Amid reports of a liquidity shortage following reports of cash back demands from suppliers, questions about Model 3 production problems and the "tent" as well as growing concerns about slumping demand, not to mention CEO Elon Musk's bizarre behavior, and - of course - a gargantuan cash burn, it is safe to say that Tesla's earnings were the most hotly expected numbers of the week, if not the quarter.

So, here is what Tesla reported moments ago:

  • Q2 Revenue $4.00 billion, in line with consensus $3.97BN
  • Q2 Adjusted loss per share: $3.06, worse than consensus exp. $2.90
  • Q2 Adjusted automotive gross margin 21%, better than consensus exp. 16%
  • Q2 Cash Burn: $739.5 Million, better than consensus exp. $900 Million.
  • Q2 Cash: $2.236BN, down from $3.4BN at the start of the year.

Here are the production highlights from the report:

  • Model 3 hit 5,000 a week "multiple times'" in July
  • 6,000 Model 3's a week by late August
  • 10,000 Model 3's a week by end of 2018

Other highlights:

  • No mention of capital raising: Company had $2.2BN in cash and expects that to grow in both Q3 and Q4. Capital spending is projected to be less than $2.5 billion in 2018.
  • Sharp drop in CapEx: "We have significantly cut back on our capex projections as a result of our revised strategy to grow capacity with our existing Model 3 lines rather than adding all new lines.
  • China production: Musk plans to build cars in his Gigagactory 3 China in 3 years with an initial capacity of 250,000 vehicles and a goal of growing it to 500,000. Construction is expected to begin in the next few quarters and is "expected to be funded through local debt."

Incidentally, the company's GAAP Net Loss was $717.5MM, an all time quarterly high.

This is what revenue looks like:

And earnings, both adjusted and GAAP:

On the income statement side, the company said that GAAP operating expenses increased to $1.24BN, an increase driven by a $103MM restructuring cost.

Additionally, on the expense side, Bloomberg points out something curious:

"The stock based compensation number is always interesting. GAAP loss would be $4.22 if expensed, $3.61 excluding a restructuring charge in 2Q18. That's a big sequential walk to sustainable profitability starting next quarter."

As regards to auto deliveries, we already knew what Q2 looked like: Tesla reported that it produced 53,339 vehicles in Q2 and delivered 22,319 Model S and Model X vehicles and 18,449 Model 3 vehicles,  totaling 40,768 deliveries.

... So it was all about the forecast and in its release, the company said that during the month of July, it have "repeated weekly" production of approximately 5,000 Model 3 cars multiple times while also producing 2,000 Model S and X per week. Having achieved its 5,000 per week milestone, Tesla says it will now continue to increase that further, with an aim being to produce 6,000 Model 3 vehicles per week by late August.

As Bloomberg adds, "Production is the big story here. Tesla said that its main assembly line in the plant should be able to get to 5,000 a week. That would be welcome news because they needed the makeshift line outside--the one under the tent--to get there before."

With 5,000 in the rearview mirror, the company also expects to increase production over the next few quarters beyond 6,000 per week, "while keeping additional capex limited."

Why are these numbers notable? Because as Musk notes, "a total vehicle output of 7,000 vehicles per week, or 350,000 per year, should enable Tesla to become sustainably profitable for the first time in our history - and we expect to grow our production rate further in Q3."

Eventually, Tesla aims to increase production to 10,000 Model 3s per week "as fast as we can". Tesla added that the majority of Tesla’s production lines "will be ready to produce at this rate by end of this year," but "will still have to increase capacity in certain places" and "will need our suppliers to meet this as well. As a result, we expect to hit this rate sometime next year."

Looking at just Q3, Tesla said it expects to produce 50,000 to 55,000 Model 3 vehicles "which will represent an increase of 75% to 92% from the prior quarter."

Which is somewhat strange, because Bloomberg's Model 3 Tracker suggests the company hasn't been able to sustain its end-of-quarter burst rate of 5,000 a week. According to the model, which estimates production using two datasets of vehicle identification numbers (VINs), the average weekly rate since July 1 has fallen just short of 4,000 of the sedans.

What about demand? According to the release, demand for Model S and Model X vehicles remains high, with Q2 2018 being our highest ever Q2 for Model S and Model X orders. 

Musk also discussed the recent production bottlenecks, explaining what went wrong in the factory. As Musk has mentioned before, he went overboard with the robots. It was so complicated, he had to build an extra production line in a tent, using humans, and says that "last quarter, it became clear that GA3, our main general assembly line... was designed to work with hundreds of robotic lifters that bring components to the line."

However, "due to the density of the line and the relatively high downtime of the lifters, ramping GA3 became substantially more complicated than we had anticipated. That said, significant progress has been  made in the last few months, and GA3 is now expected to reach a production rate of 5,000 per week very soon"

Tesla also touched on the Shanghai Gigafactory, saying that "construction is expected to start within the next few quarters, though our initial investment will not start in any significant way until 2019, with much of it expected to be funded through local debt."

