Tesla (TSLA) Q2 2020 earnings results and conference call transcript

Tesla's stock (TSLA) is jumping afterhours on another earnings beat.

CAR AND DRIVER
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Tesla posted a profit in Q2 of 2020, and shares are moving afterhours on the news. This is the first time in the company's history that they achieved positive GAAP net income in four straight quarters. The company is now eligible for inclusion in the S&P 500 index. 


Tesla's Q2 2020 Earnings Release 

Highlights

Cash 

  • $535M increase in our cash and cash equivalents in Q2 to $8.6B
  • Operating cash flow less capex (free cash flow) $418M in Q2

Profitability

  • $327M GAAP operating income; 5.4% operating margin in Q2
  • $104M GAAP net income; $451M non-GAAP net income (ex-SBC) in Q2
  • Four quarters of sequential profitability

Operations

  • Next US Gigafactory site selected; preparations underway
  • Increased Model S range to 402 miles (EPA)
  • Model Y and China-made Model 3 production rates continue to increase

Summary

Our business has shown strong resilience during these unprecedented times. Despite the closure of our main factory in Fremont for nearly half the quarter, we posted our fourth sequential GAAP profit in Q2 2020, while generating positive free cash flow of $418M.

Our profit improved sequentially due to fundamental operational improvements. Additionally, we experienced costs associated with factory shutdowns, which were offset by actions taken during the quarter to reduce expenses. For the trailing 12 months, our GAAP operating margin reached nearly 5%. We expect our operating margin will continue to grow over time, ultimately reaching industry-leading levels.

We believe the progress we made in the first half of this year has positioned us for a successful second half of 2020. Production output of our existing facilities continues to improve to meet demand, and we are adding more capacity. Later this year, we will be building three factories on three continents simultaneously.

While we invest in our product roadmap, improve technology and localize production, we continue to drive cost efficiencies across the business and closely manage working capital. It is important to manage our cash diligently in order to ensure we are ready for any scenario.

Revenue

In Q2, total revenues remained relatively flat QoQ. The positive impact of higher vehicle deliveries, higher regulatory credit revenue and higher energy generation and storage revenue was somewhat offset by lower vehicle average selling price (ASP) and lower services and other revenue.

Profitability

Our operating profit improved in Q2 despite challenging circumstances. Positive impacts included lower operating costs due to a temporary reduction in employee compensation expense, a sequential increase in regulatory credit revenue and deferred revenue recognition of $48M related to a Full Self Driving (FSD) feature release. These positive contributions were offset by significant costs related to factory shutdowns, as well as a sequential increase in non-cash SBC expense primarily attributable to $101M related to 2018 CEO award milestones.

While ASPs declined sequentially, improvements in product and manufacturing costs, driven by Model Y and China-made Model 3, and improved aftermarket software and connectivity revenue made a positive impact on our profitability

Cash

Quarter-end cash and cash equivalents increased by $535M QoQ to $8.6B, driven mainly by free cash flow of $418M. Free cash flow was negatively impacted by a higher percentage of deliveries occurring towards the end of the quarter compared to prior quarters, as well as an increase in government rebates and regulatory credit receivables, which are paid in accordance with their payment terms. Since vehicle production resumed in Fremont and Nevada in early May, our days payable outstanding was not impacted as much as initially anticipated.

Check out the full press release on the official Tesla Investor Relations website.


Check back for some highlights from the Tesla Q2 2020 earnings results conference call, which starts at 5:30 PM ET:

