California automaker Tesla Motors [NASDAQ:TSLA] might have just recorded the biggest quarterly losses of its short history, but its rapidly growing grasp of the global luxury car segment, combined with the success of its Tesla Energy products and soon-to-complete Gigafactory means that it should be turning some form of profit by the end of this year.
That’s according to Tesla Motors CEO Elon Musk and Chief Financial Officer Jason Wheeler in Tesla’s Fourth Quarter & Full Year 2015 Update shareholder letter published just moments ago on Tesla’s investor website. It’s a document which has already sent Tesla shares bouncing around in after-hours to a high of $160 per share — more than 11 percent higher than they were at the close of trading this afternoon — before then falling abruptly back down to only bounce back up again.
Following Tesla’s usual style, the letter lays out some of the firm’s key moments of the last quarter as well as making the usual forward-looking predictions for the company that wants to revolutionize the way we travel and the way we use energy. It tells of a 76 percent increase in global Model S deliveries year on year in Q4 2015, a massive 51 percent growth in the rapidly-shrinking U.S. large luxury car segment, and a record-breaking 14,037 new vehicles produced during the final quarter of 2015, as well as a positive cash flow from core operations for the first time all year.
That, says Tesla, means that it will be able to expand its delivery growth even faster in 2016 than it did in 2015, invest a total of $1.5 billion in its Gigafactory in Reno Nevada, increase customer support infrastructure, and turn a profit by the end of the year.
The following report has been written using information provided by Tesla in its official Q4 2015 Shareholders Letter, which you can read on Tesla’s shareholder site.
Production increases, as does demand
Following Tesla’s continued trend of production increases quarter by quarter, Tesla said it managed to produce a total of 14,037 new electric cars during the quarter, a small increase on the 13,091 cars produced during Q3, 2015. So far, to date, Tesla has produced more than 107,000 electric cars since the Tesla Model S first rolled off the production line in 2012.
Overall for the year, Tesla said it increased global deliveries by 76 percent over 2014, with Model S market share growing in every single market where the luxury plug-in car is sold. A total of 17,478 electric cars were delivered during the quarter, meaning that Tesla delivered more cars than it actually made, something that will have helped dramatically reduce Tesla’s previously-expanding inventory to more acceptable industry-normative levels.
Of the cars delivered, 881 Tesla cars were directly leased to Tesla customers, representing an aggregate transaction value of $85 million. Given the relatively low number of Model X deliveries during the quarter and the majority of high-end Tesla Model S P90D orders now being fulfilled, Tesla’s average transaction price fell by around two percent over Q3 2015.
While Tesla admits it had to slow production of the Model X during early January to maintain “our quality production standards,” the company says it is now ready to increase production as various quality control practices are falling into line. Sometime in Q2 ,it predicts weekly production output of the Model X will have risen to around 1,000 vehicles per week. During Q4, just 206 Tesla Model X SUVs were delivered.
On the subject of manufacturing and quality control, Tesla is careful to note that the number of repairs it is now carrying out on vehicles under one year of age is falling dramatically as overall quality control and reliability improves. In 2015, Tesla says the cost of first-year repair claims was around half of the level of cars produced in 2014 and one-quarter the level of repairs for cars produced in 2012, an important factor to note in a company which has previously come under fire from Consumer Reports for the number of failures experienced by Tesla customers.
Alongside the increased production and deliveries comes perhaps some of Tesla’s best news for the year: while demand for many big-name luxury full-size cars is falling in key markets like the U.S., demand for Tesla Model S is actually increasing. Last year, while U.S. demand for large luxury cars increased by a tiny 0.80 percent, every single large luxury brand except Tesla experienced a dramatic drop in demand. Many — such as the Jaguar XJ, Lexus LS, Mercedes-Benz S-Class and Audi A8 — experienced double-digit percentile drops. Tesla’s Model S experienced a 51.01 percent surge.
Autopilot a big hit
In Q3 2015 Tesla introduced its Autopilot semi-autonomous vehicle technology to some 60,000 Tesla Model S electric cars. During Q4, it refined that technology to add new features and improve vehicle intelligence, cumulating with the release of Tesla’s 7.1 system update earlier this quarter. While Tesla admits its Autopilot technology still has some way to go before it can operate in every road, it reports that Tesla’s Autopilot software is now learning at a rate of over one million real-world miles per day. Contrast this with Google, whose vehicles are amassing 1.5-million (virtual) miles per day in specialist test chambers, and we think you’ll agree that this is a phenomenal achievement.
Tesla Energy debuts
Another aspect of Tesla’s business which is now growing at an impressive rate is its Tesla Energy range of static energy storage products. While Tesla has yet to benefit from the high-volume mass-production benefits of lithium-ion cells at its Gigafactory in Reno, Nevada, it moved Powerwall production from its Fremont facility to the Gigafactory site in Q4. Describing it as transition which “did take slightly longer than we had expected,” Tesla confirmed that Gigafactory-built Tesla Powerwalls are now operational in the U.S., Australia and Germany.
