work is invisible.
This line of questioning is obliquely addressing a report from Edmunds that was picked up in BusinessWeek, implying that early Teslas might have quality issues. The report concerned one very early Model S that Edmunds ran a long-term test on, but this is how an internet meme gets started. Musk, without mentioning it, was trying to make clear that Tesla doesn't have a quality problem.
He says service is like a "Formula One pit crew" where a bunch of people attack the car at once. "A real opportunity to revolutionize the way service works."
5:40 pm: Addressing some manufacturers support for hydrogen fuel-cell cars, Musk and JB Straubel suggest that the only things they offer is range and refuel time -- while costing much more. Straubel points out that comparing some hydrogen car you can't buy to today's electric vehicle is pointless as better EVs are coming soon. "Building out that [hydrogen] infrastructure is substantially more expensive" than building an EV infrastructure, Straubel says.
5:42 pm: Musk continues by pointing out that hydrogen is a pretty poor vehicle fuel given that it's not a great energy carrier and has to be produced with energy. The two of them remain confounded by other manufacturers' push for hydrogen vehicle.s
5:45 pm: Quality is being asked about again. Musk admits there were issues early. Says "vast majority" of issues with early vehicles have been addressed. He's adding some specific detail on what kind of problems were common. What's impressive about this is the minutiae that Musk is familiar with; anyone questioning whether he's hands on should listen to this recording later.
5:47 pm: "The best service is no service," Musk says. "And we're getting there quite rapidly." He reiterates that there were problems at the start but they are targeting "an order of magnitude better quality than any other car."
5:49 pm: Musk confirms the construction pad is completed in Nevada for the Gigafactory. "Something similar" will occur in 1-2 other states. He talks about "incentives" from the state being in place, but clarifies he's not looking for anything that's "unfair" to state or the company.
5:51 pm: Musk is asked about how much the Gigafactory will cost and says that it will cost about $4 billion to get to serious production, but $5 billion ultimately. Tesla will provide 40-50% of the total, Panasonic 30-40%, the state maybe 10%. Other partners are likely to come up with 10-20%.
If the Panasonic rumors are true, their initial commitment is $200-300 of what Musk is estimating is perhaps $1.6 billion of the $4 billion. Given that this investment is phase over several years, it doesn't necessarily raise red flags but look for some naysayers to harp on this in coming months.
5:54 pm: "We will not have a demand issue" with the Model X, Musk said, explaining that lots of people are ordering one site unseen, without a test drive, without much information about the vehicle at all. He expects people will be delighted, but notes that demand is high without any marketing at all.
5:56 pm: Without the Gigafactory, Musk says Tesla could perhaps get to 200,000 cars annually. But the factory will be needed to push to 300,000 annually and more. "There are improvements to chemistry.. as well as geometry of cell," Musk says. Straubel says the cathode and anode of cells are next generation and so the new cells with be 10-15% more energy dense. Beyond that a lot will come from cost improvements. As Musk has noted in the past, a slightly larger cell is likely, perhaps 10% larger diameter (I've reported on this before). He says altering the diameter will improve "energy density per unit mass."
Straubel says the chemistry is critical, but the rest of the equation is going to go a long way toward delivering cost reductions.
5:59 pm: Delivery times take 2 weeks in North America, Musk says, and an extra 3-4 weeks internationally. For that reason, production will continue to exceed deliveries. They kind of side-stepped the fact that to deliver 13,000 cars in Q4, they'll need to produce significantly more by agreeing, but suggesting it wasn't a very big deal.
Of course, they're committing to a run rate of 2,000 per week by the end of next year, so pushing production to 1,200 vehicles per week in 2014 from around 800 now implies that every quarter will see production increase by about 200 vehicles per week. In other words, by this time next year production will have doubled.
6:04 pm: "I would be disappointed if it took us 10 years to get to a $100 kilowatt-hour pack," Musk says. He believes the 30% cost reduction from the Gigafactory is a "conservative number."
Straubel says "we don't need some fundamental breakthrough in chemistry or materials science" to realize current goals. But he's interested in longer-term potential for bigger battery breakthroughs. He's just aware that the further out those breakthroughs are from implementation, the less probable they'll become real.
6:11 pm: Musk implies that Tesla is "not currently showing all our cards" for the first time in a while. What secrets they'll holding will have to wait for another day.
6:12 pm: In clarifying the production ramp up for Q4, Musk says that because Q3 is losing two weeks of production, the company is already closer to the levels it will need by the end of the year than it seems. It's not like Tesla needs to go from a "true" 7,800 vehicles to 13,000 in the next quarter because it would have delivered more in the current quarter were it not for the shutdown.
6:15 pm: "We can drive demand up at will," Musk says, by opening more stores. The only unhappiness he saw in China was customers waiting too long for their cars. He says Apple is normally the leader in sales per square foot, but Tesla is doing twice what Apple is doing.
6:18 pm: Another hint that Tesla has some surprises coming was that Musk brushed aside a question about rising capital and operating expenditures by saying "there's stuff you don't know about" in there.
6:21 pm: Someone asks about the Edmunds article, apparently not understanding that every other quality-related question was about the Edmunds article. Musk politely responds anyway, explaining that service was bending over backwards with the Edmunds folk, which perhaps made it seem the car was even more sensitive than it seemed.
Straubel added that to date, Tesla has been replacing drive units when something small goes wrong in the interests of time/speed. But the actual problems have been small and going forward, they expect to do much less expensive, equally fast repairs.
6:24 pm: "We're going to be at it hardcore until our car is 10x better than any other car on the road," Musk reiterated.
6:26 pm: Musk is talking about cutting over to be ready to Model X production early next year and also that Tesla will spend some serious money to upgrade its painting facility. He says the Model X alpha, coming next week, will be in beta within just a few months. Californians can start looking out for prototypes on roads soon.
"We're going to try to move to several hundred units a week within 3 months of production," Musk says of the Model X. That's half the time they took with the Model S but it means they have to be very sure the car has been through extensive "validation."
6:30 pm: When asked about forecasting next year, Musk wouldn't claim growth would be linear from here. "Certainly more than 60,000" cars he feels comfortable with as a very preliminary forecast.
6:31 pm: The Model S has gotten "steadily lighter" over time. "It's at least a few hundred pounds less," Musk says, than when it started production. Straubel notes that weight has a relatively small impact on range.
6:33 pm: That's a wrap on the call. As always, by dropping the useless recap of the press release, there was more content than in most companies' earnings calls. I'll be back later with some thoughts on what this all means going forward for Tesla.
