When it comes to describing its situation, not even Bob Ross could paint a prettier picture than Tesla Motors. The California automaker has had a good few months and announced today that it delivered 7,579 Model S EVs in the second quarter of 2014. That's the most the company has ever delivered in a three-month period, reflecting an expanded market that now spans new countries in Asia and Europe. Tesla also built 8,763 vehicles in that time frame, another record, thanks to getting more cells from battery supplier Panasonic, and says it remains "on track for more than 35,000 deliveries in 2014."

Alongside the earlier announcement about the official Gigafactory announcement with Panasonic, the automaker also said today that it has broken ground on a "potential" location in Reno, NV, – validating earlier speculation – while it is still looking at locations in Arizona, California, New Mexico and Texas. Work at the site has mostly stopped for now, however, as the company doesn't want to begin pouring cement until state incentives are in place and a "compelling deal for all parties" has been struck. The ball in Nevada, according to CEO Elon Musk, is now in the hands of the state's governor and legislature.

The 7,579 vehicles delivered last quarter continue an upward-moving trend line. In all of 2012, Tesla sold 2,650 Model S EVs. For 2013, the company delivered 4,900 vehicles in Q1, 5,150 in Q2, 5,500 in Q3 and 6,892 in Q4. In 2014, Tesla sold 7,535 Model S EVs in Q1. Add in the 7,579 from Q2 this year, and you've got 15,100 or so, meaning that Tesla needs the next two quarters to average out at around 10,000 each in order to hit the 35,000-vehicle goal. Tesla expects 2015 to be even better, saying that the rate at which its expanding means that its, "annualized delivery rate should exceed 100,000 units by the end of next year." In other words, deliveries for Q4 2015 should be around 25,000 EVs.

A few other tidbits from the shareholder letter and today's conference call:
  • Tesla had a loss of $62 million last quarter.
  • The company's Fremont, CA factory is being upgraded to make the Model S and X on the same line and will be up and running next week.
  • Speaking of next week, the first operational Model X Alpha prototypes should be ready by next week.
  • Tesla expects North America to continue to contribute strong demand for its EVs, despite the Model S being available here for several years now. The company says, "we believe [North America and Europe] remain under-penetrated. We expect demand to continue to increase worldwide as we continue to grow our customer support infrastructure and broaden the appeal of our products, and as consumer awareness improves."
  • Model S drivers have driven 394 million miles in their fancy EVs so far.
  • Musk addressed the issue of drivetrain replacement, saying many early swaps were a result of problem misdiagnosis, including a couple performed on the vehicle belonging to Edmunds. A problem in some early drive units are being fixed with a 50-cent shim. Chief Financial Officer Deepak Ahuja said that from a cost perspective, "impact on warranty reserves have not been significant."
  • A couple of times during the call with financial analysts, allusions were made to developments that are currently not on the radar. Apparently, Tesla is "not showing all our cards" and capital expenditures and R&D numbers are better than appear because "there are things you don't know about." Hmm.
Read more below or click through our gallery of the actual letter.
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Tesla Motors, Inc. – Second Quarter 2014 Shareholder Letter

• Tesla and Panasonic announce Gigafactory agreement
• Site preparation started in June for a potential Gigafactory location
• Record Q2 Model S deliveries of 7,579 vehicles
• Record Q2 Model S production of 8,763 vehicles
• Net income of $16M and $0.11 EPS (non-GAAP), loss of $62M and $(0.50) EPS (GAAP)
• New Model S/Model X assembly line planned to begin operation next week
• On track for more than 35,000 deliveries in 2014

July 31, 2014

Dear Fellow Shareholders:

We have had an active first half of 2014, and the rest of the year is expected to be even busier. The development of our large-scale battery manufacturing facility, known as the Tesla Gigafactory, is proceeding well. We have formalized our agreement with Panasonic for cell manufacturing at the Gigafactory and remain on track with the site selection process. In addition, we are adding new production capacity at our Fremont factory that will allow us to meet the growing worldwide demand for our vehicles. The speed at which we are executing this capacity upgrade will allow us to exceed 35,000 Model S deliveries this year. Provided that we execute well and there are no serious macroeconomic shocks, Tesla's annualized delivery rate should exceed 100,000 units by the end of next year.

