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What to Watch for in Tesla’s Third Quarter Earnings

Electric motors, like the one in this Tesla Model S, have gas engines beat in just about every category there is, a former Tesla drivetrain developer says.Electric motors, like the one in this Tesla Model S, have gas engines beat in just about every category there is, a former Tesla drivetrain developer says.
Electric motors, like the one in this Tesla Model S, have gas engines beat in just about every category there is, a former Tesla drivetrain developer says.Photograph by Jasper Juinen — Bloomberg via Getty Images

The third quarter is a transitional one for Tesla Motors. The electric carmaker plans to post its earnings when the market closes on Tuesday afternoon, and all eyes will be on the number of cars it shipped, financial guidance, and any comments about its Model X, an electric SUV it just started delivering.

Tesla’s third quarter ended at the end of September, but since then it’s been a hard couple of weeks for the company led by celebrity entrepreneur Elon Musk. Last month, Consumer Reports said Tesla’s Model S had some reliability issues, despite previously giving a premium version of the Model S an ultra high rating. Musk responded to the new Consumer Reports rating by saying that the reliability problems were with early cars and those issues had been fixed already (also check out why Tesla can get away with reliability issues).

Last month, Tesla (TSLA) also introduced its latest software update for its cars that included new autopilot features like automatic driving and changing lanes. While the autopilot features show how Tesla is leading the pack in terms of software, connectivity, and machine learning, the features drew mixed results and fear from some users. Tesla says its autopilot is still in an early stage and is advising drivers to keep their hands on the wheel.

On Sept. 29—the second to last day before the end of the third quarter—Tesla delivered the first of the Model X cars to its first customers. Tesla shipments of the Model X during that quarter will be negligible, but are supposed to ramp up significantly in the fourth quarter and first quarter of 2016.

Analysts expect Tesla to grow its revenue 35% in the third quarter to $1.26 billion, from $932.4 million in the same quarter last year, and post a (non-adjusted) net loss of $95.5 million, which would be a slightly larger loss than the $74.7 million in the same quarter a year ago. Wall Street expects an adjusted net loss of 48 cents per share, compared to a 2 cents per share profit in the year earlier. Tesla says it won’t be regularly profitable until 2020.

Here’s what we’ll be looking for in the shareholder letter and during the media call:

Total car shipments: Last quarter, Tesla lowered its annual 2015 car shipment guidance from 55,000 cars to between 50,000 to 55,000 cars. Will Tesla have to lower the annual shipment guidance again?

Some of the shipment numbers depend on how well the production of the Model X is ramping up. Due to some of the company’s design decisions—like the swooping gull-wing doors and the third row seats— the car has proved to be difficult to produce. Is it so over-engineered that Tesla won’t be able to increase production of the Model X fast enough to hit its numbers?

Model X movements: We don’t expect Tesla to break out Model X shipments for the quarter, but Musk will likely answer comments about how Model X production is going. Musk’s answers will probably be pretty rosy, unless Tesla is trying to use the Q&A to soften the blow of a larger problem.

Gigafactory progress: Tesla’s massive battery factory, under construction in the desert outside of Reno, Nev., is getting closer to completion. Recent videos taken from drones show a partly built shell of a building are posted to YouTube on a regular basis. The factory is supposed to start churning out batteries next year (it only broke ground in the summer of 2014).

https://www.youtube.com/watch?v=7QDApUM41js

Tesla needs the gigafactory to reduce the costs of its batteries 30% for its third-generation car the Model 3, which is supposed to be significantly less expensive than its Model S and Model X cars.

Huge spending: Tesla has been spending a massive amount of money on its initiatives, from launching the Model X to increasing car production to designing the Model 3 to building the battery factory. The Financial Times recently noted that by the end of 2014, Tesla had spent $3.3 billion on both capital expenditures and research and development. That comes out to about $40,000 spent per car sold. And in the first six months of this year, Tesla spent another $760 million.

Watch for how Tesla breaks down that spending in the third quarter. Is its spending financially sustainable? The company had previously said it would have positive free cash flow in the fourth quarter. Is that still the case?

Grid battery business: Tesla continues to say that it’s seeing huge demand for its new business of selling batteries for the power grid and buildings. Business owners and home owners can buy Tesla’s batteries to lower electricity bills, or to pair with solar panels. Utilities are buying them to help their power grids operate more smoothly. Will Tesla give any more info on how actual deliveries of these batteries are going?

How’s China going? Tesla said recently that it’s seen its strongest quarter of sales in China, with 1,345 cars delivered in the country in the third quarter. Is Tesla finally ready to start talking about making those cars in a factory in China? That’s the next step for Tesla when sales in the country become large enough.

China is the world’s largest car market and, with massive pollution problems, should also be the world’s largest electric car market. But it’s been a hard market for many automakers to crack because of its various government rules and mandates.

To watch me briefly test out Tesla’s autopilot feature, watch this Fortune video: