Tesla Q2 Earnings: Losses Less Than Expected, Deliveries and Production Rises, Annual Production Target Falls

As with its first quarter 2015 results from earlier this year, Californian electric automaker Tesla Motors [NASDAQ:TSLA] has posted increasing losses during the second quarter of this year, despite an increased quarterly revenue compared with the same period last year and an increase in vehicular production and deliveries.

Tesla says deliveries during Q2 were the highest ever.

Tesla says deliveries during Q2 were the highest ever.

The losses, smaller than analysts had predicted, were mostly caused by a continued high capital expenditure as the firm readies its soon-to-launch Tesla Model X crossover SUV for market, as well as sustained investment in its massive lithium-ion manufacturing and reprocessing gigafactory in Reno, Nevada.

Released after the close of markets yesterday evening, the Q2 Results show a company with increasing revenues compared with both the previous quarter and the previous year — but a company which is still burning through cash at breakneck speed.

The following report has been written using information provided by Tesla in its official Q2 Shareholders Letter, along with information disclosed by Tesla in its post-earnings Press Q&A Conference Call. 

Production, deliveries increase

In Tesla’s Q2 Shareholder Letter, Tesla CEO Elon Musk and CFO Deepak Ahuja detailed an increase in Tesla Model S production during Q2 2015, up to 12,807 vehicles from 11,160 vehicles during the previous quarter. That represents a 15 percent increase in production on Q1, and a 46 percent increase from production during Q2, 2014.

As a consequence, deliveries were up too at a record 11,532 vehicles . That’s less than the total number of vehicles produced, but it’s worth remembering that Tesla does not account for a vehicle being delivered until it is handed over to a customer. That means during Q2, 2015, some 1,275 vehicles were either in transit to new customers overseas, or were in U.S. inventory awaiting use in Tesla’s own press or courtesy car fleets.

As most Model S P85D pre orders have now been fulfilled, Tesla has shifted production towards the rest of its Model S family.

As most Model S P85D pre orders have now been fulfilled, Tesla has shifted production towards the rest of its Model S family.

We note however, that despite the increase in production, Tesla quietly lowered its annual production estimate for the year from 55,000 vehicles to somewhere between 50,000 and 55,000 vehicles. This is despite a predicted 11,500 Model S deliveries for Q3, and leads us to believe that Model X production may be slightly lower than first anticipated.

Average vehicle price falls

Interestingly however, despite the increased deliveries and production volume, Tesla’s overall average vehicle price during Q2, 2015 dropped. This, says Tesla was an expected decline caused in part by a production shift away from the Tesla Model S P85D towards some of Tesla’s lesser-priced vehicles.

This doesn’t mean however that overall demand is shifting. As with many automakers, Tesla has historically prioritized the production of its high-end vehicles over lower-priced, lower-specced cars. When it unveiled the Tesla Model S P85D for the first time in October last year, it received a predictable increase in orders for its new flagship car as existing customers and new customers alike placed their orders for the super-fast dual-motor sedan.

Now, with most of those initial orders fulfilled, Tesla has shifted its production to a more equal weighting.

Certified pre-owned popular

Launched during Q2 2015, Tesla says its certified pre-owned program is already proving extremely popular with both new and existing Tesla customers. Under the scheme, customers wanting to buy a new Tesla Model S are given the choice of trading in their old Tesla, with any outstanding equity going towards the purchase of their new car.

Tesla says certified pre-owned sales have realized more than $20 million in Q2

Tesla says certified pre-owned sales have realized more than $20 million in Q2

Their old car is then given a thorough evaluation and service before being offered for sale with a new four-year warranty at selected Tesla stores in the U.S.

To date, Tesla says it has recognized revenue of $20 million from the sale of such certified pre-owned vehicles, with many first-time Tesla customers who can’t afford a brand-new Model S coming to the brand thanks to the program.

Of those, Tesla notes pre-owned Model S owners represent a far wider demographic than its new customers, with a much younger demographic and broader geographic distribution across the U.S.

