Tesla Model S sales rapidly growing, while accountants turn profit into loss

Tesla
continued to increase Model S sales, significantly beating their
estimates, while accounting rules meant the company is showing a slight
loss.

Tesla
Motors is continuing its streak of sales growth, selling 5,150 Model
S’s during Q2 2013 up from 4,900 in Q1 2013. The company announced Q2
2013 financial results today, showing a slight loss for the quarter
thanks to a decline in auto sales revenue, a decrease in the cost of
those revenues, and an increase in operating costs. Their financial
position has never been stronger, sales volume is increasing, and this
week they made their first Model S delivery in Europe.

As the leading company in the push for electric cars, the success of
Tesla Motors is a harbinger of the success of that overall project.

Q2 total revenues fell to $405 million, on a GAAP basis, from $561
million in Q1. On a non-GAAP basis, revenues were $551. The cost of
revenue fell from $465 million in Q1 to $304 million in Q2, on a GAAP
basis. Operating expenses rose slightly from $101 million to $112
million. The final result is a loss of $30 million in Q2, down from an
$11 million profit during Q1.

If sales are strong and growing, why did the company have a decline
in auto sales revenue? The company’s sales volume grew by nearly 200
cars during the quarter, and the production rate also grew from about
400 a week to almost 500 a week. Some of the production increases went
into building loaner cars for use in the service centers. The decrease
in auto sales revenue was attributed to accounting rules related to
sales under the new lease-like financing plan. The accountants say that
even though Tesla receives full payment for the cars up-front, the
revenue cannot be recognized right away, because some has to be held
back in case the customer returns their car early. (see Tesla tweaks Model S financing, giving higher resale value, and lower payments)

The accounting issues are what’s behind the big difference between GAAP and non-GAAP revenue.

The delivery of 5,150 cars in Q2 2013 exceeded the expectation of
4,500 deliveries. This is thanks to increasing the production rate to
nearly 500 cars per week. The production rate is increasing thanks to
Tesla becoming less dumb about how to manufacture cars. During a
conference call, Elon Musk quipped that at the end of 2012 they were
pretty dumb about building cars, at the end of Q1 they were less dumb,
and now they are even less dumb, and they have a ways to go before
they’re smart about building cars.

The main issue he discussed was the supply chain difficulties, and
how it impacted both gross margin (and hence the profit picture) as well
as the manufacturing rate. For 90% of the parts going into the Model S
their parts suppliers have no problem ramping up parts production,
another 5% could ramp up with some difficult, another 4% could ramp up
with a lot of difficulty, but 1% of their suppliers simply cannot ramp
up production. They cannot sell a car that’s 99% complete, of course,
meaning their production rate is constrained by that 1% of parts
suppliers.

In the past Tesla had problems attracting the attention
of the Tier-1 parts suppliers, because it was believed Tesla would crash
and burn. Now that Tesla is not crashing, but succeeding in a big way,
the Tier-1 parts suppliers are paying attention. It means that Tesla
is working to redesign the car, iteratively, to replace hard-to-get
parts while preserving every existing feature. The effect is to not
only improve the production rate, but to decrease costs.

The company expects to continue growing sales of the Model S, and
perhaps see a 40,000 car/year sales rate by the end of 2014, just for
the Model S. The reasoning behind that is Model S demand in North
America is 20,000 cars/year or more, in Europe the demand should be
similar, and the company plans to expand sales to China and Japan by
that time, both of which should see significant sales.

In addition, beginning at the end of 2014 the Tesla Model X is slated
to begin production. Full scale production of the X won’t begin until
2015, but it should mean total production of perhaps 60,000 cars (or
more) during the 2015 fiscal year between the Model S and Model X. (see Tesla Model X updated design revealed at 2013 NAIAS in Detroit)

Another impact on the revenue picture was a decline in revenue from
selling ZEV Credits. ZEV credits are earned by companies that make zero
emissions vehicles, and companies that sell gasoline burning cars need
ZEV credits in order to continue selling cars in California and other
states. Tesla earns money by selling their ZEV credits to other
companies. The revenue fell, as expected, from $68 million in Q1 to $51
million in Q2. Tesla expects these revenues to continue falling.

Tesla expects sales to continue rising in Q3, with over 5,000 units
sold. While production in Q3 should increase even more, a number of
those cars will be in transit to Europe during the quarter and may not
get delivered until Q4. They still expect total sales to be at least
21,000 units.

For the rest of the year Tesla expects to remain non-GAAP profitable,
and see positive cash flow. They’ll increase capital expenditures that
includes spending to increase production capacity. As supply chain
bottle-necks are resolved, they’ll be able to ramp up production.

For Q1 results see Tesla Motors shows strong sales, big revenue growth for Q1 2013

Originally published at TorqueNews:
http://www.torquenews.com/1075/tesla-model-s-sales-rapidly-growing-while-accountants-turn-profit-loss

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About David Herron

David Herron is a writer and software engineer living in Silicon Valley. He primarily writes about electric vehicles, clean energy systems, climate change, peak oil and related issues. When not writing he indulges in software projects and is sometimes employed as a software engineer. David has written for sites like PlugInCars and TorqueNews, and worked for companies like Sun Microsystems and Yahoo.