Tesla Swings to Profit on Higher Sales, New Product Launches

Automotive revenue soared 152% Y-o-Y to $2.15 billion, delivering record 24,821 units

t1Carmaker and energy storage manufacturer Tesla Motors Inc. (NASDAQ: TSLA) announced its Q3 FY16 financial results on October 26th, 2016.

The Palo Alto, California-based company designs, develops, manufactures and sells electric vehicles and energy storage products. The Company produces and sells two electric vehicles: the Model S sedan and the Model X SUV and has started order booking for its upcoming mass market offering, the Model 3.

In addition, it sells energy storage products under the Tesla Energy brand. Its energy storage products include the 7 kWh and 10 kWh Powerwall for residential applications, and the 100 kWh Powerpack for commercial and industrial applications. It manufactures its products at its facilities in Fremont and Lathrop, California; Tilburg, the Netherlands, and at its Gigafactory near Reno, Nevada. It uses battery packs manufactured at the Gigafactory for its energy storage products. Read more about Tesla’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Tesla’s total GAAP revenue jumped 145% Y-o-Y to $2.30 billion. Tesla’s total gross margin was 27.7% during the reporting quarter compared to 21.6% in Q2 FY16. Total Q3 FY16 GAAP operating expenses were $551 million, including $81 million of stock-based compensation (SBC). Excluding SBC, non-GAAP operating expenses grew 4% sequentially to $471 million. GAAP R&D expenses were $214 million, including $40 million of SBC. Excluding SBC, non-GAAP R&D expenses increased 10% sequentially to $174 million, as vehicle development programs accelerated. GAAP sales, general and administrative expenses were $337 million, including $41 million of SBC. After excluding SBC, non-GAAP sales, general and administrative expenses of $296 million were up 1% sequentially.

During Q3 FY16, Tesla swung to GAAP profits of $22 million, or $0.14 per diluted share, on 157 million diluted shares, compared to loss of $229 million, or $(1.78) per share, in the year-ago period. Non-GAAP net income for the reporting quarter was $111 million, or $0.71 per diluted share, after adding back $90 million of SBC. Both figures included a $0.08 per share loss of other expense, net, primarily related to foreign currency transactions and the conversion of most of its 2018 convertible notes.

Segmental highlights

Automotive: This segment’s revenue soared 152% Y-o-Y to $2.15 billion on a GAAP basis; the company delivered 24,821 units during the reporting quarter, over 300 more than the estimated delivery count on October 2nd, 2016. Deliveries grew 114% from the year-ago quarter, and comprised 16,047 Model S and 8,774 Model X vehicles. In addition, 5,065 vehicles were in transit to customers at the end of Q3 FY16. These vehicles will be delivered in Q4 FY16.

Source: Tesla, Bloomberg
Source: Tesla, Bloomberg

In Q3 FY16, deliveries where Tesla retains residual risk, and thus were subject to lease accounting, were 32% of total deliveries, down from 36% in Q2 FY16. The elimination of resale value guarantees in the U.S. in Q3 FY16 had no impact on demand, signaling strong consumer confidence. During Q3 FY16, Tesla repurchased fewer than 2% of vehicles eligible for buyback under its resale value guarantee program.

Tesla’s Q3 FY16 GAAP total automotive gross margin was 29.4%, while non-GAAP automotive gross margin was 25.0%, excluding SBC and $139 million of ZEV credit revenue. Non-GAAP automotive gross margin excluding ZEV credits increased 140 basis points sequentially due to improved manufacturing efficiency and higher production volume. The amount of issues that Tesla addressed with Model X fell 92% in the last 12 months, a reflection of the improvements made in Model X.

Source: Tesla, Bloomberg
Source: Tesla, Bloomberg

Model S average prices decreased 6.5% sequentially, primarily due to the introduction of the 60 kWh models and production of the 100 kWh variants only starting late in Q3 FY16. Model S price decline was also due to price adjustments that were made for inventory cars that already had mileage on them, showroom cars with wear, and cars that were built before product transitions. Model X average prices declined 1.2% sequentially as Tesla increased production beyond just the highest-priced Q2 Signature builds.

Service and other: This segment’s revenue jumped 78% Y-o-Y to $150 million during Q3 FY16 and grew 70% sequentially from Q2 FY16. The increase was primarily due to higher sales of used vehicles and stationary storage products. Gross margin came in at 3.4%, up from 2.5% in Q2 FY16, and in line with analyst expectations.

Other highlights

Cash flow: Tesla’s cash flow from operations during Q3 FY16 was $424 million due to higher sales and diligent expense management. Free cash flow was $176 million as the company invested $248 million in capital expenditures to increase production capacity, accelerate Gigafactory construction, and expand customer support infrastructure. Capital expenditures remain on track, with the goal of producing 500,000 vehicles in 2018. In addition, Tesla collected $173 million of cash inflows from vehicle sales to its bank leasing partners, which are not included in cash flow from operations.