Referral program already popular

While technically not part of Tesla’s Q2 earnings since it launched just a week ago, Tesla CEO Elon Musk was happy to answer questions on Tesla’s new pilot referral program during a Q&A session with members of the press.

Explaining that Tesla’s referral program will initially cost Tesla more — not less — money, Musk said that the success of the referral program will influence Tesla’s future policies regarding Tesla Stores.

“Early indications are quite positive [for the referral program] but obviously for the time being there’s going to be some overlap… as we still have all of our stores and have the referral costs,” he continued.

“It’s to inform our long-term decision [about how many stores we have],” Musk explained. “A store should be thought of as a demand generation item. In order to understand should we do a large number of stores, a small number of stores, or somewhere in between, we need to see how this program goes.”

Expenditure rises, cash burn high

During Q2, Tesla’s overall cash and cash equivalents fell by $359 million over the previous quarter to $1.15 billion, driven in part by a massive $405 spend in capital expenditure. As we’ve explained in recent reports, Tesla has been busy of late readying not only its Gigafactory in Reno, Nevada for lithium-ion cell production from 2017 onwards, but also its Fremont facility ahead of the start of production of the Model X SUV this fall and increased all-wheel drive vehicular production.

Q2 also happened to be the quarter in which Tesla closed on a new $500 million credit-line from some of the world’s biggest financial institutions. Collateralized by what Tesla calls ‘selected inventory, equipment and accounts receivable,’ the line of credit comes with the agreement that it can be expanded subject to conditions to a total of $750 million if required.

The Gigafactory -- as well as Model X preparation -- continues to be responsible for high capital expenditure.

The Gigafactory — as well as Model X preparation — continues to be responsible for high capital expenditure.

During Q2, Tesla drew $50 million of the total $500 million for use. When asked in Tesla’s usual Q&A Conference Call by a member of the press about Tesla’s current and future cash flow, both Ahuja and Musk remained bullish about future projections.

“We only drew $50 million,” Ahuja stated. “We feel pretty confident all round.” With the Tesla Model X due to launch in the next few months at Tesla’s highly-popular Energy products due to launch next year, it’s clear that Tesla’s board sees the new line of credit in much the same way as Tesla’s loan obtained through the U.S. Department of Energy’s low-interest Advanced Technology Vehicle Manufacturing program: something that will help Tesla continue its expansion in the short term — and more importantly — repayable in a relatively short term once Tesla’s capital expenditure drops.

In the same call, Ahuja stated he expects Tesla to be cash-flow positive by the first quarter of 2016, an indication which backs our theories on Tesla’s credit line.

We should note however that when asked about future potential for raising equity another way — presumably through more share offerings — Musk  did acknowledge that Tesla’s board may consider it an option to help lower the risk associated with its recently-acquired current credit line.

Losses up, share price down

Despite the generally positive news and upbeat progress on the Tesla Model X, Tesla Gigafactory (due to start initial production next year) and Tesla Energy products, Tesla’s losses widened to $61 million ($0.48 per share) using the non-GAAP accounting methods that Tesla prefers to quote. That’s because the non-GAAP method allows Tesla to factor in revenue from cars being leased by customers in its overall outlook, while the GAAP method — the standard accounting method used by all U.S. firms — does not.

With the Tesla Powerwall products due to debut next year, Tesla's revenue stream should rise dramatically

With the Tesla Powerwall products due to debut next year, Tesla’s revenue stream should rise dramatically

Using GAAP accounting, Tesla’s losses during Q2 rose to $184 million ($1.45 per basic share.) Both figures include a $13.2 million gain, mostly due to the revaluation of some of Tesla’s foreign currency assets.

This widening loss, combined with the downward shift in Tesla’s production estimates, resulted in Tesla shares dropping by more than 5 percent to $247 in after-hours trading. At the time of writing, that price has risen slightly to a pre-market price of $252 per share.


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