Laying the Groundwork for Future Growth

Earlier today, Panasonic and Tesla entered into a formal agreement to partner on the Gigafactory. Panasonic will invest in production equipment that it will use to manufacture and supply Tesla with battery cells. Tesla will prepare and provide the land, buildings and utilities for the Gigafactory, invest in production equipment for battery module and pack production, and be responsible for the overall management of the Gigafactory. Additional Gigafactory partners for production of cell precursor materials will be announced in the coming months to create a fully integrated industrial complex. Processed ore from mines will enter by railcar on one side and finished battery packs will exit on the other.

In June, we broke ground just outside Reno, Nevada on a site that could potentially be the location for the Gigafactory. Consistent with our strategy to identify and break ground on multiple sites, we continue to evaluate other locations in Arizona, California, New Mexico and Texas. The final site for the first Gigafactory will be determined in the next few months, once we have full visibility and agreement on the relevant incentives and processes for enabling the Gigafactory to be fully operational to meet the timing for Model 3. We see these concurrent efforts as prudent. This vehicle will be our third-generation product and will substantially broaden the addressable market for Tesla, helping to accelerate the transition towards sustainable transportation. Any potentially duplicative investments are minor compared to the revenue that could be lost if the launch of Model 3 were affected by any delays at our primary Gigafactory site.

At the Fremont factory, we set a new record for vehicles produced this quarter, which came in tandem with substantial efforts underway to increase the factory's capacity. Factory production reached 8,763 Model S vehicles during the quarter, up 16% from Q1. Recently, we have been producing about 800 cars per week. Panasonic's increased cell production capacity in Japan has begun to reduce this critical constraint on vehicle production.

To increase manufacturing capacity further, we are building a new final assembly line and adding more automation to our body shop. With advancements in automation and efficiency, our new assembly line has the capacity to produce more than 1,000 vehicles per week and the flexibility to build both Model S and Model X. Production on the new line begins next week after a shutdown for the transition. As planned, the transition will result in about 2,000 fewer units being produced in Q3, while having no significant impact on scheduled customer deliveries. After a short ramp up period in Q3, we foresee average Q4 production of slightly more than 1,000 cars per week, enabling us to meet our 2014 delivery guidance of more than 35,000 vehicles.

Model S/Model X Final Assembly Line – Fremont

Expanding Model S Demand

At Tesla, we see a clear distinction between demand and deliveries. We measure demand by the number of cars that have been ordered. An order occurs when a customer selects their vehicle configuration and pays the nonrefundable cash deposit. Deliveries, on the other hand, are the fulfillment of those orders. The number of deliveries in a quarter is influenced by three main factors: our ability to increase production; the allocation of that production among our North American, European and Asian markets; and the need to fill the in-transit pipeline for future deliveries in each region. This quarter, for example, we delivered 7,579 Model S vehicles, slightly ahead of guidance and up by more than 17% sequentially. However, even though we increased both production and deliveries, average global delivery wait times increased because our production growth was unable to keep pace with increased demand.

Model S orders, and thus demand, continue to grow even in our most established markets. In both North America and Europe, Q2 Model S orders increased sequentially at a much faster rate than for the rest of the automotive industry. Accordingly, we believe these markets remain under-penetrated. We expect demand to continue to increase worldwide as we continue to grow our customer support infrastructure and broaden the appeal of our products, and as consumer awareness improves.

This year, we are doubling our total global addressable market by entering China and right hand drive (RHD) markets. Model S is off to a very encouraging start in China, especially considering that we are delivering cars only in the areas around Beijing, Shanghai, Shenzhen and recently Hangzhou where we can assure customers of service coverage. We are planning to launch service and deliveries in many additional cities in the upcoming months, including Chengdu and Guangzhou. China has almost 10 times as many

cities with more than 1 million people compared to the United States, so we believe the opportunity is substantial.

RHD Model S is also being well received in the United Kingdom where it launched in June and in Hong Kong where it launched last week. Hong Kong is a unique market because Model S is exempt from registration tax that nearly doubles the cost of a comparable luxury car. We plan to begin RHD Model S deliveries in Japan and Australia later this year. Our customers have now driven the Model S for 394 million miles globally, saving nearly 18 million gallons of gasoline.

