• Record quarterly deliveries of 11,532 vehicles
• Produced a record 12,807 vehicles, exceeding plan while improving efficiency
• Introduced new Model S variants that improve range, performance and value
• Model X remains on track for start of deliveries in late Q3
• Tesla Energy deliveries set to ramp in Q4
August 5, 2015
Dear Fellow Shareholders:
Q2 marked the third anniversary of Model S. In this short period, Model S has redefined the standards for automotive safety, performance, efficiency, upgradeability and innovation. Along the way it has earned many accolades including Motor Trend Car of the Year and Best Overall Car by Consumer Reports for two years in a row. Model S owners have driven in excess of one billion miles in more than 30 countries and can enjoy free long distance road trips using our network of Supercharger stations. Now in the first half of 2015, Model S has become the best-selling electric vehicle in the U.S.
The growing success of Model S has positioned us to offer even more customer choices and accelerate the advent of sustainable transportation. The next few years at Tesla will be transformational from a product perspective, starting with significant new Autopilot features and the launch of Model X later this quarter. In Q4, we will ramp production and delivery of Tesla Energy products, and in Q1 2016 we plan to reveal the Model 3 design, with first deliveries expected in late 2017.
Winning Converts to Electric Drive
Globally, Model S orders increased following the launch of 85D and 70D. In the U.S., Q2 Model S orders grew almost 30% year-over-year. In Europe, Q2 Model S orders grew more than 50% year-over-year, despite two price increases in the past six months. Finally in Asia, Q2 Model S orders nearly doubled from last quarter, helped by the initial success of our revised China strategy. Given this improvement, we are increasing our investments in China by planning to grow this year from one to five retail stores located in high foot traffic areas.
In July, we announced product enhancements to extend the appeal of Model S even further. For those wanting a more affordable car, we introduced Model S 70 with a starting price of only $70,000 before incentives and fuel savings that typically take the starting net price down to about $50,000 in the U.S. This car has all the content of our popular 70D, but costs $5,000 less as it comes with a single rear wheel drive motor. A new 90kWh battery pack option increases the range of our 85D by 6%, enabling almost 300 miles of range at 65 mph. Finally, for performance enthusiasts, the new Ludicrous mode dramatically (and ludicrously) improves 0 to 60 mph acceleration to 2.8 seconds. Existing P85D customers also have the option of upgrading to Ludicrous mode – because sometimes Insane mode is just not enough.
Our new referral and pre-owned car programs expose more people to the benefits of driving electric vehicles. The Tesla referral program is an experiment we recently introduced to see if there is a way to return the cost of our sales to our customers. If a Tesla owner refers a friend to purchase a new Tesla, the friend will receive $1,000 off the purchase price of their Tesla, and the owner making the referral will receive a $1,000 credit to be used for Tesla service, accessories or another Tesla vehicle purchase. We will see how this works and there are certain limits, but the cost of this program reflects our typical customer acquisition costs, so it makes sense for everyone.
New Model S 70 The Next Billion Miles Test Drive Tour We launched our pre-owned program in North America in Q2 and recognized revenue of $20 million from the sale of such cars. These cars are trade-ins received from customers who upgraded to the latest Model S vehicles. Pre-owned sales activities are driven by the listing of available inventory on our website, and thus have folded smoothly into our existing sales process. Our pre-owned program benefits both the original owner and the buyer of the used Model S. Model S is holding value very well, as confirmed by a recent study by the North American Dealer Association, which showed that Model S retains the highest residual value of any premium sedan in North America. A preowned Model S retains all its performance, upgradeability and lower operating costs, plus it comes with a new 4-year warranty that starts on the re-purchase date, making it a compelling value for those wanting a more affordable Model S. In fact, a pre-owned Model S appears to have a wider buyer base with a younger demographic and broader geographic distribution across the U.S.
A Driving Experience That Improves Over Time
While many independent sources and our customers already consider Model S to be the world’s best car, we are committed to making Tesla cars and the related ownership experience even better over time. This starts with software updates, which improve the vehicle itself, and also extends to the ease of charging and service. Over the air software updates continue to enhance the vehicle even after delivery. For example, these updates will significantly increase Autopilot functionality in properly equipped cars later this year by adding new features such as lane keeping with automatic steering, parallel parking, as well as side collision warning and improved traffic aware cruise control.
