Tesla Reorg: Aligning Profit and Vision
- Today, Tesla gave details on its previously announced company reorganization. The 9% workforce cut was more than the 5% reduction we were expecting.
- We believe this reorg brings Tesla a measurable step closer to long-term sustainability.
- Reading between the lines, there is now a higher probability that they will be profitable in the Sep-18 quarter.
- We remain positive on the Tesla story given our belief that Model 3 will scale, and the company will achieve its mission of accelerating the world’s transition to sustainable energy.
Critical production metric likely unchanged. Elon Musk addressed the elephant in the room in his letter to employees, clarifying that the cuts will not impact Model 3 production. This, of course, is the most important near-term metric to the story, even more so than cash.
Framing up the cost savings. Tesla currently employs about 37,000 people, which will be reduced to about 33,500. For starters, we expect a one-time charge of $130-$150M split between cash and stock, detailed on the Jun-18 earnings call. More importantly, the quarterly op-ex savings going forward should be about $80M ($320M annually). This is estimated using a $100,000 average salary and a 6-quarter average tenure. In the context of the company’s high cash burn rate, $80M per quarter may not sound like enough to have an impact, but as the next several months may decide the fate of the company, every dollar counts.
The Road to Profitability. Tesla previously said that they will be GAAP profitable in the second half of this year. Conventional wisdom suggests we should discount any of Musk’s predictions on timing, but given the magnitude of the reorg, it’s clear he is serious about reaching profitability. The Street is generally looking for GAAP profitability in early 2019. In rare form, Musk directly aligns the company’s mission with its ability to make money, saying, “we will never achieve [our] mission unless we eventually demonstrate that we can be sustainably profitable. That is a valid and fair criticism of Tesla’s history to date.” We believe this reorg will bring Tesla one step closer to profitability – and to achieving their mission.
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