RHD Model S – United Kingdom

We continue to open stores and service centers worldwide to support our global expansion. For the rest of 2014, the rate of location openings will be fastest in China, followed by Europe, and then North America. We also continue to expand our Supercharging network, with the introduction of our Superchargers in Canada and a substantial increase in the rate of deployment in Europe and China. Globally, we just energized our 156th Supercharger, which makes our network both the largest and the most rapidly growing fast charging network in the world. We measure the network's

Q2 Results

RHD Model S – Hong Kong

size by charging capacity because it represents the ability to displace petrol-powered with electricity powered miles. In June alone, the Supercharger network passed a milestone, delivering more than 1 GWh of energy to Model S vehicles in the month, representing 2.7 million miles of driving. Since inception, our customers have driven for free nearly 32 million Supercharged miles, the same distance as traveling to the moon and back, sixty-five times!

Development efforts remain on track for production of Model X in the spring of 2015. We anticipate having operational Alpha prototypes ready by next week in order to confirm design intent and Beta prototypes to be ready later this year.

As usual, this letter includes both GAAP and non-GAAP financial information because we plan and manage our business using such non-GAAP information. Non-GAAP financials exclude stock-based compensation and non-cash interest expense, while adding back the deferred revenue and related costs for cars sold with a residual value guarantee or similar buy-back terms.

Non-GAAP revenue was $858 million for the quarter, up 55% from a year ago, while GAAP revenue was $769 million. Compared to Q1, the average selling price of Model S was stable. Automotive revenue for Q2 includes $23 million of powertrain sales to Daimler and Toyota, reflecting the start of production deliveries to Daimler for the Mercedes-Benz B Class Electric Drive and the wind down of sales to Toyota for the RAV4 EV.

This quarter, we started business leasing for Model S in the United States. We recognize revenue for leased vehicles over the term of the lease in both our GAAP and non-GAAP financials. By contrast, other automotive manufacturers recognize full revenue for the price of the vehicle even if that vehicle is eventually leased, because the vehicle is first sold to an independent dealer. To facilitate comparisons with other automakers, we have disclosed in our supplemental tables below that $16 million of aggregate sales value was related to the 158 vehicles leased to business customers in Q2. We expect to recognize this amount in revenues over the next few years. Additionally, our balance sheet disclosures summarize the cost of these operating lease vehicles, which we expect to recognize as cost of revenues over the same period.

During Q2, we achieved a non-GAAP automotive gross margin of 26.8 on a GAAP basis. These results represent a 140 basis point improvement in non-GAAP automotive gross margin sequentially, excluding ZEV credits, and our warranty reserves are generally consistent with the prior quarter.

Research and development (R&D) expenses were $93 million on a non-GAAP basis and $108 million on a GAAP basis. Non-GAAP R&D expenses were up 37% from Q1 as Model X engineering work continues to accelerate and as we develop processes for capacity expansion.

Selling, general and administrative (SG&A) expenses were $117 million on a non-GAAP basis and $134 million on a GAAP basis. The 20% sequential increase in non-GAAP SG&A expenses was driven by the rapid pace of our global growth and by the expansion of our customer support infrastructure.

Q2 non-GAAP net income was $16 million, or $0.11 per share based on 140.9 million diluted shares, while Q2 GAAP net loss was $62 million or $(0.50) per share.

We had a $2 million net cash outflow from operations in Q2 primarily due to an $82 million increase in finished goods inventory from cars in transit to Europe and China, and $15 million of cash used for leasing vehicles. Capital expenditures in the quarter totaled $176 million.

Cash at quarter end, including cash equivalents, increased to almost $2.7 billion, in part because our underwriters exercised the overallotment option on the Q1 convertible note financing, contributing an additional $267 million of cash in Q2.

Q3 & 2014 Outlook

We plan to produce about 9,000 cars in Q3. This target takes into account the effect of the two-week production shutdown related to the transition to the new final assembly line at the Fremont factory. If we had been able to avoid this production down time, we would have been able to forecast Q3 quarterly production at about 11,000 units. After considering our planned production and the need to have more vehicles in transit (including the new RHD models), we expect to be able to deliver about 7,800 Model S vehicles in Q3. Without the planned factory retooling shutdown, Q3 delivery expectations would have been approximately 9,500 vehicles.

