What To Watch Out For When Tesla Reports Its Q4 Results

Tesla Motors (NYSE:TSLA) is scheduled to announce financial results for the fourth quarter of fiscal 2015 on February 10th. ^[1] In the first three quarters of this fiscal year, the Silicon Valley based auto maker delivered just over 33,000 vehicles, implying a pace that would leave it much short of its targeted figure of 55,000 deliveries in 2015. The company had revised its target to between 50,000 and 55,000 following a disappointing pace earlier in the year. However, given its third quarter performance, we were quite skeptical that the company would even be able to meet its revised targets. The company had delivered close to 11,600 vehicles and produced just over 13,000 units in the quarter. Those figures put deliveries at 33,180 and production at 37,058 units. To meet its full year targets, the company would have to increase deliveries by a minimum of 12%  (~13,000 new deliveries) and deliver all of its surplus production from earlier this year(~4,000). These targets looked quite ambitious even though the company had been rapidly improving its production rate and narrowing the time lag between delivery and production.

The company has announced that it delivered 17,400 units in the final three months of the fiscal year, which included 208 units of the new Model X SUV. ^[2] This is a nearly 50% increase in the delivery rate and a 75% improvement over the delivery rate in the fourth quarter of the previous fiscal year, so it bodes well for the company going forward. Below, we take a closer look at what we expect when the company announces its results.

We have a price estimate of $170 for Tesla, which is about 15% above the current market price.

Revenue

Tesla’s revenue mostly comes from the sales of its cars even though it also generates some money through other segments such as development services and sales of  electric power trains. The auto maker’s revenue mostly depends on the average unit price its vehicles can command, which depends on the mix of models (the 70, 70D, 85, 85D, 90 and 90D) sold. These models offer a choice between a different set of features, but additionally each model can be customized to varying degrees. Depending on what level of customization consumers choose, the purchase price can vary significantly. The ongoing trend has been towards lower transaction prices but it will be interesting to see how the company fared on this measure in the fourth quarter.

Additionally, the company engages in a lot of accounting practices that do not conform to generally accepted accounting principles(GAAP). One such measure is the adjustment to revenue. Under GAAP rules, revenue generated from leased cars cannot be recorded until the expenses related to the sale are also incurred.  Howver, through a banking structure with US Bank and Wells Fargo, Tesla is able to book the full value of its lease revenue up front. Since, GAAP rules do not allow this revenue to be reported, the difference between reported revenue and adjusted revenue can give us hints about the proportion of Tesla vehicles being sold through the lease program. In the previous quarter, the difference between the two figures (~$300 million) was nearly a quarter of the reported revenue.

Margins

Tesla is an unusual company in the sense that in addition to selling its cars, it also has to build the equivalent of gas stations for its cars. These are known as charging stations and the company is building them out at a rapid pace to support the volume of its cars in markets around the world. Additionally, the company is engaged in a range of additional initiatives.  These include building a huge factory, known as the Giga Factory, that will make the batteries for its future vehicles and quite possibly those of others.  It is also expanding its sales efforts across the globe, increasing production of the new Model X SUV, even as it works on the development of one and possibly two new vehicles.  Finally, it has developed a new energy storage product for domestic and commercial applications that could provide low cost energy storage for intermittent solar and wind-powered energy generation. All of these efforts require ongoing expenditure and the company’s reported cash flow can vary significantly based on developments in these areas. Meanwhile, reported gross margins are also expected to be lower in this quarter, owing to increased overhead expenses, development costs of the Model X and allocations to depreciation. Some of these costs will be offset by the Zero Emission Vehicle Credits the company generates.

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1. Tesla Motors Investor Relations [↩]
2. Tesla 2015 Deliveries Squeak Past 50,000, With 208 Model X During Q4, Green Car Reports, January 2016 [↩]