Tesla Third Quarter 2016 Update
GAAP net income of $22 million and positive free cash flow of $176 million
Record vehicle production, deliveries, and revenue
GAAP gross profit per car increased significantly from Q2 to Q3
Long-term debt reduced and liquidity increased to support future growth
Every new Tesla produced now comes with hardware for self-driving
Dramatic improvement in Model X reliability
Model 3 on plan for volume deliveries in second half of 2017
The Tesla third quarter results reflect strong company-wide execution in many areas. Furthermore, we expect this to continue into Q4
and project positive GAAP net income (excluding non-cash stock-based compensation) despite ZEV credit sales in Q4 likely being
negligible. We set new records for vehicle production, deliveries and revenue, which led to GAAP profitability and positive free cash
flow (cash flows from operations less capital expenditures). At the same time, GAAP total automotive gross margin and gross profit per
car increased substantially.
New product launches, increased store efficiency and new store openings drove year-on-year order growth in Q3, while self-driving
hardware and other product enhancements position Tesla for additional market share gains. Our energy storage products are gaining
increased market acceptance, firmly establishing Tesla as a leader in energy storage solutions, and surpassing our competitors in
the breadth and scope of our offerings across residential, commercial, and utility-scale storage markets.
At the same time,we continue to lay the foundation for future growth. Gigafactory construction and Model 3 development both remain
on plan to support volume Model 3 production and deliveries in the second half of 2017. Meanwhile, our efforts to transform the solar
industry will be demonstrated at our joint product introduction with SolarCity on October 28th
Continuous Product Innovation
Last week, we announced that all newly produced Tesla vehicles have the hardware needed for full self-driving capability. This same
capability will also be built into every Model 3. Eight surround cameras provide 360 degree visibility around the car at up to 250 meters
of range. Twelve enhanced ultrasonic sensors complement this vision, allowing for detection of both hard and soft objects at nearly
twice the distance of the prior system,and computing power has been increased by 40-fold over our previous generation hardware.
Fleet learning means that all Tesla vehicles with Autopilot will naturally get better over time. Additionally, new safety and convenience
features will be rolled out via over-the-air software updates. Tesla vehicles have already been driven over 3 billion miles,including
more than 1.3 billion miles logged by vehicles with Autopilot hardware.
In August, we announced the Model S P100D with Ludicrous mode
(P100DL),which is the world’s quickest production car with a 0-60
mph time of 2.5 seconds. However, unlike other supercars, P100DL
is a four door sedan, can seat five adults plus two children,has
additional room for cargo,and has industry-leading crash safety. It
is also the longest range all-electric vehicle on the market, able to
drive 315 miles on a single charge. We also unveiled the Model X
P100DL, which can accelerate to 60 mph in 2.9 seconds.
Over the past month,we released Version 8.0 software via an overthe-air
update for all Model S and Model X vehicles. This update
adds numerous enhancements to the navigation and audio
applications on every Model S and Model X, and also increases
Autopilot capability with enhanced radar signal processing.
Strong Operational Execution
In Q3, combined net orders for new Model S and Model X
vehicles grew 68%, compared with the same period last year. During the quarter, we opened 17 new stores and service centers to
increase our customer support network to 250 locations globally. We believe new product variants such as the P100DL,additional
Model X seating variants, new product capabilities such as Enhanced Autopilot and hardware for Full Self-Driving Capability, Autopilot
8.0 software, and new store and service center openings should continue to drive strong vehicle order growth.
Every New Tesla Now Equipped with Hardware
for Self-driving Capability
We achieved record production levels in Q3, rising to 25,185 vehicles for
an increase of 37% from Q2 and an increase of 92% from Q3 last year.
More than four years since its introduction, Model S continues to expand
market share, which is a testament to our continuous vehicle innovation.
In the U.S., which is Tesla’s most mature market, Model S deliveries
grew nearly 60% year over year, increasing its lead status with a 32%
share of the top 12 selling large luxury sedans, as Model S unit growth
significantly outpaced U.S. large luxury sedan category sales growth.