We expect non-GAAP automotive gross margin in Q3 to be about consistent with the prior quarter. As manufacturing efficiencies and part costs continue to improve, we continue to anticipate a 28% non-GAAP automotive gross margin, excluding ZEV credits, by Q4 of this year. We expect to lease about 300 cars in North America during Q3, and much more in Q4.

Q3 operating expenses are expected to grow sequentially by about 20 for SG&A. Despite a higher count of leased vehicles, investments in R&D, and geographic expansion, we expect to be marginally profitable in Q3 on a non-GAAP basis. Based on our current stock price, we project between 141 million and 143 million diluted shares outstanding in Q3.

We plan to invest between $750 million and $950 million in 2014, an increase of $100 million from prior guidance. We continue to invest in additional production capacity, continued Model X and Model S development, Gigafactory construction, and further expansion of our sales, service, and Supercharger footprints. We have also chosen to slightly accelerate our investments in production capacity and the Gigafactory.

It will indeed be a busy second half of the year as we execute on the opportunities ahead.

Elon Musk, Chairman & CEO Deepak Ahuja, Chief Financial Officer


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    • 1 Second Ago
  • 38 Comments
      Mario Duran
      • 4 Months Ago
      The reported figure for global sales in 1Q 2014 is wrong, Tesla reported 6,457 units, so the total for the first half of 2014 is 14,036, so Tesla needs to sell another 21,000 units to reach its 35k goal. And by the way, adding the reported quarterly sales, with the correction noted, Model S sales totaled 39,163 units through June 2014, not bad for a start-up.
      Grendal
      • 4 Months Ago
      Tesla is lowballing Q3 delivery numbers IMO. They are saying the delivery number will be similar to this quarters. They need to do more like 10K per quarter to hit their 35K for the year. I'll bet the deliveries end up over 8500 for next quarter.
        Weapon
        • 4 Months Ago
        @Grendal
        Tesla always low balls deliveries, so yeah the definitely will be higher. But I expect Q4 will have a lot more deliveries then most people think. Remember what happened last year? Tesla is might sell off their loaner fleet.
          Grendal
          • 4 Months Ago
          @Weapon
          Yup. They can also time their foreign deliveries so they all hit by Q4. I think that is why there was a 1000 car produced overage this quarter. I'll expect that to be even larger for Q3 setting up a lot of US and Canada deliveries for Q4 which will all hit at the same time. When you have a three month window you can really hit a big number if you want to.
        wtrmlnjuc
        • 4 Months Ago
        @Grendal
        The retooling affects that number too.
      GleninCA
      • 4 Months Ago
      Smart move by Tesla by breaking ground in Nevada before committing to build...that should really put pressure on their state government to act.
      Pancakes
      • 4 Months Ago
      " Tesla had a loss of $62 million last quarter" that's a $10,000 loss per car
        Joeviocoe
        • 4 Months Ago
        @Pancakes
        No, that's a failure of your education system. Tesla spends money on things other than cars. Service Centers, stores, tooling for the Model x, r&d, etc. Learn Matt, and learn to read. Each Model S has a PROFIT MARGIN of about 25%
          CeeJayABG
          • 4 Months Ago
          @Joeviocoe
          Joevicoe, you shouldn't be so harsh --- you also need a better "education system". The company in fact lost $62M on a Generally Accepted Accounting Practice (GAAP) basis. Across 7500-odd cars, that is indeed about $8k per car. Now, if you treat non-cash events like lease accounting and expensing of stock options differently (and thus subtract them from expenses), you get a non-GAAP profit of $16M. You could argue the GAAP rules are applied inappropriately here, and that non-GAAP measurement is a perfectly good way to evaluate TSLA. Further there is nothing in the shareholder letter that hides any of this (though of course we await the details in the 10Q, which I don't think was published today but if not will be shortly). But let's be clear that the NET INCOME line in the Income Statement is where we determine "Profit". You can argue that the GAAP LOSS of $61.9M is not a useful measurement apples-to-apples against other fast-growing enterprises, and the non-GAAP PROFIT of $16.1M is more meaningful. Fair enough. But this line is where profit or loss is measured. You are mistaking the Gross Margin, which is actually closer to 27%, for the Profit Margin. IT ISN'T. Gross Profit is the is what you get when you subtract Cost of Revenues from Gross Revenues. Then we do the math of (Gross Profit / Gross Revenue) to get Gross Margin. It isn't "profit margin". You don't arrive at "Profit" or "Loss" until