After last month’s deluge of almost 400,000 Model 3 reservations, Tesla chief Elon Musk had tweeted the company would have to revise production plans, and this it has done.

As disclosed in its shareholder letter today highlighting first quarter earnings and overall progress, Tesla is stretching to achieve 500,000 annual units produced in 2018. The goal which was originally slated for 2020 already had analysts and some armchair pundits alike with eyebrows raised. Last year the company sold just around 52,000 units worldwide meaning it wanted to grow almost 10 times in five years, and now it says it will do it two years sooner.

Musk said in a conference call with investors that his “best guess” for production by 2020 could be as much as one million vehicles in the year which is an effective doubling of Tesla’s previous forecast.

In making the news, Tesla’s letter signed by Elon Musk, Chairman & CEO, and Jason Wheeler, Chief Financial Officer, reiterated the 215-mile-plus range Model 3 will launch for $35,000 by late 2017, and the 500,000 unit production goal includes Model S, Model X, and Model 3.

“Given the demand for Model 3, we have decided to advance our 500,000 total unit build plan (combined for Model S, Model X, and Model 3) to 2018, two years earlier than previously planned,” said the letter. “Increasing production five fold over the next two years will be challenging and will likely require some additional capital, but this is our goal and we will be working hard to achieve it.”

The “five fold” increase is a rounding of an estimated production as high as 90,000 this year.


What Tesla is reaching for comes amidst results that financial analysts are interpreting either bullishly or bearishly, as has been par for the course for the company that in one way or another keeps everyone guessing.

“Increasing volume to a half million a year (at an individual plant) is obviously a large task for any automaker and particularly difficult for an automaker that lacks experience in volume production,” said Michigan-based automotive analyst Alan Baum. “That said, Tesla has learned from its experience in production of the Model S and Model X and has already begun preparations for volume production of the Model 3. Moving the target forward from 2020 to 2018 is particularly challenging and will require huge efforts from Tesla and its supply chain.”

For its part, Tesla has acknowledged the challenge, and says it “will be holding both ourselves and our suppliers accountable to be ready for volume production.” On the immediate horizon, it says demand for existing product and production capacity is increasing.

“In Q1, we reached a new quarterly production record of 15,510 vehicles, up 10 percent from Q4,” said the company. “Q1 Model S production of 12,851 vehicles met plan, but Model X production of 2,659 vehicles was insufficient to meet our projected level of deliveries.”

That is a polite way of saying it has had issues with the Model X. By its own reckoning it will need to accelerate from the 15,510 record production this quarter to meet its previously set goal – reiterated today – of 80,000-90,000 units for 2016. Citing broad global orders increased by 45 percent for the Model S as well Model X demand, Tesla says it is up for the challenge.

“The growth in Model S orders and the Model X reservation conversion rate support our plan of 80,000 to 90,000 deliveries in 2016,” said the company.

Two Executives Leaving

Tesla confirmed two key executives are leaving as Model X production is ramping up, and the company is preparing for Model 3.

These are Greg Reichow, vice president of production, and Josh Ensign, vice president of manufacturing.


The automaker said Reichow was taking a leave of absence “so that he can have a well-earned break” and would remain at Tesla “as long as necessary until his successor is on board.”

No comment was offered on Reichow, and Tesla’s commentary contradicts a source cited by Bloomberg that the executives are leaving because of production delays and glitches, along with a recall that has plagued the company’s Model X crossover.

Stock Surges

The news of the executives’ departures contributed to a 4.2 percent decline in Tesla’s stock price, but the earnings report at the end of the business day in turn sent TSLA upward in after hours trading.

An hour-and-a-half after the 5:30 Eastern time news, TSLA is up 3.34 percent, and indeed it has been a reactive stock. Its 52-week high was $286.65, and its 52-week low was $141.05.


Tesla, which likes to report its numbers in both GAAP (generally accepted accounting principles) and non-GAAP terms beat analysts’ expectations slightly by non-GAAP reckoning,

By GAAP reckoning, Tesla’s first-quarter was $282.3 million, compared to $154.2 million lost one year prior. By non-GAAP, the first quarter loss was $75.3 million, or 57 cents a share.

