Tesla’s Losses Widen as it Bets Big on Future Growth

Carmaker completes Model 3 design and schedules to launch the $35,000 vehicle in 2017

T1Carmaker and energy storage manufacturer Tesla Motors Inc. (NASDAQ: TSLA) announced its Q2 FY16 financial results on August 3rd, 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 sport utility vehicle (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.

Q2 FY16 financial highlights

During Q2 FY16, Tesla’s total GAAP revenue grew to $1.3 billion from $0.9 billion in the year-ago period. Non-GAAP revenue jumped 31% Y-o-Y to $1.6 billion during the reporting quarter. Tesla’s total Q2 gross margins came in at 21.6% on a GAAP basis and 20.8% on a non-GAAP basis during Q2 FY16.

The Company’s total GAAP operating expenses for Q2 FY16 jumped to $513 million from $383 million in the year-ago quarter, and included $61 million of non-cash stock-based compensation. Excluding this compensation, non-GAAP operating expenses rose 8% sequentially to $452 million during the reporting quarter. R&D expenses increased sequentially as Tesla worked to finalize Model 3 vehicle engineering. Non-GAAP sales, general and administrative expenses reflect a one-time payroll tax expense of $17 million associated with the exercise of CEO stock options that would have expired this year.

Source: Tesla
Source: Tesla

Tesla, which is betting big on future-focused investments, such as its Gigafactory and Model 3, reported that its Q2 FY16 GAAP net loss widened to $293 million, or $2.09 loss per share, versus $184 million, or $1.45 loss per share, in the year-ago period. Non-GAAP net loss came in lower at $150 million, or a $1.06 loss per basic share. Both GAAP and non-GAAP figures include a $0.05 per basic share loss from foreign currency transactions.

Segmental highlights

Tesla’s Q2 FY16 Automotive revenue increased to $1.2 billion on a GAAP basis as compared to $0.9 billion in the year-ago period. On a non-GAAP basis revenue was at $1.5 billion, and included a $293 million net increase in deferred revenue and other long term liabilities. During the quarter under review, Tesla delivered 14,402 new vehicles consisting of 9,764 Model S and 4,638 Model X. Model S average prices increased 3% sequentially due to higher option take rates and price increases associated with the Model S refresh.

Source: Tesla
Source: Tesla

Model X average prices were more than 15% higher than for Model S, despite declining sequentially as mix shifted away from Signature Series variants.

During Q2 FY16, Tesla consistently produced nearly 2,000 vehicles per week, and the total production for the reporting quarter was a record 18,345 vehicles, up 18% from Q1 FY16 and up 43% from Q2 FY15. Production hours per vehicle also declined throughout the quarter for both cars. Based on this progress, vehicle production is now on track to support about 50,000 deliveries in H2 FY16, with automotive’s gross margin improvement.

Tesla’s Q2 FY16 Automotive gross margin was 23.1% on a GAAP basis. On a non-GAAP basis, gross margin excluding ZEV credits increased over 200 basis points from Q1 FY16 to 21.9%, mainly due to improved manufacturing for Model X and favorable pricing for Model S.

Tesla’s Q2 FY16 Services and other revenue jumped 15% Y-o-Y to $88 million primarily due to lesser number of pre-owned cars to sell. However, Service and other’s gross margin declined to 2.5% from 4.7% in Q1 FY16.

Other highlights

Tesla’s Q2 FY16 cash and cash equivalents rose to $3.25 billion, driven by the successful completion of its $1.7 billion secondary offering, receipt of Model 3 deposits, an incremental $113 million draw against ABL, and effective cash management. GAAP cash flow from operations during Q2 FY16 was $150 million, and included the receipt of Model 3 deposits. After adding $143 million of cash inflows from vehicle sales, Tesla’s cash flow from core operations was nearly $293 million at the end of Q2 FY16.

During the reporting quarter, Tesla invested $295 million in capital expenditures to increase production capacity, accelerate Gigafactory construction, and expand customer support infrastructure, aimed at reach the goal of producing 500,000 vehicles in 2018.

Under the captive leasing program, Tesla Finance directly leased 1,132 cars to customers worth $117 million of aggregate transaction value in Q2 FY16.

More importantly, Tesla has completed the design phase of Model 3 and released Model 3 for tooling, production planning and validation. Later in 2016, Tesla plans to begin construction of new Model 3 body and general assembly centers.

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.

Acquisition of SolarCity

Source: SolarCity
Source: SolarCity

On August 1st, 2016, Tesla signed a definitive agreement to acquire SolarCity Corp. for $2.6 billion in an all-stock transaction, subject to a shareholder approval. 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.

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. Vehicle production efficiency has been improving rapidly by increasing the weekly production rate even further. Without any anticipated supply constraints, the Company plans to exit Q3 FY16 with a steady production rate of 2,200 vehicles per week and increase production to 2,400 vehicles per week in Q4 FY16.

Tesla’s total non-GAAP operating expenses are forecasted to increase sequentially in Q3 FY16 and Q4 FY16, and in full year FY16 non-GAAP operating expenses to increase by about 30%. The carmaker expects to invest about $2.25 billion in capital expenditures in FY16 to support the production plan for Model 3.

Stock Performance

T6Tesla’s stock ended the day at $229.08, gaining 1.29%, at the close on Tuesday, August 9th, 2016, having vacillated between an intraday high of $231.54 and a low of $226.65 during the session. The stock’s trading volume was at 2,198,308 for the day. The Company’s market cap was at $32.92 billion as of Tuesday’s close.

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