you subtract Operating Expenses. For TSLA that is Research and Development and Selling and General Administration. You call these "things other than cars", but they are largely essential to selling the cars at all. You could argue that Model X R&D is "an investment", but in fact new models are essential to the viability of the company. The SG&A for dealerships is key to expanded sales. These are not "nice to haves" -- without them the company has almost no engineering, no marketing, legal, management staff, etc. You don't get to count them as extras. The following are all FACTS as they appear in TSLA's own financial filings: They have had only one profitable quarter on a GAAP basis. They have had several modestly profitable quarters on a non-GAAP basis. The total history of TSLA shows net negative cash flow from operations. TSLA has plenty of cash, mostly from financing, and is quite solvent. Overall on a P&L basis (this is NOT cash flow), TSLA retained earnings (losses) are about ($1.2B). (NOTE: none of these are intended as positive or negative perspectives of the company. It is a high-momentum company, well-liked by many investing authorities, and trades well above typical industry multiples. It is a high-risk, high-reward issue. But if you wish to tout its performance, you need to be clear what you mean when you speak through accounting terms. Pancakes had some problems with arithmetic, but he was "more right" than you are. TSLA is CURRENTLY modestly profitable at best.)
          Joeviocoe
          • 4 Months Ago
          @Joeviocoe
          @ CeeJayABG --"I think it's clear I understand financial metrics far better than you do" Arrogance aside, you are referencing arguments which neither I, nor Pancakes are making. You're on a completely different page, trying to prove your intelligence? --"“a lack of reading comprehension” yikes... Pot, meet Kettle. I read Shareholder Letters and 10Qs with no trouble, thanks" Wasn't even talking to you. The only thing I see you doing is defending an obviously ignorant comment from Pancakes and piling on a bunch of stuff to make yourself sound smart. --"The “$xk loss/car” doesn't apply to Tesla because their accounting method is not the same. I wouldn't even think of bringing it up; too bad you did." No, pancakes brought it up with his comment.
          JakeY
          • 4 Months Ago
          @Joeviocoe
          And on the subject of gaap loss versus non-gaap profit, it's because Tesla doesn't get to count the full amount of the value of the leases they get under GAAP even though they have already collected the full amount already. Rather they only get to account for it like a 3 year lease (1/36 of the value every month). Basically it takes the assumption that everyone who leases will default on it (even though that's unlikely). This typically doesn't make much difference in "older" companies because they have ongoing leases expiring that limits the fluctuations from lease income. However, for a young company adding a lot of new leases there will be a bigger gap between the two numbers. http://www.slate.com/blogs/moneybox/2013/08/07/tesla_non_gaap_accounting_profit_or_not.html
          bluepongo1
          • 4 Months Ago
          @Joeviocoe
          http://green.autoblog.com/2014/07/22/beating-teslas-coast-to-coast-time-in-a-model-s/ @Pancakes is a logic fail who claims : he is "bored with and over Tesla " yet still clicks on and posts on Tesla threads. For what it's worth: I understand your comments @ Joeviocoe and don't think they are harsh..... unless someone can prove my suspicion that @ Pancakes is "special" :-D
          Joeviocoe
          • 4 Months Ago
          @Joeviocoe
          @ CeeJayABG --"Pancakes had some problems with arithmetic, but he was "more right" than you are." I have no problem admitting that Tesla is not overall "profitable". And yes, 'gross margin' is what I meant to say. My problem is the stupidity of the phrase, "Per Car". The losses do not increase linearly with each car sold... as if the loss is coming from "each car". The losses Tesla incurs come from their growth.... which cannot be so haphazardly divided into number of cars sold thus far. So no, he is NOT "more right". And to suggest that Tesla's GAAP losses are from "each vehicle" represents a gross misunderstanding of the financials, a lack of reading comprehension, and the same Fox News accounting practices that led to the whole, "GM loses $50,000 on each Volt" ignorance. It is a special type of laziness that simply takes the total expense of an entire company, and divides by the current number of cars sold so far. It ignores the fact that R&D, tooling, stores, service centers, superchargers, etc... (despite being much more than 'nice to haves') add value to the company for decades to come... and do NOT just exist for the current batch of Model S's on the road right now. So again, it is disingenuous to support such nonsense. The fantasy number of "Company X is losing $xx,xxx on every car" is a number that changes retrospectively as the growth period ends and spending slows down. In 5 years... when Tesla isn't spending as much on their growth... one can say truthfully that the car was ALWAYS "profitable" since the losses were NOT tied directly to the materials and labor of "each car" Just as the 1st Chevy Volt to roll off assembly line... did NOT cost the $ amount of the entire GM R&D programs for the EV-1 and Volt combined. That same math was used to say how much the Volt was a loss leader... and was ignorant to the same degree of Pancakes comment
