Tesla (TSLA) profit drop in Q4, 7% workforce cut planned after growing 30% last year

Tesla CEO Elon Musk dropped an email to employees last night at 1am PT, which was also released publicly and filed with the SEC, to announce important job cuts to control costs. It also served to temper profit expectations for TSLA stock holders.

[Update: TSLA stock down nearly 10% in early morning trading]

In it, he details the challenges ahead for Tesla as it tries to reduce the price of its Model 3 to the $35,000 price point and make its other products more competitive to fossil fuel equivalents. 

The standout TSLA statistic is that Tesla will reduce its workforce by 7% to try to make its products more cost competitive. That 7% doesn’t seem dire when shown against the 30% employee growth Tesla accumulated last year.

Tesla also again plans to retain only the “most critical temps and contractors” as well. This is after Musk ran a brutal review of contractors last year after he found that a great deal of waste in the sector at Tesla.

Musk also noted that Q4 wouldn’t be as profitable for TSLA (but it would still be in the black) as Q32018 in which Tesla reported its first significant profit of $312 million.

Tesla (TSLA) shares are down in mornings pre-trading almost 7%.

Here’s the email to employees in full:

January 18, 2019

This morning, the following email was sent to all Tesla employees:

As we all experienced first-hand, last year was the most challenging in Tesla’s history. However, thanks to your efforts, 2018 was also the most successful year in Tesla’s history: we delivered almost as many cars as we did in all of 2017 in the last quarter alone and nearly as many cars last year as we did in all the prior years of Tesla’s existence combined! Model 3 also became the best-selling premium vehicle of 2018 in the US. This is truly remarkable and something that few thought possible just a short time ago.

Looking ahead at our mission of accelerating the advent of sustainable transport and energy, which is important for all life on Earth, we face an extremely difficult challenge: making our cars, batteries and solar products cost-competitive with fossil fuels. While we have made great progress, our products are still too expensive for most people. Tesla has only been producing cars for about a decade and we’re up against massive, entrenched competitors. The net effect is that Tesla must work much harder than other manufacturers to survive while building affordable, sustainable products.

In Q3 last year, we were able to make a 4% profit. While small by most standards, I would still consider this our first meaningful profit in the 15 years since we created Tesla. However, that was in part the result of preferentially selling higher priced Model 3 variants in North America. In [TSLA] Q4, preliminary, unaudited results indicate that we again made a GAAP profit, but less than Q3. This quarter, as with Q3, shipment of higher priced Model 3 variants (this time to Europe and Asia) will hopefully allow us, with great difficulty, effort and some luck, to target a tiny profit.

However, starting around May, we will need to deliver at least the mid-range Model 3 variant in all markets, as we need to reach more customers who can afford our vehicles. Moreover, we need to continue making progress towards lower priced variants of Model 3. Right now, our most affordable offering is the mid-range (264 mile) Model 3 with premium sound and interior at $44k. The need for a lower priced variants of Model 3 becomes even greater on July 1, when the US tax credit again drops in half, making our car $1,875 more expensive, and again at the end of the year when it goes away entirely.

Sorry for all these numbers, but I want to make sure that you know all the facts and figures and understand that the road ahead is very difficult. This is not new for us – we have always faced significant challenges – but it is the reality we face. There are many companies that can offer a better work-life balance, because they are larger and more mature or in industries that are not so voraciously competitive. Attempting to build affordable clean energy products at scale necessarily requires extreme effort and relentless creativity, but succeeding in our mission is essential to ensure that the future is good, so we must do everything we can to advance the cause.

As a result of the above, we unfortunately have no choice but to reduce full-time employee headcount by approximately 7% (we grew by 30% last year, which is more than we can support) and retain only the most critical temps and contractors. Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months. Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range (220 mile), standard interior Model 3 at $35k and still be a viable company. There isn’t any other way.

To those departing, thank you for everything you have done to advance our mission. I am deeply grateful for your contributions to Tesla. We would not be where we are today without you.

For those remaining, although there are many challenges ahead, I believe we have the most exciting product roadmap of any consumer product company in the world. Full self-driving, Model Y, Semi, Truck and Roadster on the vehicle side and Powerwall/pack and Solar Roof on the energy side are only the start.

I am honored to work alongside you.

Thanks for everything,

Elon

Electrek’s take:

This isn’t surprising and as dire as I’m seeing everyone report. Tesla introduced the lower price Model 3 Medium range at the end of the year which means its average selling price dipped. That likely ate into margins and profitability quite a bit. Tesla also spent quite a bit of money trying to get every car it could delivered before the end of the year, incurring additional one time shipping and labor premiums.

Tesla also may have been forced to take the charge on its lucrative referral program which also likely ate into its profitability and is likely the reason it ended abruptly yesterday (though it will run the next 2 weeks until the end of January).

For me this is a natural progression as the Federal Tax program is reduced. Demand likely fell off quite a bit in the US meaning few people needed in sales and delivery centers and on the lines until demand is again spiked by a lower-priced Model 3.

Again, Tesla’s workforce grew at a 30% clip last year which seems like an astronomical rate to deal with the massive growth of Model 3 sales. So scaling back here makes some sense. It is absolutely unfortunate that a chunk of Tesla’s workforce has to be let go, especially in this tumultuous labor climate, but a healthy Tesla is better for everyone.

As for TSLA profitability, I expect it to be significantly lower in Q4 2018 perhaps at $100M or less, otherwise I don’t think Tesla would have made as drastic cuts to labor and referral program as we’re seeing here.