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3 major surprises in Tesla's Q3 win – The Motley Fool

Tesla (NASDAQ: TSLA) caught investors last Wednesday by reporting a massive third quarter of $ 312 million. It was only…

Tesla (NASDAQ: TSLA) caught investors last Wednesday by reporting a massive third quarter of $ 312 million. It was only the third time in the company’s history that it reported quarterly earnings under GAAP’s accounting rules, and it was easy to set up a new result for Tesla.

That being said, the fact that the pioneer of electric vehicles became profitable was not very shocking. While analysts had expected a slight loss on average, Tesla previously predicted that it would be profitable for the quarter. Nevertheless, there were many surprises in the income statement. Here are three big ones.

Model 3 Gross Margins over Expectations

Three months ago, Tesla reported that the model 3 gross margin was “somewhat positive” in the second quarter. At that time, the model 3 gross margin is expected to improve to around 1

5% in the third quarter and around 20% in the fourth quarter, heading to a long-term target of 25%.

Tesla started delivering more expensive four-wheel drive versions of Model 3 last quarter. It also increased the production speed. These two factors clearly supported a significant improvement in gross margin. However, with the mix of Model 3 cars that would decrease the cheaper versions over time, it was difficult to see a road from Tesla’s projected Q3 Model 3 gross margin of 15% to the long-term goal with a gross margin of 25% – even allowing further manufacturing cost reductions .

Tesla at least partially rectified this concern by reporting model 3 gross margin over 20% for the third quarter. This quickly sets the company close to reaching its long-term margin target for its newest vehicle. Marginal performance was particularly remarkable, as it represented a pure break from Tesla’s record of repeatedly missing its forecasts.

Tesla gross margin for model 3 exceeded the guidance of the management. Image Source: Tesla.

Tesla will still need to achieve significant cost reductions to compensate for the introduction of cheaper Model 3 options, but the 25% long-term gross margin is much more credible now than a week ago.

Operating Cost Decline

The unexpectedly high gross margin performance for Model 3 was the most important factor in Tesla’s income statement. The strong operating cost control, however, played a major role.

During the second quarter, research and development costs (R & D) increased less than 5% the year before, Tesla’s sales, general and administrative (SG & A) costs increased 40% year over year and 9% in succession. Given that Tesla’s vehicle deliveries doubled in the third quarter compared with the second quarter, it would be natural to expect another major step in SG & A expenses last quarter.

Instead, SG & A costs decreased 3% in succession to $ 730 million. On a yearly basis, SG & A only increased by 12%. Tesla also reported a slowdown of 9% and an increase of only 6% on the R & D line compared to the corresponding period last year. Tesla attributed to the strong cost performance of the latest cost-cutting measures and has already completed most of the development work for model 3.

Teslas Model 3 Gross Margins Act may have been the most important factor for the company to be profitable last quarter, but spending discipline was the difference Between Equing Out a Profit and Reporting Blowout Revenue.

Incredibly Free Cash Flow

Finally, Tesla’s cash flow earnings were even more impressive than the result. Operating cash flow increased to $ 1.4 billion in the third quarter after having been negative during the first two quarters of the year. Previously, Tesla never generated more than about $ 500 million of operating cash flow in a quarter.

 TSLA Cash from Operations (quarterly) Chart

Tesla Cash from Operations (quarterly), data from YCharts. [19659003] The free cash flow amounted to $ 881 million last quarter, which was significantly higher than Tesla’s net income. Part of the deviation came from the $ 205 million share-based compensation that Tesla distributed, while the capital increase also made a modest contribution.

Tesla’s strong free cash flow, however, reflected primarily solid results. It suggests that it was more to its high profit rate than bookkeeping pressure. It also means that Tesla’s goal of being profitable during the fourth quarter – and hopefully also in 2019 – could be within reach.

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