Additionally, and perhaps most importantly for Tesla, sales lead for Tesla Energy products have already exceeded vehicle sales leads, meaning that Tesla’s market share and potential revenue has been dramatically increased as a consequence of this new aspect to Tesla’s business.
Model 3 on track for March 31 unveiling, with deliveries due late 2017
Of its highly-anticipated long-range, mass-market Tesla Model 3 electric car, Tesla says we’ll get to see it for the first time in just over a month’s time on March 31, with production due to begin by the end of 2017. Assuming Tesla can keep to this schedule — and we note it has yet to keep to any of its previous automotive production schedules — this means the Model 3 will launch one year after the 2017 Chevrolet Bolt EV, GM’s first 200+ mile electric car. This not only gives the Chevy Bolt EV a year-long head-start but also means that Tesla won’t really be able to benefit from the increased revenue expected from the $30,000 plug-in for nearly another two years.
But in talking with reporters in a post earnings press call, Musk admitted that Tesla has learned some significant lessons on vehicle production as a consequence of the challenges it faced with model X. Admitting that Tesla has “perhaps tried to do too many things” with the Model X (despite it being “the best car in the world”), Musk hinted that Model 3 production would be focused a little more on meeting production targets and making Model 3 a little less outlandish in its feature set.
Revenue, Losses up
Despite the generally positive news, Tesla’s total losses yet again widened during Q4 2015. While Tesla Q4 non-GAAP revenue — the accounting method which Tesla prefers since takes into account revenue from leased vehicles — was up to $1.75 billion during Q4, Tesla’s expenses during the quarter were still extremely high. Alongside the capital expenditure associated with Model X refinement and production, Gigafactory investment, expansion of Tesla service, sales and supercharger locations and research and development into the Model 3, Tesla said other losses occurred during Q4 were related to a lower-than-planned Model X production volume, as well as the costs associated with removing obsolete production and painting equipment at its Fremont facility.
In total, Tesla spent $497 million in GAAP operating expenses, translating to a non-GAAP operating expense of $429 million, a figure which is higher than Tesla had expected and up 18 percent from the same figure in Q3 2015. Both figures included $50 million on non-cash stock-based compensation. In terms of Capital expenditure, Tesla spent $411 million on Capital expenditures during Q4, totalling a massive $1.6 billion during the year.
For the quarter, Tesla’s net losses increased to $114 million using the non-GAAP method, equivalent to $0.87 for each of the 131 million basic shares issued by Tesla to date. GAAP net losses were $320 million for the quarter, equivalent to $2.44 per share. This included a $17 million loss ($0.13 per basic share) related to losses occurring from unfavorable foreign exchange rate fluctuations.
For the full year, Tesla’s net loss using non-GAAP was $2.30 per share based on 128 million basic shares, or $6.94 per share using the GAAP basis.
Looking forward, Tesla said that it hopes to use its leasing partners as the primary funding source for indirect leasing activities during 2016, and predicts that it will draw down on its asset-based credit line to support some of its operations. At the end of 2015, Tesla said it used one asset-based financing credit line to pay off a more expensive third-party warehouse loan facility, resulting in a total of $135 million drawn against its credit facility at the end of the year. To ensure a continued cash flow, Tesla said it has now extended its credit facility to $1 billion due to meeting the required targets set by its credit line providers in its previous asset-based credit line agreements.
Profitability just around the corner
With widening losses, it’s hard to imagine that Tesla could possibly turn itself a profit within the next few quarters. Yet that’s exactly what Tesla predicts it will do in 2016, achieving non-GAAP profitability for the year-ending December 2016. Funding around $1.5 billion in capital expenditures from its own funds (without accessing any outside capital) Tesla says it will invest heavily to support the start of lithium-ion cell production at the Gigafactory, begin fitting its production facility with the machinery needed to bring Model 3 to production, open 80 new retail and service centres, and switch on an additional 300 Supercharger sites.
Following its current production pattern, Tesla also says it will almost double electric vehicle deliveries and production for 2016, producing somewhere between 80,000 and 90,000 Tesla Model S and Tesla Model X vehicles before the end of the year.
That increased production, it predicts, combined with increased revenue from vehicle sales and Tesla Energy products, reduced production costs and streamlined processes, means that it will reach reach GAAP profitability some time in Q4 2016.
In other words, in just a year’s time, Tesla says it will not only be profitable, but have nearly double the number of cars on the road that it does today.
It’s a tall order, but as we’ve said before, Tesla is one of a handful of companies which has the drive to make it happen. We’ll be watching carefully to see if it succeeds.
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