Earnings Review: Tesla’s Small Improvements In Margin and Production In Q1 Might Be Too Small For 2015 Targets

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Tesla Motors (NYSE:TSLA) announced first quarter results for fiscal 2015 on Thursday. During the quarter, the company’s revenues stood at $939 million, down from $957 million in the fourth quarter of fiscal 2014. The net income loss stood at ~$154 million, or a loss of $1.22 per share. The automaker delivered a record 10,045 vehicles this quarter and produced 11,160 vehicles this quarter, exceeding its production target by 10% .The Silicon Valley-based company produced more than 1,000 vehicles per week on average this quarter, and recorded successful launches of the 85D and 70D Model S vehicles. The auto maker is targeting 55,000 deliveries for the year and how close the company comes to meeting that target will depend to a large extent on the successful launch of the Model X, which is scheduled for the market in late Q3.

Tesla had introduced a new lease program earlier in 2013. GAAP requires Tesla to spread out the revenues of the cars sold through this program over the lease tenure (i.e. treating these revenues as deferred revenues). Therefore, a better method to gauge the automaker’s performance is to analyze the non-GAAP figures. On a non-GAAP basis, Tesla’s revenues were $1.1 billion, up slightly compared to the previous quarter. The net income loss stood at 36 cents a share. [1]

We have a price estimate of $170 for Tesla, which is about 25% below the current market price. We are in the process of revising our estimates to incorporate the latest earnings.

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Outlook For 2015

In 2014, the automaker expected to sell 35,000 Model S cars, helped by higher production rates and expansion into new markets. Due to production delays experienced because of difficulties in transitioning to a new assembly line in the third quarter, the company revised its delivery target for the year to 33,000.  The fourth  quarter’s 9,834 vehicles produced means that Tesla only delivered around 31,800 cars for the year.  Meanwhile, the company has also been working on making its assembly line efficient enough to be able to improve the production rate to 1,000 vehicles a week by the end of 2014 and 2,000 vehicles per week by the end of 2015. [2] The company produced a record 11,627 vehicles in the fourth quarter, implying a production rate of roughly 894 vehicles per week.

In the first quarter of fiscal 2015, the production rate has increased to more than 1,000 vehicles per week. For the second quarter, the company has guided for a figure of 12,500 vehicles produced, implying a 12% sequential growth in production. [2] The company expects the production rate and demand to increase in 2015, and guided for a delivery target of 55,000 vehicles in the calendar year, implying a growth rate of 70%. Additionally, the company reported that it had increased the number of stores and service centers by 40% in 2014, and the number of supercharger networks by 400%. The Silicon Valley automaker entered 2015 with 10,000 pre-orders for Model S and 20,000 pre-orders for Model X, which is due for launch later in the year.

To meet its 2015 targets, Tesla will have to increase its delivery rate by about 70% for each quarter compared to the rate this year. The planned introduction of the Model X by the middle of 2015 should help the company in attaining that target, but a lot of it will rely on how quickly it is able to reach the production rate target of 2,000. By our estimates, about 1,400 of the cars produced in the fourth quarter were only delivered in the first quarter of fiscal 2015, which meant that the lag time between production and delivery came down considerably for this quarter, as just under 80% of the cars produced this quarter were delivered. The company said that it expects the quarterly gap between vehicles produced and vehicles delivered to decline in the future quarters. This is important as some customers, especially in China, have expressed disappointment at the time lag between time of order and time of delivery. Company management stated that they have been making progress on the operational front — Tesla has switched from using trucks to rail for the deliveries of its vehicles to many parts of U.S. and Canada. This should reduce the time taken for deliveries while also saving on costs for the company.

See full analysis for Tesla Motors

Impressive Margin Expansion

The automaker’s gross margins improved to 28.2% on a non-GAAP basis on account of lower manufacturing costs and a richer sales mix. On a GAAP basis, gross margin stood at 27.7%. Tesla is targeting gross margins of 26% in 2015. [3] Auto companies, in their definition of cost of goods, usually include some fixed cost components like labor costs, plant operational expenses, etc. Therefore, as volumes increase, the additional revenues often result in improved gross margins.

However, Tesla also cautioned that administrative and capital expenses will rise significantly as the company scales up its customer support to keep pace with the growing global demand for its products. The company stated that it plans to accelerate the rate at which it opens stores and service centers. Additionally, the company plans to increase its Supercharger network count by 50% in 2015. Superchargers are charging stations installed by Tesla for its customers to charge their car batteries for free. [2]

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Notes:
  1. Tesla Shareholder Letter Q1 2015, Tesla Investor Relations []
  2. Ref: 1 [] [] []
  3. Ref: 1 []