Tesla Shareholder Briefing: 2013 Financial Performance and Strategic Expansion
Sources: Tesla Motors, Inc. – First Quarter 2013 Shareholder Letter
Tesla Motors, Inc. – Second Quarter 2013 Shareholder Letter
Tesla Motors, Inc. – Third Quarter 2013 Shareholder Letter
Tesla Motors, Inc. – Fourth Quarter & Full Year 2013 Shareholder Letter
Executive Summary
Tesla Motors experienced a pivotal year in 2013, achieving profitability for the first time in its ten-year history in Q1 2013 and maintaining non-GAAP profitability throughout the year. The company demonstrated strong growth in Model S production and deliveries, significantly expanding its gross margin despite a planned reduction in Zero Emission Vehicle (ZEV) credit revenue. Key strategic initiatives included the introduction of a popular financing program with a resale value guarantee, aggressive expansion of its global retail and service infrastructure, and a rapid build-out of the Supercharger network to enhance the Model S value proposition and enable long-distance travel. Looking forward to 2014, Tesla aimed for substantial growth in Model S deliveries, further gross margin improvements, and continued international expansion, particularly in Europe and Asia.
Key Themes and Facts
1. Financial Performance & Profitability
Achieved Profitability (Q1 2013): Tesla became GAAP profitable for the first time in Q1 2013, reporting a GAAP profit of $11 million and a non-GAAP profit of $15 million, even "without the benefit of a one-time accounting gain related to the DOE warrant." This marked a significant milestone for the company.
Sustained Non-GAAP Profitability: Tesla maintained non-GAAP net income for three consecutive quarters in 2013, reporting $26 million in Q2 and $16 million in Q3. While Q4 reported a GAAP net loss of $(16.264) million, it achieved a non-GAAP net income of $45.920 million.
Revenue Growth:Q1 2013: Record sales of $562 million, an 83% increase from Q4 2012.
Q2 2013: Non-GAAP revenues reached $551.951 million.
Q3 2013: Non-GAAP revenues were $603 million, up 9% from Q2. GAAP revenues were $431 million.
Q4 2013: Non-GAAP revenues hit $761.344 million, contributing to a full-year non-GAAP sales of almost $2.5 billion.
Gross Margin Expansion:Q1 2013: Gross margin doubled from Q4 2012 to 17%.
Q2 2013: Non-GAAP gross margin improved to 22%, up from 17% in Q1, despite a "significant reduction in ZEV credits." Non-GAAP automotive gross margin (excluding ZEV credits) improved by 8 percentage points.
Q3 2013: Non-GAAP automotive gross margin (excluding ZEV credits) rose to 21% from 14% last quarter.
Q4 2013: Exceeded targets, achieving 25.2% non-GAAP and 25.8% GAAP automotive gross margin.
ZEV Credit Impact: ZEV credit sales amounted to approximately $68 million (12% of revenues) in Q1 2013, but were expected to decline significantly in future quarters. The company reiterated its target of 25% gross margin in Q4 2013 "assuming zero ZEV credit revenue," emphasizing "improving fundamental automotive gross margin, excluding regulatory credits." The anticipated drop in ZEV credit revenue to $10 million in Q3 from $51 million in Q2 reflected a shift in sales mix to Europe and non-ZEV states.
Cash Position & Debt Repayment: Cash balance increased by $10 million in Q1 to $231 million, despite a $13 million DOE loan payment. In Q2, the cash balance grew to almost $750 million after a "$1 billion capital raise and subsequent repayment of the $440 million outstanding loan from the Department of Energy." The cash balance further increased to $796 million in Q3.
2. Model S Production & Deliveries
Increased Production Rates: In Q1 2013, Tesla consistently produced "400 or more Model S vehicles per week, for a total of over 5,000 during the quarter." Production was expected to reach "about 1,000 cars/week by end of [2014]."
Strong Delivery Numbers:Q1 2013: 4,900 vehicles delivered, exceeding internal targets.
Q2 2013: Record sales of 5,150 Model S vehicles in North America. Over 13,000 Model S vehicles were on North American roads, having logged nearly 60 million miles.
Q3 2013: Record 5,500 Model S deliveries. Over 19,000 Model S owners had driven their cars more than 100 million miles.
Q4 2013: Record deliveries of 6,892 vehicles.
Full-Year Deliveries (2013): Exceeded prior targets, raising guidance from 20,000 to "about 21,000 deliveries" for the full year 2013. The actual deliveries for 2013 reached 22,477 vehicles.
2014 Outlook: Expected to deliver "over 35,000 Model S vehicles in 2014, representing a 55+% increase over 2013."
3. Market Demand & Geographic Expansion
Strong Global Demand: Tesla reported "strong global demand for Model S" in Q1, with orders "greater than 20,000 per year worldwide." This increased to "greater than 20,000 per year worldwide." This increased to "greater than 20,000 per year worldwide." Orders were growing proportionate to deliveries, indicating word-of-mouth sales.