  • 5:30 PM ET - Conference call is supposed to start, I am eating a late lunch.
  • 5:31 PM ET - Elon probably taking pregame bong rips
  • 5:32 PM ET  - TSLA at $1677/share, call starts
  • 5:33 PM ET - Elon and Zack are on the call with other execs
  • 5:33 PM ET - Elon thanks Tesla team for their "incredibly job"
  • so many challenges, too many to name
  • honor to work with such a great team
  • foruth consecutive profitable quarter
  • we managed to grow deliveries in the first half of the year
  • announcing next gigafactory in Texas
  • five minutes from Austin International Airport
  • 2000 acres
  • right on the Colorado River
  • It's going to be an ecological paradise
  • open to the public
  • GIgaTexas is a go
  • Cybertruck, Semi, Roadster in Texas
  • California to do Model S and X and 3 and Y a bit
  • continuing to grow in California
  • but Cybertruck will be built in Texas
  • thanks city of Tusla for their consideration
  • Tesla was super impressed 
  • strongly consider Tusla for future Tesla expansion
  • GigaTexas construction already underway
  • Retrofit Solar pricing is the lowest cost solar in the US
  • Tesla Solar costs $1.49/watt
  • Produced production car with more than 400 miles of range (Model S)
  • FSD - launched traffic lights and stop signs
  • testing full-self driving personally when he drives
  • Alpha FSD is profoundly better than people realize
  • Very confident about FSD being feature complete by the end of the year
  • Thanks Tesla team for all of their hard work
  • The next twelve to eighteen months there will be even more factories online
  • so much to be excited about that it is hard to fit into this call
  • hardcore engineering on autonomy and manufacturing front is mindblowing
  • battery day coming soon
  • will really surprise people
  • thanks again for your support in our long-term mission
  • looking forward to have a great journey with you
  • I've never been more optimistic about the future of Tesla in the history of the company
  • 5:42 PM ET - Zack takes the mic
  • recognized $48 million on FSD revenue during the quarter
  • $428 million in credit revenue
  • Megapack product achieved first quarterly profit as a segment
  • Accounts Receiveables - only 30% are related to vehicle sales
  • 40% of AR is related to regulatory credit sales
  • 3 new factories over the next 18 months
  • Q/A - institutional
  • What is important to hitting 20 million/year long-term target?
  • Elon says it is reasonable to assume we will make a compact vehicle and a higher passenger vehicle
  • long way to go with 3, Y, Semi, and Cybertruck.
  • We'll do the obvious things
  • What is your vision for software at Tesla (monetization outside of FSD)?
  • Elon - FSD is the most important thing
  • upgrading of the fleet to FSD with an over-the-air update will be the largest asset value increase, in his opinion
  • a million cars becoming higher utility with an update
  • everything else is secondary
  • productivity and entertainment would be opportunities down the road
  • Zack - highlights app's ability to upgrade vehicle
  • premium connectivity package
  • Elon - step change to FSD is a lot of value
  • Autopilot and FSD question about important milestones
  • Elon - transition of the autonomy system from thinking in 2.5D to thinking in 4D
  • 3D plus time
  • architectural change in the AI is what matters for FSD
  • not currently on the market
  • Autopilot is mostly 2D and not correlated to time
  • hard to convey just how much better a fully-4D system works
  • compares looking at individual pictures to immersive 360 video
  • giant improvement
  • Elon - how much better than humans does it need to be?
  • that is the real question
  • AI is something we should be concerned about
  • the direction AI is going
  • Update on manufacturing engineering?
  • 1000% more engineering required behind a factory than the product
  • We are getting way better at making cars
  • more efficient car design informing factory design
  • Jerome - Focus is on increasing CapEx efficiency
  • build new factories for less money in less time
  • potential for improvement is tremendous - Elon
  • We want more people 
  • Plenty of exciting places for people to work - Jerome
  • Exciting and fulfilling to design new production systems
  • you don't get forcefed a turd sandwich - Elon - lmao
  • long-term advantage for Tesla will be manufacturing
  • GigaTexas capacity?
  • Elon - zero right now.
  • Long-term? A lot
  • Tesla Energy question from retail investor
  • The sector is bigger than automotive
  • we need sustainable energy generation
  • that will need a lot of batteries
  • three elements of the sustainable future: EVs, solar/wind, and batteries
  • battery and solar will both be enormous
  • Megapak has been well received
  • Zack - Autobidder ensures the battery can do anything it can to conserve energy for users
  • It is like a UPS of a massive size - Elon
  • Zack - power plants need to be optimized on a minute to minute basis
  • Elon - cell production at an affordable price is our limit
  • that is the fundamental scaling constraint
  • Tesla Semi question
  • 2021 sounds like the moment for the Tesla Semi