Tesla Reports Good News

By its own reckoning, investors and consumers have reason to stay confident in the growing company.

“With Model 3, our mission of accelerating the transition to sustainable transportation is more achievable than ever,” said the company citing what it accounts as $14 billion in future sales based on 325,000 reservations in the first week of its revealing despite no advertising or paid endorsements.

As for Model S demand, this has grown prior to updates making it better than ever, Tesla says.


“We introduced the Model S refresh in April, with the largest single set of hardware changes (nearly 300 part changes in total) on Model S to date,” said Tesla. “Updates include an enhanced look for the front of the car, adaptive headlights, faster charging and more range, all for a minimal price increase. Air quality inside the car is just as important as it is outside, so we added the same HEPA air filtration system that Model X has. Now all of our new Model S and Model X customers can have access to Bioweapon Defense mode.”

The Model X has faced more challenges with Tesla forums, such as the Tesla Motors Club, filled with early owner accounts of numerous quality issues.

Owners have posted photos and detailed anecdotes of trials faced, often praising the level of service they get at service centers, but citing fit and finish issues, software glitches, and more for the crossover.

Tesla is aware of issues, and has sought to make good. Its warranty repair expenditures according to an analysis by Reuters has been higher than other automakers, but owners generally pleased with the company have been known to often look with forbearance on teething issues.

On a conference call today with investors, Musk said he wants Tesla to become the world’s best manufacturer, and issued an open invite for the world’s best talent to join Tesla.

Otherwise, Tesla’s letter says the plan with the Model X is onward and upward.

“With respect to Model X, greater production has led to greater availability,” said the company. “In April, we launched online Model X configuration in North America and began to deploy Model X to many of our stores in the United States. Model X will be in the rest of our stores by year end.”

In anticipation also of the accelerated growth plans, Tesla says its service and sales presence is growing alongside its Supercharger station network.


“To support the rapidly growing fleet of Tesla vehicles, we continue to expand our network of sales, service, and Superchargers worldwide,” said the company. “We remain on plan to open more than 70 additional retail and service locations in 2016, to bring our total to nearly 300 locations. We also energized 29 Supercharger locations and 311 Destination charging locations during Q1, bringing our total away- from-home charging locations to almost 615 and 2,200, respectively. Global Supercharger and Destination connectors now total over 3,600 and 3,700, respectively.”

Also an energy company, Tesla says it’s making some progress on filling early reports of tens of thousands of Powerwall reservations.

“Tesla Energy posted strong growth in the quarter as well. During Q1, we delivered over 25 MWh of energy storage to customers in four continents,” says the company. “We delivered over 2,500 Powerwalls and nearly 100 Powerpacks in the quarter throughout North America, Asia, Europe and Africa.”

Looking Ahead

Next quarter, Tesla projects about 20,000 vehicles will be produced with most of these delivered in the quarter, but some spilling over into Q3.

“Due to a large number of vehicles in transit to customers in Europe and Asia at end of quarter, Q2 deliveries are expected to be approximately 17,000 vehicles,” said Tesla.

As for the big picture – the stretch goal of a half-million cars produced in 2018 – Tesla says as it accelerates Model 3 development after mid-2016, operating expenses should increase pushing non-GAAP operating expenses up for the entire year by about 20- 25 percent.


And, just to keep the analysts guessing, the aggressive target will tax cash flow and profitability further, says Tesla.

“Given our plans to advance our 500,000 total unit build plan, essentially doubling the prior growth plan, we are re-evaluating our level of capital expenditures, but expect it will be about 50 -percent higher than our previous guidance of $1.5 billion for 2016,” says the company. “Naturally, this will impact our ability to be net cash flow positive for the year, but given the demand for Model 3, investing to meet that demand is the best long-term decision for Tesla.”

The Model 3 represents a goal the company’s original founders set more than a decade ago to “advance the world’s transition to sustainable transportation.”

Its $35,000 reported entry price may go to an average selling price of $42,000 said Musk. This, he says could be affordable for half of new car shoppers.

He has hinted beyond this an even lower priced car is also being planned, but next to no information has been revealed about that.

Shareholder letter