International Expansion:Europe: First Model S deliveries in Europe began in Q2 2013 (Norway, Switzerland, Netherlands). Orders from Europe grew every month since February. The European manufacturing facility in Tilburg, Netherlands, expanded to enable vehicle assembly and serve as a parts warehouse and service center.
Asia: Plans to begin taking reservations in China in Q3 2013, with first deliveries anticipated in Q1 2014.
Right-Hand Drive Markets: Expansion into markets like the United Kingdom, Japan, Hong Kong, and Australia was planned to occur gradually starting spring 2014.
Demand Projections: If demand in North America and Europe was matched by Asia, annualized Model S sales "could exceed 40,000 units per year by late 2014."
4. Product Enhancements & Customer Experience
Financing Program & Resale Value Guarantee (RVG): Introduced a financing product in Q1 2013 allowing "no money down" and effective monthly costs as low as $580 (or $350 for business use). Tesla also "guarantees a resale price in three years that is the highest of any premium sedan brand made in volume." This program proved popular, with "over 30% of vehicles delivered in Q2 took advantage of our financing program." In Q4, 1,667 cars were delivered with RVG, and Model S was tracking to an "outstanding residual value."
Product Variants & Updates:Q1 2013: Introduced a lower-cost 60 kWh battery pack (208 miles EPA range) and a Performance Plus option for 85 kWh cars (improved handling, 10-mile range extension). Started delivery of cars with standard coil suspension. Introduced a new red paint color. Remotely pushed software updates for features like voice activation.
Q2 2013: Announced new options like a sub-zero weather package, parking sensors, upgraded leather interior, new wheel options, and a yacht-style floor center console. Xenon headlights and HD backup camera became standard. Unbundled the performance package for more customization.
Safety: Model S was awarded a 5-star safety rating by NHTSA in every subcategory in Q3 2013.
5. Infrastructure Expansion
Retail & Service Network:Q1 2013: Total network expanded to 41 locations (34 stores/galleries). Plan to add approximately 30 service locations and 15 more stores/galleries in 2013 (half in Europe/Asia). Eliminated the reservation process for North American customers.
Q2 2013: Opened seven new retail locations for a total of 41 worldwide (30 N. America, 8 Europe, 3 Asia). Planned to accelerate service center openings over stores, noting that "simply increasing our service center coverage is sufficient to drive substantial Model S sales."
Q3 2013: Combined global retail and service locations expanded by almost 20% since Q2. Began offering Model S as loaner cars with valet service.
Supercharger Network:Q3 2013: Supercharging became a significant value proposition, with 90% of customers opting for the capability. 31 stations open in North America, enabling free long-distance driving on the entire West Coast. Expected cross-country US coverage by year-end 2013.
European Supercharger Expansion: Six stations opened in Norway in August 2013. Plans for faster 135 kW Superchargers in Germany by March 2014, with complete coverage by mid-2014. By end of 2014, expected widespread coverage in Netherlands, Switzerland, Belgium, Austria, Denmark, Luxembourg, England, Wales, and Sweden.
6. Research & Development / Supply Chain
R&D Investment: R&D expenses were $44 million (non-GAAP) and $52 million (GAAP) in Q2. In Q3, they were $56 million (non-GAAP) and $67 million (GAAP), increasing due to Model X development and international Model S adaptation. R&D expenses were expected to increase by about 25% in Q4 2013 as product development accelerated.
Supplier Relationships: Expanded 2011 supplier agreement with Panasonic to supply "a minimum of 1.8 billion [automotive-grade lithium-ion battery] cells over four years, more than three times our previous agreement." Panasonic capacity ramp-up and addressing "supplier bottlenecks" were critical to increasing production to 1,000 cars/week by end of 2014. Battery cell supply was expected to constrain production in H1 2014 but improve significantly in H2 2014.
Key Takeaways
Transformative Year: 2013 marked a turning point for Tesla, demonstrating its ability to achieve and sustain profitability, scale production, and expand globally.
Model S Success: The Model S was the driving force behind the company's financial and operational achievements, with demand consistently outstripping supply.
Strategic Vision: Tesla's focus on an integrated approach – combining innovative product design, compelling financing options, a rapidly expanding Supercharger network, and a growing direct sales and service infrastructure – was crucial to its growth.
Future Growth: The company set aggressive targets for 2014, emphasizing continued production ramp-up, international market penetration, and further gross margin improvements, aiming for 28% non-GAAP automotive gross margin by Q4 2014, excluding ZEV credits.
Transparency with Non-GAAP: Tesla increasingly relied on non-GAAP financial reporting, excluding non-cash items and lease accounting impacts, believing it provided a clearer picture of underlying cash flow and operational performance.
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