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BMW's Profit Drops 6% on Higher R&D Spending

German luxury-vehicle maker BMW AG (NASDAQOTH: BAMXF) revealed in its third-quarter earnings release Tuesday that its pre-tax profit for the period fell 6% from its year-ago result, to 2.42 billion euros ($2.81 billion), due in part to higher spending for new models and advanced technologies.

But despite the Q3 profit decline, BMW raised its full-year pre-tax profit guidance. 

Sales of BMW's smallest SUV, the X1, are up nearly 40% this year. The X1 has been in particularly high demand in China. Image source: BMW AG.

BMW earnings: The raw numbers

Metric Q3 2017 Q3 2016 Change
Revenue 23,424 million euros 23,362 million euros 0.3% 
Units sold: Autos 590,415 583,499 1.2%
Units sold: Motorcycles 39,429 35,290 11.7%
Earnings before interest and tax (EBIT) 2,304 million euros 2,380 million euros (3.2%) 
EBIT profit margin, auto segment 8.3% 8.5% 0.2 ppts
Earnings before tax (EBT) 2,422 million euros 2,575 million euros (5.9%) 
Net profit 1,789 million euros 1,821 million euros (1.8%) 
Operating cash flow, auto segment 2,739 million euros 2,369 million euros  15.6% 

Data source; BMW AG. "Ppts" = percentage points. On Nov. 7, 2017, 1 euro = approximately $1.16.

What happened at BMW during the third quarter

In a nutshell, BMW's profit fell due to a few factors:

  • A less-favorable product mix: Small cars and SUVs made up a higher proportion of total sales than they did in in Q3 2016;
  • Unfavorable exchange-rate movements;
  • Higher research and development spending. R&D expenses in the quarter totaled 3.485 billion euros, up 14.3% from a year ago. BMW has ramped up its investments in electric drivetrains and autonomous-vehicle systems. It's also gearing up to bring 40 new or revamped models to market across its three brands by the end of next year. 

BMW was the world's leading seller of luxury vehicles for about a decade, but it lost that top spot to archrival Mercedes Benz (a unit of Daimler AG (NASDAQOTH: DDAIF)) in 2016. It's looking to those new models to help it regain that sales title. 

Here's how BMW's results broke down across its three principal business segments. 

Automotive segment

  • While BMW's overall auto sales rose 1.2% from a year ago, revenue in its automotive segment fell 2.4% to just over 21 billion euros. 
  • Auto segment EBIT fell 4.6% to 1.753 billion euros. 
  • Automotive EBIT margin was 8.3%, within BMW's target range, but down 0.2 percentage points from Q3 2016. For comparison, Mercedes-Benz's Q3 EBIT margin was 9.2%; Audi's was 8.9%. 
  • BMW-brand sales rose 1.2% to 499,467. BMW's small 1 Series sedans and X1 SUVs have both seen significant sales gains in 2017; that's a win for BMW in the segments (particularly in China), but the side effect was an unfavorable shift in BMW's overall product mix.
  • Mini-brand sales rose 1.1% to 90,180. The Mini Countryman and Convertible models have both seen significant year-over-year sales growth in 2017.
  • Rolls-Royce sales fell 18.4% to 768. Earlier this year, Rolls-Royce ended production of its top-of-the-line Phantom sedan; production of an all-new Phantom will begin in January. 

Motorcycles segment

  • Deliveries from BMW Motorrad, the company's motorcycles unit, rose 11.7% from a year ago, driving a 14% increase in revenue to 514 million euros.
  • Motorcycles EBIT rose 65.6% to 53 million euros. EBIT margin was 10.3%.
  • The gains were driven by strong sales in Europe, particularly in Germany, France, and Italy. Sales in the U.S. slipped. 

Financial services segment

  • New-contract originations fell 7% to 435,026, a result of new limitations imposed on auto lending and leasing in China. The number of new leasing contracts fell 2.7% from a year ago, while new financing contracts fell 9.1%
  • Despite the drop in originations, financial-services revenue rose 4.3% year over year to 6.679 billion euros. EBIT rose 5.4% to 607 million euros. 

What BMW's CEO said about the quarter

CEO Harald Krueger talked up BMW's investments, emphasizing their effects on employment, a key issue in the company's home country of Germany. 

We are resolutely doing things the BMW way, keeping our promises and raising the bar for our own ambitious targets. We are investing substantially in tomorrow's mobility, enabling us to maintain our leading position of innovation and sustainable employment. In this way, we remain a dependable partner for society, policymakers and the environment as well as one of the most attractive employers worldwide.

An increase to full-year guidance

BMW had previously said that it expected "slight increases" in 2017 in deliveries and pre-tax profit from their record 2016 levels, as well as an EBIT margin for its automotive segment in the range of 8% to 10% for the year. It tweaked that forecast a bit in its Q3 report: It still expects a "slight increase" in deliveries, but now expects a "solid" increase in pre-tax profit, both to new record levels. 

But, Krueger noted, BMW's research and development expenses would likely be higher again in the fourth quarter. 

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John Rosevear has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.