Almost all Model S owners benefit from the growth and improvement of our Supercharger and service networks, which enhance the broader Tesla ownership experience. We now have 487 Supercharger stations globally and have recently accelerated the pace of deployments such that one new Supercharger station is opening nearly every 24 hours. With the growth of our network, it is easier than ever for our customers to find Superchargers. For example, drivers in California are on average never more than 42 miles away from a Supercharger, while drivers in Germany are on average never more than 33 miles away from a Supercharger. We are also retrofitting sites with our new liquid-cooled charging cable to allow even faster Supercharging capabilities that we plan to introduce over time. On the service side, we are building more locations to make servicing vehicles even more convenient for our growing customer base. We are on track to grow the square footage of our service centers by more than 60% in 2015 relative to the end of 2014.
Adding New Products & Production Capacity
In Q2, we produced 12,807 vehicles, exceeding our target of 12,500 vehicles. This represents a 15% sequential increase in production and a 46% increase from a year ago.
As we prepare to launch Model X in September, we are building more validation vehicles, executing final engineering and testing work, enabling our new manufacturing equipment and finalizing arrangements with our suppliers. We have been producing release candidate Model X bodies in our new body shop equipped with more than 500 robots as we fine-tune and validate our production processes.
We just concluded a planned one-week Fremont factory shutdown and made changes in stamping, Model S body center, drive unit production, battery module and pack production and general assembly to allow for an elevated level of production and efficiency. Since Model S and Model X will both share the general assembly line, we used the week to validate the newly installed equipment by completely building several Model X test vehicles. This month, we plan to start painting Model X in our new paint shop well before transitioning Model S painting there, to help de-risk this portion of our overall production ramp.
New S/X Body Line Model S – Refer A Friend
Q2 Results
Total non-GAAP revenue was $1.20 billion for the quarter, up nearly 40% from a year ago, and up 8.5% sequentially, while GAAP revenue was $955 million. Total Q2 gross margin was 23.4% on a non-GAAP basis and 22.3% on a GAAP basis. Our income statement reflects new classifications of revenues and costs of revenues. For details on these classifications and our GAAP and non-GAAP financial information, please see the accompanying tables and footnotes.
Automotive revenue was $1.12 billion on a non-GAAP basis, and comprises GAAP Automotive revenue of $878 million plus a net increase of $242 million in deferred revenue and other long-term liabilities as a result of lease accounting. We delivered 11,532 Model S vehicles in Q2, in line with our July announcement of approximately 11,507 deliveries. As expected, the average selling price of Model S declined during the quarter due to a product mix shift away from P85D. Q2 Automotive revenue included $27 million of total regulatory credit revenue, of which $14 million came from the sale of ZEV credits. In Q2, Tesla directly leased 631 cars to customers, worth $63 million of aggregate transaction value. To use our capital more efficiently, we have increased bank partner leasing over the last quarter, thereby reducing the percentage of vehicles directly leased by Tesla.
Q2 Automotive gross margin excluding ZEV credits was 23.9% on a non-GAAP basis and 22.9% on a GAAP basis. Non-GAAP gross margin was about 100 basis points below guidance, primarily due to higher manufacturing and part costs related to the ramp of our small drive unit line and the deferral of revenue recognition for certain Autopilot features which are now scheduled for release later this year.
Q2 Services and other revenue was $77 million, up 85% from a year ago. This includes about $32 million of powertrain sales to Daimler, $23 million of service revenue and $20 million of pre-owned Model S sales. Q2 Services and other gross margin was 2.2%, compared to negative 3.2% last quarter. The 540 basis points of sequential improvement was driven by production efficiencies related to powertrain sales and improved margin from services and merchandise sales.
We improved our operational efficiency for the second quarter in a row, achieving record deliveries and developing new products while managing to grow operating expenses at a slower rate than the growth in our non-GAAP revenue. Our operating expenses in Q2 were $345 million on a non-GAAP basis, up 6.5% from Q1. GAAP basis operating expenses were $384 million and include non-cash stock based compensation.
Our Q2 non-GAAP net loss was $61 million, or a loss of $0.48 per basic share based on 126.7 million basic shares, while our Q2 GAAP net loss was $184 million or a loss of $1.45 per basic share. Both figures include a $13.2 million gain, or $0.10 per basic share, related to mostly unrealized gains from revaluation of our foreign currency holdings.