          jimmy_james44
          • 4 Months Ago
          @Joeviocoe
          The real money is in their bank account, in the real world. The "loss" is a paper loss until the leases are up.
          CeeJayABG
          • 4 Months Ago
          @Joeviocoe
          Joe: Sorry it's not the unfiltered cheerleading for TSLA that you desire. Let's go through your errors point by point. “to suggest that Tesla's GAAP losses are from 'each vehicle' represents a gross misunderstanding of the financials” I think it's clear I understand financial metrics far better than you do. The erroneous perspective you took in your lashing out to Pancakes proves that. As for “profit per widget”, a broad, rule-of-thumb metric is typical for suppliers, partners, and investors to consider risk/reward (like cost-per-click or profit-per-seat-mile). Moreover, it does tell a story, particularly in terms of how much expense can be tolerated, and how much growth (top line AND margin expansion) are needed to sustain valuation. Tesla is only just entering non-US markets, and the expense is significant, with SGA spend that outpaces Musk and Ahuja's earlier guidance. Profitability per unit also gives us a marker on how better amortization of fixed cost might support guidance for improved GM, especially in the face of surprisingly large CapEx (more below). For people who know how to read financial reports (i.e., not you) it makes plenty of sense. “a lack of reading comprehension” yikes... Pot, meet Kettle. I read Shareholder Letters and 10Qs with no trouble, thanks. You should try it. “the same Fox News accounting practices that led to the whole, 'GM loses $50,000 on each Volt' ignorance.” Ahh... now I get it. You think that addressing financial questions is a political issue. Not at all. The whole Volt losses dust-up was based on an accounting method that put R&D investment on the balance sheet and amortized the expense over production, and was dependent on actual vs. expected numbers produced as well as forecasts. The “$xk loss/car” doesn't apply to Tesla because their accounting method is not the same. I wouldn't even think of bringing it up; too bad you did. Keep your angry politics in your pants where they belong. Finally, “it is a special type of laziness...” Where to start? Many of the “growth” items you list (e.g.,tooling and superchargers) don't even show up in Expenses yet. They are CapEx ($175M in Q2) and will start hitting the bottom line with depreciation soon. And if you are so actively aware then you'd know Capital was about $100M over previous guidance, and projected top line growth is NOT keeping up with current Expense growth (looking at last 3 Qs). Anytime a stock trades at more than 100x fwd non-GAAP earnings, knowledgeable people look at this sort of thing, as do bond holders with paper tied to stock price ($2B in TSLA convertible bonds) and those expecting another raise soon. I get it: people who value companies (either literally or, in your case, figuratively) on emotions and political perspectives do not. You may take whatever course you wish. But in the mean time you might learn that the world does not consist of Cable News debates, and you do not distract from your misunderstanding by shouting insults.
        brotherkenny4
        • 4 Months Ago
        @Pancakes
        This is a good conversation that follows and Joe wins. That aside, isn't it rather nice that Tesla still has a waiting list. I think those who use the "they lose $XXX on each vehicle" argument were also predicting a end to them once the initial brainwashed greenies had bought theirs. Yet demand is not waning. They still have many markets that are yet to be fully developed, but also it is a high end quality vehicle.
          CeeJayABG
          • 4 Months Ago
          @brotherkenny4
