All eyes have been on Tesla Motors this past week as it disputed the veracity of an account of a long distance drive by The New York Times reporter John Broder. While it was somewhat amusing to watch NYT counter the original accusation of fakery made by CEO Elon Musk, only to be then publicly slapped with a handful of revelatory vehicle logs, today's release of Tesla's shareholder letter and fourth quarter financial results are certainly more relevant to the company's future. And, if Tesla manages to keep performing as it has these past few months, that future looks bright.

According to the letter, the California automaker ramped up its production to 400 units per week, building a total of 2,750 Model S sedans last quarter, bringing its yearly total to 3,100 vehicles. Of course, building cars is one thing and delivering quite another. The delivery process (in most States) involves buyers meeting with a specialist who explains the intricacies of owning and operating the car. The tricky logistics go some way to explain why Tesla delivered 2,400 units (100 units less than its target) for the quarter and around 2,650 for 2013. The next few months will see that number increase significantly with 4,500 deliveries planned for the 1st quarter of 2013.

"I'm quite certain we will deliver more than 20,000 cars this year."

Continuing at its current production rate, the company expects to build 20,000 all-electric machines in 2013, and CEO Elon Musk said on a conference call with analysts today that those are already sold. "I'm quite certain we will deliver more than 20,000 cars this year," he said, adding that if Tesla shut down all its stores and stopped taking orders, they'd still sell out for 2013. Tesla received an additional 6,000 new reservations in the 4th quarter of 2012, putting its net reservations – discounting deliveries and cancellations – at year end in excess of 15,000. Musk is happy about this, naturally, but is focused on figuring out, "how do we exceed the 20,000 number next year?"

Financially speaking, the numbers also look pretty positive. Tesla's quarterly loss shrunk to $90 million from $110 million in the third quarter, while revenue dramatically increased over 500 percent from the previous quarter to $306 million. That income was derived not only from Model S and a few Roadster sales, but also benefited – to the tune of $12 million – from its work on the Mercedes B-Class EV program and drivetrain shipments for the Toyota RAV4 EV.

"I don't want to be overconfident. I do think we'll be profitable in Q2, and subsequent quarters, too."

Perhaps the most interesting piece of the financial puzzle came in a prediction in the investor letter, and we quote, "... we expect to be slightly profitable (excluding only non-cash option and warrant-related expenses) in Q1 2013." Later, during the call, Musk expanded on that point saying that the only thing that could stop Q1 profitability is a "force majeure" event, like an earthquake. He is "cautiously optimistic" about Q2, but is waiting to see how things develop before he makes as bold a claim as he is with the Q1 prediction saying, "I don't want to be overconfident. I do think we'll be profitable in Q2, and subsequent quarters, too."

You can read the investor letter and financial results for yourselves below. We'll have more from the analyst call, including information on leasing in North America and a snazzy new "awesome red" color for the Model S soon.
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Tesla Motors, Inc. – Fourth Quarter & Full Year 2012 Shareholder Letter
  • Achieved 20,000 annualized production rate
  • Record new Model S reservations
  • Model S unanimously named Motor Trend Car of the Year
  • Q4 revenue increases sequentially by 500% to $306 million
  • Rapid growth of Model S sales and service network
  • First profit now expected Q1 2013 versus prior guidance of late 2013
February 20, 2013

Dear Fellow Shareholders: We started 2012 with a few Model S prototypes in hand and the goal of going from producing hundreds of Roadsters per year to producing hundreds of Model S vehicles per week. During the year, we successfully completed homologation of the car, started initial deliveries on time in June and ramped the production rate to our year-end target of 400 vehicles per week. Along the way, Model S picked up almost every major automobile award, including the first ever unanimous designation as the Motor Trend Car of the Year®. Tesla powered cars have now been driven more than 40 million miles. With our production now reliably at an annualized rate of 20,000 units per year and thousands of Model S vehicles on the road, our plan for 2013 is to introduce Model S to customers around the world. Many of our reservation holders and potential customers have yet to experience Model S. That will change this year, with our growing network of stores and galleries, service locations and Supercharger sites, along with first deliveries in Europe and Asia scheduled for later this year. We will also continue to implement production and delivery efficiencies throughout the year. We have already made significant progress this quarter. As a result, we expect to be slightly profitable (excluding only non-cash option and warrant-related expenses) in Q1 2013.