One key aspect that investors were looking at as noted above, was Tesla's cash burn, which in Q2 came in at $739.5 million, better than the estimated $900 loss, however this was largely the result of another decline in CapEx, which shrank to $610MM in Q2 from $655MM last quarter and $959MM a year ago.

Commenting on its cash burn, the company said cash outflow from operating activities in Q2 2018 was $130 million, "which was significantly better than outflows of $398 million in Q1."

This improvement occurred despite a substantial increase in finished goods vehicle inventory of $579 million as a result of the timing of deliveries.

And a key fact that may explain why the stock is higher in the after hours right now, Tesla reported that "Model 3 gross profit excluding non-cash items shifted from negative in Q1 to positive in Q2, driving significant improvement in cash profitability."

In other words, Tesla again expects to be "sustainably profitable and cash-flow positive" beginning in the second half of this year; and as Bloomberg notes, that "sustainably" is new and would be a surprise to analysts, who on average don't expect that to happen until late 2019.

Tesla also revealed when it will exhaust its EV credits: "In July 2018, we delivered our 200,000th vehicle in the US, which means that our US customers will have access to the full $7,500 federal tax credit until the end of 2018, at which point it will phase out over the course of 2019."

Telsa also reported that customer deposits decreased compared to Q1 to $942 million, however it notes that "this does not reflect the incremental deposits we received once we opened the Model 3 configurator for orders in early Q3 2018."

Regarding this chart, Musk said he won't take deposits on the Model 3. He's going to direct ordering just like on the Models S and X.

"We continue to generate strong Model 3 demand despite having done almost nothing to try to sell it, and even though Model 3s have only been available to cash/loan purchasers of the long-range battery version with the premium interior package in North America."

Meanwhile, those who are concerned that Tesla may have a working capital "source of cash" after the WSJ story about asking suppliers for cash, here is a chart of Tesla's Accounts Payable and accrued liabilities.

Finally, here are Inventories: it appears that a lot of production is building up without being sold.

Now the outlook:

As noted above, Tesla expects to produce 50,000 to 55,000 Model 3 vehicles in Q3, and notes that deliveries should outpace production in Q3 "as our delivery system stabilizes."

The company expects Model 3 gross margin should grow significantly to approximately 15% in Q3 and to approximately 20% in Q4 predominantly due to continued reduction in manufacturing costs and to some extent an improving mix, which is curious considering production is largely taking place inside a tent.

Those hoping for a chearper Model 3 will have to wait as average selling price will remain high for several quarters "as we expect a richer mix in the initial wave of Model 3  deliveries to Europe and APAC."

But what happens to margins when the "cheap" Model 3 rolls out? "We believe future Model 3 cost savings will more than offset the normalization of the Model 3 average selling price in the second half of 2019, resulting in improving gross margins and stable gross profit per vehicle."

The company repeats that its target of delivering 100,000 Model S and Model X vehicles this year remains unchanged.

Meanwhile, "used car sales in particular are growing rapidly and are becoming more profitable" and additionally, "a vast majority of our customers coming off lease are either obtaining a new Tesla or keeping their existing car" an assertion which we doubt the market will easily swallow.

Finally, the financials. Here, Tesla says it believes that for the rest of this year, total non-GAAP operating expenses should remain relatively stable at Q2 levels excluding restructuring costs, as a result of our overall drive towards operating efficiencies.

However, Tesla does note that "the higher import duties on Chinese components and unfavorable currency movements are likely to cause negative pressures."

Even so, the company still expects to achieve GAAP profitability in Q3 and Q4.

On the cash burn side, "the company expects to generate positive cash including operating cash flows and capital expenditures."

Tesla also writes that it has significantly cut back on its capex projections as a result of its revised strategy to grow capacity with its existing Model 3 lines rather than adding all new lines. As a result, total 2018 capex is expected to be slightly below $2.5 billion, which is significantly below the total 2017 level of $3.4 billion.

To Bloomberg, this sounds like Musk is backing off on some of his plans for new products, even though he didn't specifically say Tesla will delay the roadster, pickup, semi truck or Model Y sport utility.

Eventually, Tesla "will be able to adjust our capital expenditures depending on our operating cash generation", but right now it's better not to spook investors with what reality may look like.

Oh and finally, Tesla did not say anything about raising capital, probably to give investors more confidence that the company can grow organically.

* * *

The market reaction was chaotic, and while the stock initially slumped, it is now over 6% higher after hours, as a result of what appears to be better than expected cash burn, a strong Model 3 production pipeline, expectations of turning profitable in the second half, a big drop in projected CapEx, and no discernible concerns about liquidity.

And as we now turn our attention to Tesla's conference call, which if last quarter was any indication should be anything but "boring", here is a Bingo suggestion for the call.