Tesla earnings highlight rapid Model 3 production ramp-up

Electric-car company Tesla's (NASDAQ:TSLA) second-quarter results are out. As expected, revenue soared and losses continued to mount. Beyond the quarter's financial results, Tesla's second-quarter update provided an important glimpse into other important areas, including Model 3 production, a forecast for cash to increase in the second half of the year, and more.

This article originally appeared in the Motley Fool.

Driven primarily by an 85% year-over-year increase in deliveries, Tesla's revenue increased 43% year over year to a record $4 billion. During the quarter, Tesla delivered 40,768 vehicles. Combined Model S and X deliveries amounted to 22,319 units, and Model 3 deliveries were 18,449.

Highlighting how sharp Tesla's ramp-up in Model 3 production and deliveries is, the important vehicle's deliveries increased 125% sequentially.

Tesla's non-GAAP loss per share of $3.06 was wider than its loss of $1.33 in the year-ago quarter, but it was narrower than its non-GAAP loss per share of $3.35 in Q1. Tesla's GAAP loss per share widened from a loss of $2.04 in the year-ago quarter to a loss of $4.22 in Q2, but this loss was nearly in line with its $4.19 loss per share in Q1.

Highlights

• Tesla highlighted a range of important updates on its business in its second-quarter shareholder letter, including the following:
• Tesla's automotive gross margin was 20.6% in Q2, up from 19.7% in the first quarter of 2018.
• Non-GAAP automotive gross margin was 21%, up from 18.8% in Q1.
• Model 3 gross margin went from negative in Q1 to "slightly positive in Q2, even though we were still ramping production and did not yet deliver any All-Wheel-Drive or performance models," Tesla said in its second-quarter shareholder letter.
• Tesla's Model 3 margin improvements were due to "dramatic reductions in manufacturing costs through lower labor hours per unit, reduction in ramp cost, higher leverage of fixed costs, and lower material costs."
• Tesla's Gigafactory battery production achieved an annualized production run rate of about 20 gigawatt hours, "making it the highest-volume battery plant in the world by a significant margin," Tesla said.
• Cash outflow from operating activities narrowed from $398 million in Q1 to $130 million in Q2.
• Model 3 gross profit when excluding non-cash items was positive for the first time.
• Negative free cash flow narrowed from $1.05 billion in Q1 to $738 million in Q2.
• Tesla maintained its recently achieved production rate of 7,000 vehicles per week (5,000 Model 3s and 2,000 combined Model S and X) "multiple times" during July.

Looking ahead

Management believes the second half of the year will be far better than the first, driven by soaring Model 3 production and profitability.

Expecting to achieve a Model 3 production rate of 6,000 units per week by the end of August, management anticipates seeing Model 3 production rise from 28,578 units in Q2 to 50,000 to 55,000 units in Q3. Model 3 deliveries are expected to be even higher during the period.

As Model 3 production and deliveries increase, Tesla expects to achieve improved economies of scale. Management said it expects a Model 3 gross margin of 15% in Q3 and about 20% in Q4. As a result, Tesla still expects to achieve GAAP profitability in Q3 and Q4 and believes its $2.2 billion in cash and cash equivalents will increase in both quarters.

Longer-term, Tesla says it's aiming to achieve a Model 3 production rate of 10,000 units per week sometime next year.

Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.