Achieved 2013 Production Rate Goals
Our most significant achievement in Q4 was the successful ramp of production volume to more than 400 vehicles per week for three consecutive weeks in December, and this has continued at a consistent rate in Q1. This has established a production level that will allow us to achieve our goal of 20,000 Model S deliveries in 2013. We produced over 2,750 vehicles during the quarter and more than 3,100 vehicles during the full year, while maintaining our stringent quality standards.

To quadruple the pace of production during the quarter, we dramatically improved our manufacturing processes, and made significant strides in improving initial end-of-line quality. We were also able to overcome many of our past supply chain challenges and methodically stabilized the supplier base.

In the quarter, we also began to scale our delivery strategies. Both personal home delivery and factory pick-up were very popular delivery options for customers. However, w e faced some challenges scheduling deliveries near the end of Q4 as our peak production coincided with vacations during the holiday season. As a result, we delivered approximately 2,400 Model S vehicles during the quarter and about 2,650 for the year. We have improved the delivery process in Q1 of 2013, and will continue to make enhancements to the process throughout the year.

Growing Model S Demand
New reservation activity once again hit record levels during the quarter driven by holiday traffic to our stores, multiple Car-of-the-Year awards, the start of European marketing, and visibility of customer cars on the road and related word-of-mouth enthusiasm. As a result, we added more than 6,000 new reservations in Q4, up from almost 2,900 in Q3. During the quarter, we also announced a U.S. price in crease for new reservations made after December 31st.

We invited a large number of reservation holders to configure their cars during the quarter. Converting these reservations to firm, non-refundable orders increased cancellations, as expected. After deliveries and cancellations, our net reservations at year end, were over 15,000, up from about 13 ,000 at the end of Q3. New reservations continue at a steady, although slower pace in Q1 2013, as compared to December, due in part to the pull ahead of reservations into Q4 by customers seeking to avoid the price increase. Q1 cancellations are likely to remain elevated as the remaining older reservation holders are invited to configure their vehicle s within a set timeframe or pay the higher price just like new reservation holders.

Targeted Model S Infrastructure Investments
To expand and support our growing customer base, we continue to make targeted investments in stores and galleries , service center s and Superchargers. Because our distribution and service strategies are less expensive to build and operate than the traditional dealer model, we are able to expand this support network in a cost effective manner.

We opened eight stores and galleries during the fourth quarter in Chicago, Illinois ; Morristown and Paramus, New Jersey ; San Diego and Los Angeles, California ; Seattle, Washington ; Toronto, Canada ; and Miami, Florida. Visitor traffic soared during the holiday season, as we welcomed more than 1.6 million visitors to our nineteen new-design stores and galleries in North America during Q4. This was almost as many people who visited our stores and galleries during the entire first three quarters of 2012.

At year end, we had 32 stores and galleries around the world. We plan to open 15 to 20 more stores and galleries this year with about half the opening s in Europe and Asia to support our expansion into these regions during the second half of 2013. Notably, we have already started construction of our first store in Beijing, China in preparation for its opening this s pring. We also opened eight Tesla Fremont Service Center Tesla Store in Toronto new service locations during the quarter , for a total of 29 locations at the end of Q4. We plan to double this number by the end of 2013 to keep pace with the growing fleet of customer cars.

Following the successful launch of our Supercharger network in California, we opened the first two Superchargers on the east coast in Q4, in Milford, Connecticut and Newark, Delaware. These Superchargers allow for fast and convenient travel between Boston , New York and Washington , D.C . As expected, our customers are enjoying the speed and convenience of charging for free during road trips. Construction planning is underway to install additional Superchargers in 2013. Our plan is to expand cover age on the U.S. West and East Coasts, and around the rest of the country .

Quarterly Results
Total revenues for Q4 were $306 million, a 500% increase over Q3. During the quarter we delivered approximately 2,400 Model S vehicles. We delivered the remaining North American Signature Series cars and shipped exclusively cars with the 85 kWh battery pack. We also saw strong demand for options such as the Performance version and Tech Package. Finally, we sold most of our remaining Roadsters during the quarter. In Q4, we completed various milestones under the Mercedes-Benz B-Class EV program which contributed to total development services revenue of $12 million. We also continued to deliver full electric powertrains at a steady pace to Toyota for the RAV4 EV program.