  • nickel-based batteries will be the mass efficient solution for Semi
  • design efficiencies has gotten good enough for Model 3 that we can use iron phosphate batteries in some models
  • that would free up battery capacity for longer range vehicles that need nickel batteries
  • No more Standard Range Y?
  • Elon - any mining companies out there, please mine more nickel
  • don't wait for nickel to go back to some higher price
  • efficient, ecofriendly, nickel mining needed
  • Tesla will pay you
  • 300 mile range will be the new normal
  • next question on Tesla Insurance
  • Will Tesla Insurance expand outside of California?
  • Zack - We are working super hard on insurance
  • talks about using driver profiles to lower premiums based on driving data
  • unique advantage 
  • Could take the Cali product, or delay the product
  • we chose to delay implementing insurance products in other states
  • Close to be filing that in other states shortly
  • Hope to have this in a handful of states by the end of the year
  • Wow, Zack got to make some news
  • Good for Zack
  • Elon jibber jabbers about things they can do that other insurance companies can't
  • Feedback loop for improvement better than insurance companies
  • a lot of great people want to join Tesla
  • on the insurance front, we are building a great insurance company
  • I would love to have some high energy actuaries join Tesla
  • lol
  • lmao
  • Elon
  • Why?
  • We want revolutionary actuaries
  • Will Tesla Insurance be required to participate in the Tesla Ride-Hailing Network?
  • Zack - insurance will be required, and Tesla insurance will be there
  • Analysts Questions
  • Dan Levy - On the quarter, update on Gross Margin?
  • was China accretive?
  • broadly on strategy, insourcing versus outsourcing
  • Berlin and Texas question on that
  • Zack - progress on gross margins in China
  • Factory still ramping
  • continued opportunity to optimize cost structure there
  • Model Y margins improved
  • Model Y and 3 cost structures will converge
  • Elon - Shanghai factory is pretty big
  • continuing to do more and more internally
  • we are producing a ton of parts that were being shipped to Shanghai
  • and we are locally sourcing for that
  • Proportion for local sourcing has been going up 5-10% a month in Shanghai
  • Very strong and active suppliers in China
  • next question Tony Sacconaghi with Bernstein
  • Question about Gross Margin
  • Industry-leading margins over time?
  • PTI for luxury is 8-10%
  • what should we expect
  • how much will come from EV credits?
  • Zack on regulatory credits
  • We don't manage the business with the expectation of regulatory credits
  • Eventually the stream of credits will reduce
  • Elon - worth noting that buyers of our cars don't get a tax credit
  • and yet our sales are continuing to do well
  • Continued decline in the costs to produce mature product lines
  • We're on a bit of a journey here - Zack
  • Followup by Tony - tradeoff between profitability and growth/adoption
  • Would you give back industry leading margins to keep growing?
  • Elon - we can probably do both
  • it is important to focus on two things: value and affordability
  • We will not succeed in our mission if we don't make our cars more affordable
  • we need to fix that
  • we are making progress in that regard
  • we need to not go bankrupt
  • but we are not trying to be super profitable either
  • we want to be slightly profitable and maxmize growth - Elon
  • Dumpster baby question about current demand enviroment for your vehicles
  • Dumper Baby is Deutsche Bank, btw
  • Demand is not our problem - Elon
  • Production, supply chain challenges
  • Lower body casting on the Model Y has been tricky
  • World's biggest casting press is being assembled right now in Fremont
  • it looks awesome
  • Firefighting on supply chain and production issues
  • Don't worry about demand, that is not the issue - Elon
  • Berlin plant question about capacity
  • battery sourcing for Europe?
  • Zack - we will solve this problem
  • Labor mobility in Europe is low - Elon
  • we need more talented people in Berlin
  • Garden leave is mandatory in between jobs over there
  • Those who know Europe will know what I am talking about - Elon
  • 6:33 PM ET - Conference Call ends TSLA share price is $1662.01/share

Full Disclosure:

At the time of this article, Asif A. Khan, his family members, or his company Virtue LLC had the following positions: Long Tesla via TSLA shares and options

CEO

Asif Khan is the CEO and majority shareholder of Shacknews. He began his career in video game journalism as a freelancer in 2001 for Tendobox.com. Asif is a CPA and was formerly an investment adviser representative. After much success in his own personal investments, he retired from his day job in financial services and is currently focused on new private investments. His favorite PC game of all time is Duke Nukem 3D, and he is an unapologetic fan of most things Nintendo. Asif first frequented the Shack when it was sCary's Shugashack to find all things Quake. When he is not immersed in investments or gaming he is a purveyor of fine electronic music. Asif also has an irrational love of Cleveland sports.

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