Despite still ramping production, Model X is also gaining market share,
already growing to 6% of the U.S. large luxury SUV market in Q3, or #8
in the large luxury SUV category, edging out the Porsche Macan and
Cayenne, the Land Rover R-R Sport and the Infiniti QX80. The large
luxury SUV category is three times the size of the large luxury sedan
category in the U.S., and represents a huge opportunity to further
increase Model X sales.
We continue to expand the Tesla vehicle charging network.
At the end of Q3, we had 715 Supercharger locations
globally,with 4,461 individual Superchargers. 97% of the
population in the continental U.S. and 86% of western
Europeans are now within 150 miles of a Supercharger.
High population areas in China, Japan and Australia will soon
reach similar coverage levels. The Supercharging network is
supplemented by3,222 destination chargers with 5,547
connection points globally at the end of Q3. Destination
charging offers convenient charging at hotels, restaurants
and shopping centers.
Tesla’s energy storage business also continues to grow.
Tesla is installing a 20 MW/80 MWh Powerpack system at
the Southern California Edison Mira Loma substation to help
reduce rolling blackouts. Upon completion, this system will
be the largest lithium ion battery storage project in the world
and will hold enough energy to power more than 2,500
households for a day or charge 1,000 Tesla vehicles.
Future Growth Initiatives
For Model 3, we have completed production line layouts and will soon begin installation of new body welding and final assembly lines.
We have established a world class team of suppliers for Model 3 production equipment and components and critical long lead time
equipment and components have been sourced. We are now testing vehicle systems such as chassis, the high voltage drive system,
and low voltage subsystems such as vehicle controllers, HVAC, infotainment and lighting. As refinement of the Model 3 continues, we
remain on plan for our timing, volume, vehicle capability, pricing,and margin targets.
The Gigafactory remains on track to begin cell production later this year for use initially in our energy storage products and later to
support volume production and deliveries of Model 3 in the second half of 2017. In addition, we continue to expand production capacity
at our Fremont facility and are exploring additional production capacity in Asia and Europe.
With the previously announced plan to acquire SolarCity, we look forward to making solar as compelling as electric vehicles. Acquiring
SolarCity would leverage Tesla’s existing investments in the Gigafactory and the next-generation Powerwall and Powerpack to drive
revenue growth. In addition to the revenue growth associated with making solar more compelling, the combined company is expected
to achieve over $150 million of direct cost synergies in the first full year post-close. Over the coming days,there will be a number of
additional events relating to the SolarCity acquisition and our strategic plan for the combined company:
October 28th: Product demonstration event to unveil an integrated solar roof with next-generation energy storage and EV
November 1st: Additional information to be released about the combined company.
November 17th: Stockholder meeting to tally the final vote on the acquisition.
Model S P100DL
The World’s Quickest Production Car
Growing Destination Charging Coverage
Starting this quarter,our financial releases no longer include the non-GAAP revenue disclosures that we historically provided. To
simplify our financial reporting, we add back non-cash stock-based compensation (SBC) to calculate non-GAAP results. Consistent
with previous quarters, non-GAAP automotive gross margin will also exclude ZEV credit sales.
Total Q3 GAAP revenue was $2.30 billion, up 145% from Q3 2015, while total Q3 gross margin was 27.7%, compared to 21.6% in Q2.
Total automotive revenue was $2.15 billion on a GAAP basis, up 152% from Q3 2015. Our final Q3 delivery count was 24,821,over
300 more than the estimated delivery count we shared on October 2
. Deliveries increased 114% from the third quarter of 2015, and
was comprised of 16,047 Model S and 8,774 Model X vehicles. In addition, 5,065 vehicles were in transit to customers at the end of
the quarter. These vehicles will be delivered in Q4.
In Q3, deliveries where we retain residual risk,and thus were subject to lease accounting,were 32% of total deliveries, down from 36%
in Q2. The elimination ofresale value guarantees in the U.S. in Q3 had no impact on demand, signaling strong consumer confidence in
the long-term value of our vehicles. During Q3, we were asked to repurchase fewer than 2% of vehicles eligible for buy back under our
resale value guarantee program.