          Leave it to ABG to provide the most bizarre atmosphere for discussion: where the erroneous and emotional view of financial metrics “wins” over facts. The discussion of Tesla is so wildly politicized and polarized it’s not possible to address actual company-provided data without the angry cries of acolytes or antagonists. It’s crazy. The sensitivity that you and Joe show for discussing simple, common metrics is no different from the “scam” accusations from the other side. Joe's rash insults add some tasty pathological spiciness. Too bad. I don’t know what typical professions are for participants on this blog, but surely SOMEBODY here has looked across an industry to understand the performance of potential customer opportunity or investment. When I was in aerospace, Gulfstream was a prized customer. Their superior pricing position and high profitability was a clear indicator of a solid foundation for future platform investment. You would do whatever you had to in order to get on their new projects. Conversely, when companies like Fairchild Dornier or Eclipse tendered bids, a little research told you that these guys didn’t merit your best proposal. As an investor, you look at companies in a similar way. So… Tesla’s order book is strong. Their GMs are superior by industry standards. Profitability peaked in 2013 and leadership is not guiding higher. Their cash production has come solely from financing, which they have done masterfully and at low cost. Do these words make you angry? Why? They are not my judgments; they are facts. These facts do not point to anything other than a set of performance conditions that depict the company’s condition. It is not damning to state that the company continues to lose several thousand dollars per Model S, nor is it irrelevant. They have a significant challenge to execute rapid growth and achieve consistent profitability. Obviously, the market believes they can; otherwise how could they possibly have such a stratospheric valuation? What is wrong with addressing these challenges in the discussion of an article about the company's performance update in a QUARTERLY FINANCIAL REPORT? Like a huge number of retail investors, I’ve been in and out of TSLA more than once. Like many in technical/manufacturing professions, I’ve participated in great success and awful failures. I would love to hear people’s rational, measured views on how Tesla might pull off the hat trick and where the pitfalls might be. That might mean (gasp!) the discussion of ACTUAL METRICS and quantitative assessments of strategy. Sadly, it appears that really can’t happen anywhere on the web, with ABG no exception. Honestly, if loud advocates weren’t so overtly ignorant of basic accounting, I’d have thought you all to be paid posters in the employ of major holders. But that’s obviously not true. It’s just wild devotion and political evangelism. I look forward to more downvotes for the heinous act of quoting TSLA’s financial reports.
          purrpullberra
          • 4 Months Ago
          @brotherkenny4
          CeeJayABG: I like discussing the facts. However the facts generally don't live separate lives on little cards with no relation to each other. Facts about Tesla all relate to one another. To claim that Tesla have lost $x dollars per car insinuates that no more amortization of any resources will ever occur again. NONE. EVER. That is such an ignorant idea as to be laughable. Now I'd love to speculate on how much more investment per car is coming, how has expenditure on ModelS slowed as sales rise? Then saying "profitability peaked" insinuates 1.that there is no prospect of profit EVER. NONE. 2.that you really don't understand how companies amortize R&D, equipment etc. This isn't a problem with basic accounting, it's a situation where your 'basic accounting' is completely insufficient to understand how all of the metrics relate to one another. Intelligent analyst's always talk about profit now AND future. Intelligent analyst's don't claim stupid things like $x lost per car That is the talk of TV talking heads who like to brainwash people. You seem to be under the spell with this whole comment of yours. You can't seriously think separating out things like $ profit per car at this point makes you the honest person and someone like me with the "erroneous view of financial metrics"? I'm willing to discuss it all. You aren't.
          CeeJayABG
          • 4 Months Ago
          @brotherkenny4
          and ppb one more time (thanks for your comments, BTW): re: Leased Autos (“’Basic accounting’ is not the solution it is a PROBLEM FOR YOU.”) Honestly, I’m so glad you brought this up. First of all, the lease accounting methods applied by Tesla DO, as you point out, back out a substantial fraction of the revenue. Now, I’m stuck in an airport and so have the time to go back to comments from TSLA Q1 results (May 7) in which I said: “Lease accounting: Tesla does not recognize the full sale value of leased autos since they carry the lease (i.e. , no dealers); they also recognize warranty expense for these vehicles in a fairly conservative way.” See? It’s not a problem for me. Accounting is your friend! In this case you can look up SEC Staff Accounting Bulletin No. 101 – Revenue Recognition in Financial Statements and confirm that in fact Tesla addresses all the issues like residual value guarantee in an entirely appropriate fashion. Now, so how does that effect their GAAP profitability? Check page 9 of the Letter (“Reconciliation