Tesla (NASDAQ: TSLA) The stock slipped Friday after the company announced plans to reduce full-time employees by 7%. The decision was made when Tesla faced "an extremely difficult challenge", Elon Musk, CEO, said in a letter to the staff about the reduction and as the company's production volume increases, it is important for Tesla to bring its cars, batteries and solar products with it In a letter, Musk explained, "Making it cheaper to compete with established products.
This letter comes at a critical time for the electric car company. The cost-cutting effort follows a major hype in 2018 and a massive increase in the company's vehicle production volume. In addition to the plans to reduce the workforce of the company, the letter provides investors with insight into fourth-quarter profitability, Q1 expectations and more. Here are some of the most important snacks from the letter.
1. Expect a lower profit in the fourth quarter
The letter contained a preview of what to expect for Tesla's recently completed fourth quarter.
"In Q4, preliminary unaudited results indicate that we once again made GAAP earnings, but less than in Q3," Musk said. With Tesla's third-quarter earnings of $ 1.75 per share, investors expect fourth-quarter earnings to be below this level. The analysts were far from a perfect match, but still remarkable. They expected Tesla's non-GAAP earnings in the fourth quarter to be slightly lower than in the third quarter. On average, analysts expected the company to report a non-GAAP EPS of $ 2.26, compared to $ 2.90 in the third quarter of 2018.
2. Tesla aims for a "tiny" profit in the first quarter
For the current quarter of Tesla a profit is not as sure as a result.
"As in Q3, shipping more expensive Model 3 variants (this time to Europe and Asia) will hopefully earn a tiny profit with great difficulty, effort, and luck," Musk said in the letter.
3. Tesla needs to bring the more cost effective versions of the Model 3 on the market
To further expand the business, Tesla says it is necessary for the company to make progress in producing and selling the promised $ 35,000 version of the Model 3. Currently, the cheapest available Model 3 is its mid-range version, which starts at $ 44,000.
"[S]By May we will have to offer at least the middle model variant 3 in all markets, "explained Musk. We have to reach more customers who can afford our vehicles. In addition, we need to make further progress towards more favorable variants of Model 3. "
4. Tesla faces big challenges
Musk highlighted the $ 1,875 tax credit for qualified Tesla buyers due on July 1, and the company's need to reach a broader global market with a lower-priced Model 3 variant, warning employees of difficult conditions times.
"[T]The way to the future is very difficult, "said Musk.
This is not new to us - we've always been facing big challenges - but it's the reality we have to face. ... Attempting to scale up affordable clean energy products inevitably requires extreme effort and relentless creativity, but the success of our mission is essential to ensure a bright future. So we have to do everything we can to make it happen.
5. The economies of scale must be improved
To bring more cost-effective versions of Model 3 to the market, a huge effort is required, so Musk in writing. In addition to cutting 7% of its full-time employment, the company must increase Model 3 production and make "many production improvements in the coming months".
The CEO added:
Larger quantities and improvements in manufacturing design are critical to Tesla's ability to achieve the economies of scale required to produce the standard range (220 miles), the standard interior model 3, at $ 35,000 and still be a viable business. There is no other way.
6. The product roadmap is promising
Musk is more enthusiastic about the company's pipeline. He believes that Tesla has "the most exciting product roadmap of all consumer goods companies in the world," including complete self-drive features, Model Y, a semitrailer, a pick-up truck, a new version of the Roadster, the solar roof, and energy storage products. These products "are just the beginning," Musk said.
Musk had led Tesla through the recession and the launch of four large vehicles, including Tesla's Roadster, Model S, Model X and Model 3. Musk had previously faced great challenges. And 2019 will be another challenge as the company seeks to move from a niche electric car manufacturer to a mass market participant.