Cash and cash equivalents were $1.15 billion at the end of the quarter, down $359 million sequentially, as capital expenditures were $405 million in the quarter. Capital expenditures were primarily for the capacity expansion and tooling associated with Model X and all-wheel drive vehicles, as well as for the construction of the Gigafactory. We have historically been frugal with our capital spending, and our most recent capital spend per unit of incremental capacity is significantly more efficient than even our prior performance.
In Q2, we closed a $500 million asset based credit line that can be expanded to $750 million. This line is collateralized by selected inventory, equipment and accounts receivable, and is specifically designed to provide us both increased liquidity as we ramp Model X deliveries and operating flexibility to expand all aspects of our business. We drew $50 million under this line in Q2.
Also during the quarter, we expanded our warehouse line for our direct leasing program from $100 million to $150 million. We drew down another net $37 million during the quarter, for a cumulative draw of $114 million at quarter end.
Adjusting for the impact of our leasing and financing business, our core business was breakeven on cash generated in Q2 prior to capital expenditures, despite a planned $79 million increase in inventory mostly from customer-configured cars that were in transit for deliveries in Q3. Our GAAP cash outflow from operations during the quarter was $160 million, but this does not include $119 million in cash inflows from vehicle sales to our bank leasing partners. Furthermore, $44 million of cash was consumed by our direct leasing business funded by Tesla, but is included in cash flow from operations.
Outlook
In Q3, we expect to produce just over 12,000 vehicles, representing a more than 60% increase from a year ago, and deliver approximately the same number of vehicles as in Q2, despite having one week of planned shutdown in Q3. This includes a small number of Model X deliveries. We are now targeting deliveries of between 50,000 and 55,000 Model S and Model X cars in 2015. While our equipment installation and final testing of Model X is going well, there are many dependencies that could influence our Q4 production and deliveries. We are still testing the ability of many suppliers to deliver high quality production parts in quantities sufficient to meet our planned production ramp. Since production ramps rapidly late in Q4, a one-week push out of this ramp due to an issue at even a single supplier could reduce Model X production by approximately 800 units for the quarter. Furthermore, since Model S and Model X are produced on the same general assembly line, Model X production challenges could slow Model S production. Simply put, in a choice between a great product or hitting quarterly numbers, we will take the former. To build longterm value, our first priority always has been, and still is, to deliver great cars.
In addition, the timing of the Model X production ramp and high total deliveries in Q4 create operational challenges for our delivery organization towards the end of the year. This adds complexity in predicting our delivery rate with precision.
Looking ahead to next year, we are highly confident of a steady state production and demand of 1,600 to 1,800 vehicles per week combined for Model S and Model X.
In Q3, we expect to directly lease about the same percentage of cars that we did in Q2. As always, we will use lease accounting for these cars even in our non-GAAP financial results, as such treatment is consistent with the cash collected on these transactions. We expect to sell about $45 million of regulatory credits in Q3, including $30 million from ZEV credit sales.
We expect the Model S average selling price to decline by more than 100 basis points in Q3 as the dollar has continued to strengthen against currencies in our key markets and our delivery mix shifts towards our lower priced 70 and 70D models. We plan to partially offset this pressure with lower production costs, and as a result we expect non-GAAP automotive gross margin, excluding ZEV credits, to be just slightly below the Q2 level.
We are on track to start production of Tesla Energy products this quarter at our Fremont factory, with a plan to ramp up production in Q4. As a result, we expect Q3 services and other revenue to grow modestly and gross margin to be comparable to Q2. We expect to further expand Tesla Energy battery module and pack production at the Gigafactory in Q1 2016 on a more automated line, where construction remains on plan.
Our operating leverage is expected to improve, with revenue and gross profit both growing at a faster rate than operating expenses during the next several quarters. Operating expenses should grow roughly 5-10% sequentially in Q3, and 45-50% for the full year as we invest in product development, including Model 3, and expand our sales capability.
We still plan to invest about $1.5 billion in capital expenditures this year as we expand production capacity, purchase Model X tooling, construct the Gigafactory, and expand our stores, service centers and Supercharger network.
In the coming months we are growing from a single product to a multi-product company. This is a milestone in the maturation of Tesla. We invite everyone to join us in getting to Tesla’s next billion miles and making Tesla Energy a part of our daily lives.