From Q3 to Q4, total gross margin rose from (17), as a result of a higher Model S production rate, the move to production prices for certain Model S parts, sale of regulatory credits and healthy margin contribution from development services. Still, as expected, we experienced significant early-stage cost inefficiencies in Q4 as a result of several factors. These factors included lower fixed cost absorption, manufacturing inefficiencies during the initial production ramp and higher logistics costs as our supply chain took time to mature. We also had higher component prices as many vendors were not supplying parts at production prices early in the quarter due to their own manufacturing in efficiencies. Elevated costs during the initial ramp phase of a new factory and a new vehicle, as well as subsequent efficiency improvements, are typical in the automotive industry and consistent with our own past experience with the Roadster.

Since we are now producing cars at steady state production, we have shifted our focus to cost reduction. As a result, the cost of producing Model S is beginning to decline. Our operations in 2013 are already more efficient compared to Q4 , as we continue to stabiliz e and improve the production process. In addition, further cost reduction efforts undertaken by both us and our suppliers will continue to reduce costs in Q1 and in upcoming quarters. Consequently, we expect gross margin to continue to improve towards our 25 % target by year-end.

Research and development (R&D) expenses were $ 6 2 million on a non-GAAP basis and $69 million on a GAAP basis. A significant portion of the R&D costs in Q4 were non-recurring, as we completed engineering, design and testing of our vehicle and components both internally and at our suppliers. As a result, Q1 R&D spending is expected to decline by about 15% from Q4 2012.

Selling, general and administrative (SG&A) expenses were $ 40 million on a non-GAAP basis and $46 million on a GAAP basis. Much of the increase in selling expenses was again driven by the expansion of our store network and service infrastructure. General and administrative expenses also rose slightly in Q4, driven primarily by higher information technology costs. Q1 SG&A spending will continue to rise mode rately primarily due to the growth in our stores and service centers.

Our non-GAAP net loss for the quarter was just under $ 75 million, or $(0.65) per share, based on 113.8 million weighted common shares outstanding. Our GAAP net loss was $90 million, or $(0.79) per share for the quarter.

We ended the year with more than $221 million in total cash, after having made the first quarterly principal payment of $12.7 million to repay the loan to the U.S. Department of Energy (DoE) on schedule. Our short term restricted cash is primarily for the second DoE loan payment due in March 2013. In Q4 2012, our negative free cash flow (cash from operations plus capital expenditures ) was $102 million, down by almost 40% from the prior quarter. In the month of December we generated positive free cash flow, through growing sales and careful working capital management.

2013 Outlook
We plan to deliver about 20,000 Model S units in 2013. We expect to start the year with about 4,500 deliveries in Q1, as we gave the manufacturing team the first week of the year off to celebrate their accomplishments during 2012.

We plan to start European deliveries of the Model S this summer and Asian deliveries later this year. We have now started delivering Model S with the 60 kWh battery pack. These cars have an EPA-rated range of 208 miles on a single charge. Delivery of cars with the 40 kWh battery pack is expected to begin later this summer.

As we enter 2013, production ef ficiency is improving substantially as labor inputs decline and initial end-of-line production quality improves. We expect first quarter material, labor and overhead cost s to be substantially lower than in the fourth quarter of 2012, and for this trend to continue in 2013.

As a result of these actions and the favorable impact of regulatory credits, Q1 gross margin is projected to improve to the mid-teens percentage range. We expect our gross margin to continue to rise into the second half of the year to our target of 25%, despite a much lower contribution from regulatory credits.

Longer term, regulatory credit revenue should decline relative to our automotive sales as we grow our sales outside the United States and earn fewer credits on the smaller battery packs. While we will pursue opportunities to monetize the credits we earn from the sales of our vehicles, we do not need to rely on such sales to be a significant contributor to gross margin, and our business model is not predicated on such credits.

In the first quarter of 2013, we expect to generate slightly positive net income, on a non-GAAP basis. We also expect to be near breakeven on cash flow from operations. These targets would be achieved through a combination of improved gross margin and lower R&D expenses. The achievement of operational and manufacturing efficiencies will drive some adjustments in our personnel, primarily affecting contractor and temporary employees. At the same time, we are continuing to hire and convert to full time key talent where required. In 2013, we plan to spend significantly less on capital expenditures than we did in 2012, as we have concluded the majority of our investment in the Tesla Factory and Model S tooling. This reduction will be partially offset by expenditures related to expanding our service and store network, investing in new capital equipment and tooling to reduce variable costs and new product development. To conclude, 2012 was indeed the Year of Model S. This year, we are on a journey to expand the presence of Model S and turn profitable.

Elon Musk, Chairman, Product Architect and CEO Deepak Ahuja, Chief Financial Officer

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