Q3 GAAP Total automotive gross margin was 29.4%, while non-GAAP Automotive gross margin was 25.0% excluding SBC and $139
million of ZEV credit revenue. Non-GAAP automotive gross margin excluding ZEV credits increased 140 basis points sequentially
because of improved manufacturing efficiency and higher production volume. Reliability of our vehicles continues to improve and our
warranty accrual rates on new and used vehicles declined from Q2 to Q3. The amount of issues that we have addressed with Model X
have fallen by 92% in the last 12 months, a reflection of the improvements we have made in Model X due to our ability and com mitment
to react quickly to issues.
Model S average prices decreased 6.5% sequentially, primarily due to the introduction of the 60 kWh models and production of the 100
kWh variants only starting late in Q3, which would otherwise have balanced that out. 2% of the decline was due to price adjustments
that were made for inventory cars that already had mileage on them, showroom cars with wear, and cars that were built before product
transitions, such as those with the original fascia. Model X average prices declined 1.2% sequentiallyas we increased production
beyond just the highest-priced Q2 Signature builds.
Q3 Services and other revenue was $150 million, up 78% from Q3 2015 and up 70% sequentiallyfrom Q2. The increase was primarily
due to higher sales of used vehicles and stationary storage products. Q3 Services and other gross margin was 3.4%, up from 2.5% in
Q2, and generally in line with our expectations .
Total Q3 GAAP operating expenses were $551 million, including $81 million of SBC. After excluding SBC, non-GAAP operating
expenses were $471 million, up 4% from Q2. GAAP research and development expenses were $214 million, including $40 million of
SBC. Excluding SBC, non-GAAP research and development expenses increased 10% sequentially to $174 million, as vehicle
development programs accelerate. GAAP sales, general and administrative expenses were $337 million, including $41 million of SBC.
After excluding SBC, non-GAAP sales, general and administrative expenses of $296 million were up 1% sequentially,demonstrating
our efforts to increase operating leverage.
Our Q3 GAAP net income was $22 million,or $0.14 per share on 157 million diluted shares, while our non-GAAP net income was $111
million, or $0.71 per share on a diluted basis, after adding back $90 million of SBC. Both figures include an $0.08 per share loss of
other expense, net, primarily related to foreign currency transactions and the conversion of most of our 2018 convertible notes.
Our cash flow from operations during the quarter was $424 million due to increased sales, coupled with careful expense management.
Free cash flow was $176 million as we invested $248 million in capital expenditures to increase production capacity, accelerate
Gigafactory construction, and expand customer support infrastructure. Capital expenditures remain on plan to help us reach our goal of
producing 500,000 vehicles in 2018. In addition, we collected $173 million of cash inflows from vehicle sales to our bank leasing
partners, which are not included in cash flow from operations.
With our strong cash flows this quarter, we were able to reduce the balances on our borrowing facilities by $178 million and settle $422
million of conversions on our 2018 convertible notes, strengthening our balance sheet. After this $600 million in debt repayment, cash
and cash equivalents were $3.1 billion at quarter end, compared with $3.2 billion at the end of Q2.
Our sources of liquidity expanded in the quarter as we were able to increase our borrowing capacity with the addition of a $3 00 million
retail lease financing facility. We were also able to expand our indirect leasing capacity for our customers as our largest partner in the
U.S. increased our capacity with them by over 80%. We are also adding a new leasing partner in the fourth quarter of 2016. These
increases will allow us to continue to provide attractive and convenient financing sources for our customers.
We maintain our guidance of 50,000 new vehicle deliveries for the second half of 2016, with a Q4 plan of just over 25,000 deliveries,
despite the challenges of winter weather and the holidayseason. We expect about 30% to 35% of these deliveries to be accounted for
as leases for revenue recognition purposes.
As previously provided in our second quarter update, we guided a 2 to 3 percentage points improvement in automotive gross mar gin on
a GAAP and non-GAAP basis by the end of 2016. Automotive gross margin on a non-GAAP basis excludes ZEV credits and SBC. We
are on track to meet this guidance.
We also guided in our second quarter update that full year 2016 operating expenses, both on a GAAP and non -GAAP basis, would
grow approximately 30% from 2015. We are also on track to meet this guidance.
We now expect our capital expenditures in 2016 will be approximately $1.8 billion as we continue to focus on capital efficiency. Capital
expenditures for the past three quarters totaled $759 million.
We plan to continue demonstrating strong execution against established goals while also creating new opportunities for future growth.