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Tesla’s Musk Predicts 25% Model S Output Gain After Snag

February 21, 2013

Tesla Loss Widens, Expects to Be Profitable in First Quarter

The company named for inventor Nikola Tesla reiterated a goal of delivering 20,000 lithium-ion-powered sedans this year, after falling short of an initial target of 5,000 in 2012. Photographer: Patrick T. Fallon/Bloomberg

Tesla Motors Inc. (TSLA:US), the maker of electric cars headed by billionaire Elon Musk, plans to increase output by at least 25 percent this year after earnings were hurt by startup snags that drove up costs in 2012.

The company’s shares fell the most in almost five months after it posted a quarterly loss that missed analyst estimates.

Production of the rechargeable sedan at Tesla’s Fremont, California, plant will probably reach 500 a week in mid-2013 after climbing to 400 a week in December, Musk said in a phone interview yesterday. The company will hold off on increasing output until it smoothens out the high amounts of overtime and delays in parts shipments it faced in 2012, he said.

The carmaker, named after inventor Nikola Tesla, reiterated a goal of delivering 20,000 of its lithium-ion battery-powered sedans this year, after falling short of an initial target of 5,000 in 2012. Tesla is counting on demand for the car, priced from about $60,000, to help it turn profitable as early as this quarter, with growth accelerating when the Model X crossover vehicle is added in 2014.

The shares fell 8.8 percent to $35.16 at the close in New York, the biggest one-day drop since Sept. 25.

“I want to keep the company on a steady production pace and focus on efficiency,” said Musk, 41, Tesla’s chief executive officer and biggest shareholder. “We need to level off and focus on running a real tight ship.”

Production at its Fremont factory may increase beyond 500 a week toward the end of the year if there’s demand, he said.

Quarterly Loss

The Palo Alto, California-company reported a fourth-quarter loss that was larger than analysts anticipated yesterday after the markets closed, blaming a jump in operating costs during the start of production.

Operating expenses rose 29 percent to $114.7 million in the quarter because of higher logistics costs and component prices, the company said.

John Lovallo, an analyst for BofA Merrill Lynch Global Research, today lowered his rating on Tesla to underperform from neutral, following the company’s results.

Musk said the share price drop in extended trading yesterday was due to a misconception about demand for the Model S.

“If we were to close all of our stores today, we’d be sold out basically for the whole year,” he said. “We’ve got reservations for roughly 15,000 cars, over and above what we’ve already delivered.”

Shipments of Model S to Europe start in the third quarter this year, and to Japan and Hong Kong in the final months of 2013, the company said yesterday. Tesla is also preparing to sell the car to drivers in China, said George Blankenship, vice president of sales.

Beijing Outlet

“We’re under construction on a store in Beijing that will open in the spring,” Blankenship said in an interview. “It’s going to be one of the larger stores, with respect to the China market size.”

With the addition of those markets and higher production, deliveries may increase 50 percent in 2014 from this year, Musk said.

“I think 30,000 units in 2014 is a pretty reasonable target,” he said. “That’s with a little bit of X in the mix.”

The fourth-quarter net loss (TSLA:US) widened to $89.9 million, from $81.5 million a year ago, Tesla reported yesterday. Excluding some items, the loss was 65 cents a share, compared with 69 cents a share a year ago. Analysts on average estimated (TSLA:US) a loss of 57 cents, according to data compiled by Bloomberg.

Tesla now expects to post (TSLA:US) a profit excluding certain items in the first quarter, as sales of the sedan expand. Analysts on average had projected an adjusted loss of 23 cents a share in the first quarter.

Turning Profitable

“Our focus in the first quarter is making sure we’re profitable as promised,” Musk said. After that, “we’re certainly going to try to be profitable every quarter.”

Tesla’s Model S, with a base price of $59,900 before a $7,500 U.S. tax credit, travels as far as 300 miles (483 kilometers) with a full charge, according to the company. The U.S. has certified Model S range of being between 208 miles and 265 miles, based on battery size.

Sales in the fourth quarter jumped more than seven-fold to $306.3 million, from a year earlier, in line with the average analyst estimate of $306.1 million. The company delivered a total of 2,650 vehicles to customers last year, including 2,400 in the fourth quarter. The delivery goal this quarter is 4,500.

Operating expenses rose because of “significant early- stage cost inefficiencies,” including higher logistics costs and component prices, the company said. Those costs will drop “substantially” this quarter, Tesla said.

Overtime Expenses

High amounts of overtime, with employees in Fremont working about 70 hours a week in late 2012, use of additional temporary workers, and costs to have tires and other parts delivered via airfreight led expenses to jump, Musk said.

“Most of the nightmares happened in the fourth quarter,” he said. Currently, plant employees are working about 50 hours a week, “and we want to get to more like a 45-hour week,” Musk said.

The company expects to be near break even on cash flow from operations in the current quarter.

“Ideally, cost problems they might have had during the launch are mostly behind them,” said Alan Baum, principal of Baum & Associates consulting firm in West Bloomfield, Michigan. “If that’s the case, and it seems to be, it allows them to have a more positive cash flow situation earlier than planned.”

Tesla counts Daimler AG (DAI) and Toyota Motor Corp. (7203) as both customers and investors, supplying each with battery packs and motors.

Tesla rose 14 percent this year before today, after gaining 19 percent last year. The stock outperformed the Standard & Poor’s 500 Index’s gains of 6 percent and 13 percent respectively in the periods.

To contact the reporter on this story: Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net


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