Elon Musk, Chairman & CEO
Deepak Ahuja, Chief Financial Officer
Webcast Information Tesla will provide a live webcast of its second quarter 2015 financial results conference call beginning at 2:30 p.m. PT on August 5, 2015, at ir.teslamotors.com. This webcast will also be available for replay for approximately one year thereafter. Forward-Looking Statements Certain statements in this shareholder letter, including statements in “Outlook” section; statements relating to the progress Tesla is making with respect to product development, including future Autopilot features and functionality and Model X development, supplier readiness, delivery and launch plans; statements regarding growth in the number of Tesla store, service center and Supercharger locations; statements relating to the production and delivery timing of Tesla Energy products, as well as future products such as Model 3; growth in demand and orders for Tesla vehicles and the catalysts for that growth; the ability to achieve vehicle demand, volume, production, delivery, revenue, leasing, average sales price, gross margin, spending, capital expenditure and profitability targets; productivity improvements and capacity expansion plans; and Tesla Gigafactory timing, plans and output expectations, including those related to battery module and pack production, are “forward-looking statements” that are subject to risks and uncertainties. These forward-looking statements are based on management’s current expectations, and as a result of certain risks and uncertainties, actual results may differ materially from those projected. The following important factors, without limitation, could cause actual results to differ materially from those in the forward-looking statements: the risk of delays in the manufacture, production and delivery of Model S and Model X vehicles, and production and delivery of Model 3 vehicles; Tesla’s future success depends on its ability to design and achieve market acceptance of Model S and its variants, as well as new vehicle models, specifically Model X and Model 3; the ability of suppliers to meet quality and part delivery expectations at increasing volumes; adverse foreign exchange movements; any failures by Tesla vehicles to perform as expected or if product recalls occur; Tesla’s ability to continue to reduce or control manufacturing and other costs; consumers’ willingness to adopt electric vehicles; competition in the automotive market generally and the alternative fuel vehicle market in particular; Tesla’s ability to establish, maintain and strengthen the Tesla brand; Tesla’s ability to manage future growth effectively as we rapidly grow, especially internationally; the unavailability, reduction or elimination of government and economic incentives for electric vehicles; Tesla’s ability to establish, maintain and strengthen its relationships with strategic partners such as Panasonic; potential difficulties in finalizing, performing and realizing potential benefits under definitive agreements for the Tesla Gigafactory site, obtaining permits and incentives, negotiating terms with technology, materials and other partners for Gigafactory, and maintaining Gigafactory implementation schedules, output and costs estimates; and Tesla’s ability to execute on its retail strategy and for new store, service center and Tesla Supercharger openings. More information on potential factors that could affect our financial results is included from time to time in our Securities and Exchange Commission filings and reports, including the risks identified under the section captioned “Risk Factors” in our quarterly report on Form 10-Q filed with the SEC on May 11, 2015. Tesla disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events, or otherwise. Investor Relations Contact: Press Contact: Jeff Evanson Khobi Brooklyn Investor Relations – Tesla Communications – Tesla ir@teslamotors.com press@teslamotors.com Classification of Revenues and Costs of Revenues Our income statement reflects the classifications of revenues and costs of revenues to segregate our new vehicle business from our other business activities. “Automotive” revenue and related costs now reflect activities related to the sale or lease of new vehicles including regulatory credits, data connectivity, Autopilot functionality and Supercharging. “Services and other” revenues and related costs include activities such as powertrain sales, service revenue, Tesla Energy and pre-owned Tesla vehicle sales. Tesla Motors, Inc. Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share data) Revenues Automotive (1A) Services and other Total revenues Cost of revenues Automotive (1B) Services and other Total cost of revenues (2) Gross profit Operating expenses Research and development (2) Selling, general and administrative (2) Total operating expenses Loss from operations Interest income Interest expense Other income (expense), net Loss before income taxes Provision for income taxes Net loss Notes: (1) (A) Net increase in deferred revenue and other long-term liabilities as a result of lease accounting and therefore not recognized in automotive sales (B) Net increase in operating lease vehicles as a result of lease accounting and therefore not recognized in automotive cost of sales The table above excludes assumed net warranty and stock based compensation amounts included in non-GAAP cost of sales. (2) Includes stock-based compensation expense of the following for the periods presented: Cost of revenues Research and development Selling, general and administrative Total stock-based compensation expense Due to the application of lease accounting for Model S vehicles with the resale value guarantee or similar buy-back terms, the following is supplemental information for the periods presented: Net loss per common share, basic and diluted Shares used in per share calculation, basic and diluted June 30, 2015 Mar 31, 2015 June 30, 2014 June 30, 2015 June 30, 2014
