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Even Without Accounting Gimmicks, Electric-Car Maker Tesla is Now Profitable

To stay profitable, Tesla needs to keep cutting costs and selling more cars.

As expected, Tesla Motors, the maker of the luxury Model S electric sedan, announced today that it was profitable for the first time in its ten-year history. During the first quarter of 2013 it had profits of $11 million. Total revenues were $562 million.

The profits came as Tesla cut costs and managed to sell more cars as it ramped up production at its factory in California. According to reports, Tesla’s Model S outsold electric vehicles from both GM and Nissan in the first quarter.

Tesla CEO Elon Musk had previously said that Tesla would be profitable, so the news comes as no surprise. It was good, though, to see that the profits were based on generally accepted accounting principles, and not on (any apparent) accounting sleight-of-hand.  

While the results were expected, the official announcement remains an important milestone for the company, lending credence to its sales projections and its overall vision of eventually producing electric vehicles cars that most people in the U.S. can afford. The Model S costs about $70,000, although that can vary a lot depending on the model.

The announcement is also a rare bit of good news for Department of Energy loan guarantee programs that have been criticized because of the failure (or impending failure) of some loan recipients, such as Solyndra and Fisker Automotive (see “Why Tesla Survived and Fisker Won’t”). Tesla received a $465 million loan under the Advanced Technology Vehicles Manufacturing loan program.

Yet, as Tesla acknowledges, much work is needed to set the company on a solid foundation and allow it to keep developing new, lower-cost cars. According to one analyst, achieving its profit margin targets would require lowering the cost per vehicles by something like $17,000 to $19,000. On an earnings call Wednesday, Musk said that some of those cost savings have already been realized by improving the design of the car, improving manufacturing, and getting better deals from suppliers as volumes increase.

The company seems to be getting better at managing day-to-day operations. During a previous earnings call Musk had bemoaned an operational error that had required the company to air-freight tires at ten-times the cost of shipping them by sea (see “Tesla Needs a Tim Cook”). In the current letter to shareholders, Tesla reported that “better inventory management contributed over $30 million in cash and reduced logistics costs.”

Another significant help was decreasing R&D expenses associated with bringing the Model S to market. This was the first quarter that Tesla sustained production volumes at its target levels. 

But R&D expenses will increase again starting next quarter as the company starts to spend more on developing its next car, the Model X SUV.

At the same time one big source of revenue is expected to decline. About 12 percent of revenue, or $68 million, came from selling zero emissions vehicle credits in California, but that number is expected to go down as the price per credit declines. As automakers make their own zero-emissions vehicles, they won’t have to buy credits from Tesla to meet California regulations.

One source of uncertainty about the future of the company comes from the fact that Tesla is no longer saying how many people have reserved its Model S electric luxury sedan. It had used quarterly reservation numbers as a measure of progress before it had actual sales figures because it wasn’t yet making any of the cars. Without those numbers, it’s harder to gauge whether the company’s successful sales will continue. People had been waiting for the car for a long time—its unclear whether the first quarter sales were so good just because of this pent-up demand, and reservation numbers may have given an indication of whether the pace will continue.

That said, while Tesla is forecasting a slight decline in shipments for next quarter—down to 4,500 from 4,900—it has raised its overall estimate to 21,000 for the year, up from 20,000. It expects to post a loss next quarter in part because of accounting rules around a new payment plan. But it will still get the money from the sales, and expects to be able to cover expenses, in spite of the loss “on paper.”

As usual, Musk provided a candid look at some of the challenges faced by a new car company. Some customers had trouble with the Model S’s fancy door handles—when they pulled on them, the door didn’t open, a problem he says Tesla has solved now. 

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