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Abu Dhabi, UAEMonday 10 December 2018

Tesla to stick with Model 3 plan but says cash burn may rise this year

Money-losing Tesla’s long-term viability depends on annually selling billions of dollars of Model 3s

Tesla is sticking to its targets on new Model 3 but says spending may increase further. Christophe Ena/AP
Tesla is sticking to its targets on new Model 3 but says spending may increase further. Christophe Ena/AP

Tesla said on Wednesday it was sticking with chief executive Elon Musk’s revised production targets for its Model 3 saloon, cheering investors who have put up with two delays, but the electric automaker’s plans to raise spending this year underscored its growing need for cash.

Reflecting the mixed fourth-quarter report, shares of the Palo Alto, California-based company, which are up 10 per cent since the start of the year, were barely changed in extended trading.

Money-losing Tesla’s long-term viability depends on annually selling billions of dollars of Model 3s, the new saloon that starts at $35,000, about half the price of its flagship Model S. Tesla said that net reservations for the new model were stable during the fourth quarter.

Production delays blamed on battery issues resulted in only 1,550 deliveries in the fourth quarter, far below the 4,100 vehicles expected by analysts - meaning revenue from the highly anticipated vehicle has yet to hit Tesla’s bottom line.

But obstacles to production of 5,000 vehicles by the end of the second quarter “were getting smaller with every week”, Mr Musk told analysts on a conference call. Once at that production rate, Tesla could begin to generate sustained positive operating income “at some point in 2018,” he said.

“I‘m cautiously optimistic that we will actually be GAAP profitable with no asterisk,” he added. Using that accounting method, Tesla lost nearly $2 billion last year.

Tesla posted its biggest-ever quarterly loss, but the loss was not as wide as analysts were expecting, and revenue just topped targets.

Mr Musk reiterated a bold goal to produce 1 million vehicles annually by 2020, with plans to make capital investments related to the upcoming Model Y 4x4 toward the end of this year. Nearly two years ago, Musk proclaimed that Tesla would produce 500,000 vehicles in 2018, which Model 3 troubles has made near impossible.

Analyst Jamie Albertine at Consumer Edge Research said there was a trade-off between accelerating growth and vehicle quality, and it was better not to rush Model 3 production and risk a recall. Tesla’s reiteration of its production target for the quarter was good news, he said.

Tesla chief financial officer Deepak Ahuja said that more than 50 per cent of Tesla’s spending was on the Model 3, underscoring that project’s importance and its high cost.

Tesla burned through $3.4bn last year, and $787 million in the fourth quarter alone, and said capital spending in 2018 would be “slightly more” than in 2017 due to expanded production at its Fremont factory and Nevada Gigafactory.

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Other upcoming capital needs include the recently unveiled Tesla Semi, the Model Y and a factory in China.

Tesla ended the fourth quarter with $3.37bn in cash, just below the $3.5bn in the previous quarter, which had been boosted by a $1.8bn debt sale. For the first time, Tesla securitised its leases, raising $546m earlier this month in securitised notes backed by Model S and X lease payments.

Still, Tesla’s cash burn eased in the quarter, in part thanks to customer deposits for the just unveiled Semi truck and Roadster, inventory reduction of finished vehicles and some Model 3 capital spending deferred to the first quarter.

The niche car maker has made inroads among luxury car buyers with the advanced technology and innovative design in its Model S saloon and Model X 4x4.

Still, it faces a wave of electric vehicles from competitors on the horizon. Global automakers from Ford to Volkswagen are cumulatively investing $90bn in electrification over the next five years, with luxury models from Audi and Tata Motors’ Jaguar due to hit showrooms this summer.

Amid that sales pressure, Mr Musk announced that Jon McNeill, president of global sales and service, and seen by some as a possible successor to Musk, was leaving the company. He will join US ride hailing company Lyft as its new chief operating officer.

Despite the competitive environment, Tesla’s stock has soared 35 per cent in the last year, making the company the second-most valuable US auto maker, with a market capitalisation of $56.1bn, just behind General Motors, which had net revenue of $145.6bn in 2017.

Mr Musk scored a clear victory on Tuesday with the successful launch of the world’s most powerful rocket, Falcon Heavy, made by his private company SpaceX. But some analysts have questioned whether his myriad of other interests, from space exploration to tunnel boring technology, are a distraction at a critical time within Tesla.

Net loss widened to $675.4m, or $4.01 per share, for the fourth quarter ended December 31 from $121.3m, or 78 cents per share, a year earlier.

Total revenue rose to $3.29bn from $2.28bn.

Excluding items, the company lost $3.04 per share, above the $3.12 per share loss expected by analysts.