Tesla – terrible Q3

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Tesla’s Q3 2017 results came out last night and were in a word terrible with a capital T. Tesla reported an adjusted, non-GAAP loss of $2.92 per share, far worse than the expected loss of $2.27, which was more than double the $1.33 loss in Q2. The chart above tabulates the cash flow progression from the CMR report published Monday. While Tesla claimsit has $3.5bn cash in the bank it has more than $3.9bn in accounts payable liabilities! Tesla continued to burn piles of cash on the factory floor. Q3 cashburn was a record $1.4 billion ($16 million per day): much higher than the $1.2bn forecast.

Im our report we said that production issues were the one area that will catch Tesla out. In the car game, production efficiency is everything- the promises to make 5,000 Model 3s every week by December is now a goal likely pushed out til March 2018 at the earliest as “production hell” bites.

Musk blamed suppliers for having to push back the delivery schedule again, He said,

to date, our primary production constraint has been in the battery module assembly line at Gigafactory 1, where cells are packaged into modules. Four modules are packaged into an aluminum case to form a Model 3 battery pack. The combined complexity of module design and its automated manufacturing process has taken this line longer to ramp than expected. The biggest challenge is that the first two zones of a four zone process, key elements of which were done by manufacturing systems suppliers, had to be taken over and significantly redesigned by Tesla.”

The amusing thing about this quote is that Tesla is somehow telling (presumably Panasonic) how to do mass manufacturing. That is telling in itself – the rookie telling the amateur.

Also in our report we noted that no single mainstream auto supplier is on Tesla’s deck which tells us how little faith they have in the company. Auto suppliers run on the smell of an oily rag and after so many bad experiences won’t accept dealing with auto makers who may jeopardize their own future. Recall how many auto suppliers almost went to the wall (many were in Chapter 11) after the tech bubble collapse at the turn of the century.

Tesla expects capex of $1 billion in Q4 which is mainly for milestone payments on Model 3 production equipment and Gigafactory 1. So cash burn continues.

Tesla promised to redirect “our best engineering talent to fine-tune the automated processes and related robotic programming…and we are confident that throughput will increase substantially in upcoming weeks and ultimately be capable of production rates significantly greater than the original specification.” What??? Why weren’t the engineers working on that before. The whole point of mass production is to stamp out the bugs before a conveyor belt is turned in anger. Tesla, true to rookie form is doing everything back to front.

Are investors starting to see through the charade? Shares were pounded 5% after market. Although some may draw comfort from better Tesla S & X production, Model 3 looks like a nightmare of Halloween. Maybe the next capital raising can be called “trick or treat”!

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