Tesla troubles: 5 important takeaways from earnings report

The Model 3 is running into production challenges.

Evan Niu, CFA
The Motley Fool
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Tesla (NASDAQ: TSLA) reported third-quarter earnings last night, and expectations were already muted heading into the release considering the company's big miss with Model 3 production that was previously disclosed. Beyond the headline figures that included its biggest quarterly loss ever ($671 million), the focus was expectedly on what the bottlenecks were and how Tesla is working to overcome them.

Here are five important takeaways from the release and subsequent conference call.

Pushing back the Model 3 ramp timeline

The most significant news was that Tesla is pushing back its production rate target of 5,000 Model 3 vehicles per week due to aforementioned bottlenecks. The company was previously hoping to hit that production rate by the end of 2017. Under ideal circumstances, Tesla could have then pumped out 20,000 Model 3 vehicles in December.

Looks like we can reach 20,000 Model 3 cars per month in Dec

— Elon Musk (@elonmusk) July 3, 2017

Tesla is pushing back this timeline by a quarter, and now expects to hit the production rate of 5,000 Model 3 vehicles per week by the end of Q1 2018. Tesla will provide more detail on its progress when it announces Q4 2017 deliveries in early January.

Battery module production is the weakest link

So far, the biggest bottleneck for Model 3 has been battery modules at Gigafactory 1 in Nevada, in line with recent comments from Panasonic CEO Kazuhiro Tsuga that suggested delays in automating the production process have hindered manufacturing but these bottlenecks would soon be solved.

Tesla pinned the problems on a third-party manufacturing systems supplier that "dropped the ball," according to CEO Elon Musk. As it is often wont to do, Tesla insourced the project and "significantly redesigned" that part of the module assembly line.

Gross margin took a big hit

On a sequential basis, non-GAAP automotive gross margin fell from 25% to 18.7% due to a handful of factors, the first of which was increased Model 3 manufacturing costs that were spread over a small number of units since capacity utilization is extremely low for those production lines right now. Tesla also discounted inventory vehicles with discontinued trims (90 kWh packs) in order to move inventory, and the mix shifted toward the less profitable 75 kWh trims.

Tesla is also trying to further differentiate the Model S from the Model 3, and made numerous features like Smart Air Suspension and dual-motor standard, which added to costs.

More: Car buyers get bigger discounts in October despite strong auto sales

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The China factory

Tesla confirmed that it had inked a deal to build a factory in China, a few months after saying it was negotiating with the Chinese government. The Wall Street Journal reported last month that a deal had been reached.

Capital spending related to this factory won't be meaningful until 2019, and Tesla's current goal is to commence local production in approximately three years in order to serve the Chinese market -- the largest electric vehicle market in the world -- as well as other markets in the region. Total production capacity is expected to be "at least a couple hundred thousand" vehicles per year.

Considering Tesla's tendency to miss its deadlines, investors should probably adjust expectations to four to five years.

About those mass firings

Musk chastised the media for covering the mass firings that have been creating some controversy for Tesla. The electric-car maker fired hundreds of employees earlier this month across both its automotive business as well as its SolarCity subsidiary, and attributed these terminations to annual performance reviews. There was some speculation that the firings could have impacted as many as 1,000 employees.

Anecdotally, some employees claimed they had either not received recent reviews, or their reviews were positive, undermining Tesla's justification. It wasn't clear exactly how many employees were terminated, but Musk confirmed it was approximately 700, or 2% of Tesla's headcount.

Evan Niu, CFA owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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