Earnings Preview: What We Will Be Watching Out For In Tesla’s Earnings Report

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Tesla Motors (NYSE:TSLA) is scheduled to announce financial results for the second quarter of fiscal 2015 on August 5th. [1] The Silicon Valley based auto maker delivered 11,507 vehicles in the second quarter, after having delivered 10,045 vehicles in the first quarter, an increase of 14.5%. [2] The company is targeting 55,000 sales for the full year. In the first half of the year the company managed to deliver 22,552 vehicles which puts it on pace for about 45,000 deliveries for the full year. Additionally, it is scheduled to release the Model X SUV in the third quarter, which should help the company meet its sales target, especially as according to the company it entered 2015 with 20,000 pre-orders for the vehicle. Below, we take a look at the financial implications of these figures as well as outline the factors that we will be watching out for in the earnings call.

We have a price estimate of $170 for Tesla, which is about 35% below the current market price.

Production Rate

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Part of the reason Tesla missed its sales target of 35,000 last year was the trouble it had in transitioning production to a new assembly line in the third quarter of fiscal 2014. The auto maker is targeting a production rate of around 2,000 units per week, after having surpassed a production rate of 1,000 units in the previous quarter. ((Tesla Shareholder Letter Q1 2015, Tesla Investor Relations)) The company had guided for 12,500 units produced in the second quarter, so it will be interesting to see how close it came to that target. [3] Additionally, we will be looking out for the company’s expectations on what the company’s production rate was by the end of the quarter.

Lag Time Between Production and Delivery

According to our estimates, about 1400 of the cars produced in the fourth quarter of fiscal 2014 could only be delivered in the first quarter of fiscal 2015, meaning just under 80% of the cars produced in the quarter were delivered. The company has said that it expects the quarterly gap between vehicles produced and vehicles delivered to decline in the future quarters. This is significant as customers, especially in China, have expressed disappointment at the time lag between time of order and time of delivery. A number of orders for vehicles made in September and October 2013 were not fulfilled immediately as the company opened sales in China last year in April and that has affected sales in the region somewhat. The company also made some changes in its distribution process as it switched from trucks to rail as the preferred mode of transporting its vehicles for delivery in many parts of U.S. and Canada. This should reduce the time taken for deliveries while also saving on costs for the company.

Margins

Tesla offers a lot of customizable features in its Model S vehicles. Depending on the kind of features customers demand, the average unit price for a Tesla Model S can range between $70,000 and $110,000. Additionally, Tesla offers a leasing option through an arrangement with U.S. Bank. Depending on the mix of the vehicles sold directly or via lease, the company’s results and margins can vary. Additionally, the unit price on a vehicle sold can also influence the gross margins for the company.

The company also benefits from Zero Emission Vehicle Credits. In fact, Tesla’s battery swap program was launched in part to draw revenue from this source as the vehicle using Tesla Supercharger network stations do not qualify for ZEV credits under the new California state regulations. So, it will be interesting to see the level of uptake that initiative got during the quarter, especially as the company has been skeptical of the program and has hinted that it  might be ready to pull the plug on it. [4]

Model X and Power Wall

In the second half of the year, the company will have two new products on the market: the Model X SUV and the Tesla Powerwall, a battery storage option for homeowners and businesses. The company has said that it has significant pre-orders for the former in the past and we are eager for an update. In addition, we want to hear from the company about the kind of customers Tesla thinks the battery storage option will find as early adopters.

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Notes:
  1. Tesla Motors Investor Relations []
  2. Tesla Delivers 11,507 Vehicles in Q2 of 2015, Tesla IR, July 2015 []
  3. Ref: 3 []
  4. Musk: Tesla “unlikely” to pursue battery swapping stations, Road and Track, June 2015 []