Product innovation: Tesla announced that all newly produced Tesla vehicles, including Model 3 cars, will have the hardware needed for full self-driving capability, including eight surround cameras to provide 360 degree visibility around the car at up to 250 meters of range. New cars will also have 12 enhanced ultrasonic sensors to complement this vision, allowing for detection of both hard and soft objects at nearly twice the distance of the prior system, and computing power has been increased by 40-fold over its previous generation hardware. Additionally, new safety and convenience features will be rolled out via over-the-air software updates. Tesla vehicles have already been driven over 3 billion miles, including more than 1.3 billion miles logged by vehicles with Autopilot hardware.

t4Launch of Model S P100D: In August 2016, Tesla announced the Model S P100D with Ludicrous mode (P100DL), which is the world’s quickest production car with a 0-60 mph time of 2.5 seconds. However, unlike other supercars, P100DL is a four door sedan, can seat five adults plus two children, has additional room for cargo, and has industry-leading crash safety. It is also the longest range all-electric vehicle on the market, able to drive 315 miles on a single charge.

Over the past month, Tesla released Version 8.0 software via an over-the-air update for all Model S and Model X vehicles. This update adds numerous enhancements to the navigation and audio applications on every Model S and Model X, and also increases Autopilot capability with enhanced radar signal processing.

Store openings: Tesla is speeding up its store openings and plans to add a new retail location every four days on average during H2 FY16, especially in new population-dense markets like Taipei, Seoul, and Mexico City, as well as mature markets like California. During the reporting quarter, Tesla opened 17 new stores and service centers to increase its customer support network to 250 locations globally.

Source: SolarCity
Source: SolarCity

Acquisition of SolarCity: On August 1st, 2016, Tesla signed a definitive agreement to acquire SolarCity Corp. for $2.6 billion in an all-stock transaction. As per the agreement, SolarCity’s shareholders will receive 0.110 shares of Tesla for each share of SolarCity at $25.37 per share value. Tesla’s acquisition of the largest residential solar energy installer and generator in the U.S. along with its unique panel technology will help it gain synergies in product innovation and integration. The transaction is expected to close by Q4 FY16. As part of these plans, Tesla will hold a shareholder vote over its planned acquisition of SolarCity on November 17th, 2016.

Launch of new rooftop solar system: On October 28th, 2016, Tesla unveiled its new solar roof-top panels, a new $5,500 Powerwall 2 high-capacity residential battery pack, and the Powerpack 2 for businesses. The new solar roof shingles incorporates solar technology without using standard photovoltaic panels, and are made of a kind of textured glass and embedded with devices that convert sunlight into electricity. They are more durable than conventional roofing options, and are expected to last, on average, two to three times longer. The company plans to make four different roof designs: Tuscan Glass tile, Smooth Glass tile, Textured Glass tile, and Slate Glass tile. The solar tiles are designed to collect sunlight and store energy inside Powerwall 2, a battery for homes and small businesses that stores the sun’s energy and delivers clean, reliable electricity even in the absence of sunlight.

t6While the rooftop solar tiles capture solar energy, the Powerwall battery pack turns sunlight into electricity for immediate use or storage. The two 14kWh lithium-ion batteries inside each pack (over double the capacity of the previous version) will power a four-bedroom house with lights, refrigerator and other appliances for an entire day. The new Powerall also now includes a built-in power inverter, as compared to the previous version that required a separate piece of hardware. The inverter in the new Powerwall works directly with the solar roof tiles to convert sunlight into electricity.

Guidance for full year FY16

Tesla Model 3; Source: Tesla
Tesla Model 3; Source: Tesla

Tesla’s production and demand are on track to support deliveries of approximately 50,000 new Model S and Model X vehicles in H2 FY16. The company expects about 30% to 35% of these deliveries to be accounted for as leases for revenue recognition purposes. Tesla also predicts a 2% to 3% improvement in automotive gross margin on a GAAP and non-GAAP basis by the end of 2016.

The company also forecasts operating expenses, both on a GAAP and non-GAAP basis, would grow approximately 30% from 2015. The carmaker expects to invest about $2.25 billion in capital expenditures in FY16 to support the production plan for Model 3. Capital expenditures for the past three quarters totaled $759 million.

Stock Performance

t8Tesla’s stock ended the day at $190.56, gaining 1.68%, at the close on Friday, November 4th, 2016, having vacillated between an intraday high of $193.46 and a low of $185.96 during the session. The stock’s trading volume was at 5,143,435 for the day. The Company’s market cap was at $28.64 billion as of Friday’s close.

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