of GAAP to non-GAAP Financial Information”), and it adds up to $18.6M deferred GP. Not trivial, which is, I think, what you were correctly pointing out . Now, since you are concerned that I have not addressed “the future”, try this on: Musk could establish an arms-length privately-held “Tesla Financial Services” in which the lease accounting takes place. Then TSLA the public entity could take the full sale value AND not be exposed to asset value risk. It’s more complicated than such a simple structure (don’t want an Enron here) and would need quite a cash infusion to spin up, but there are definitely ways to do it. “You can't just cherry pick some useless metric that no one in the industry uses and then claim there is something wrong with calling you out for it.” Look, you might think that nobody uses unit profitability as a metric. Whatever --- that’s simply not correct. But let’s get to the point of “cherry picking” a metric. The reason I defended the $/car P/L is because Joe made a giant assault on this “pancakes” guy with the usual drivel about “education”, a childish insult that was completely out of line. I AM NOT THE ONE WHO ORIGINATED ITS USE IN THIS DISCUSSION, but in point of fact there is nothing wrong with using this as a baseline value to understand the targets for margin growth, expense reduction, setup amortization, etc. Honestly there are way more interesting trends to watch, like CapEx and the elements of cash flow. I would not think to use ANY single metric in a vacuum, but I would also not insult someone for suggesting a valid metric is worth talking about. I'm on a plane soon --- thanks for a rational exchange.
          Marco Polo
          • 4 Months Ago
          @brotherkenny4
          @ CeeJayABG " thanks for a rational exchange." No, thank you for your knowledgeable contribution ! It's really great to read comments from well-informed readers who can contribute impartial analysis. Unfortunately, while any discussion of Tesla may seem to arouse an army of one-eyed fans with all the tolerance of a holy-roller preacher toward backsliding heretics, the upside it that all that passion is directed to supporting a well run company, with brilliantly innovative products. I look forward to seeing more comments from "CeeJayABG" !
          purrpullberra
          • 4 Months Ago
          @brotherkenny4
          CeeJay ABG: Another issue that makes your point rather hard to defend is that the "basic accounting" you are relying on to give you your great insight is nowhere near sufficient to understand everything about Tesla's current "financial metrics". One example is leasing cars: every other maker sells leased cars outright but Tesla isn't doing that. Another example is the guaranteed trade-in value. "Basic accounting" is not the solution it is a PROBLEM FOR YOU. And "quantitative assessments" are utterly useless without QUALITY assessments. That's where you fall down again. You can't just cherry pick some useless metric that no one in the industry uses and then claim there is something wrong with calling you out for it. You are the one who isn't talking about anything substantive.
          CeeJayABG
          • 4 Months Ago
          @brotherkenny4
          ppb: “To claim that Tesla have lost $x dollars per car insinuates that no more amortization of any resources will ever occur again.” No, not at all. “Loss” just means not profitable for the period of performance. Since Tesla expenses engineering, that’s the way it looks on the Income Statement. The value isn’t amortized. Again, if a business is losing money today, it’s just a marker of today’s performance. Notice that when I said “they’re losing $8k/car”, I didn’t make any negative comment? That’s because without the 10Q and associated comments it is really just a number right now --- a very real and unambiguous number based on their accounting methods --- but we don’t see yet where they will be going. “Then saying ‘profitability peaked’ insinuates…” No, no, no! This is where you guys go wrong. I’m truly not “insinuating” ANYTHING. Tesla’s best Quarter so far (Q1 ’13) was the only quarter that they had a GAAP gain. At the time they had just gotten their arms around production issues, had a windfall of ZEV credits, and had really tamped down OpEx -- R&D and SG&A -- (to $55M and $44M, respectively). That’s less than half of today’s OpEx total. So what does that tell us? It’s not ominous; it simply illustrates boundary conditions defining where Tesla needs to go for steady profitable growth once again. And those boundary conditions are multi-dimensional: improving gross margins, living in a world without regulatory credits, engineering effectiveness, and SG&A efficiency. Stop thinking that identifying challenging news today implies a negative comment about tomorrow. “Now I'd love to speculate on how much more investment per car is coming, how has expenditure on ModelS slowed as sales rise?” Read the comments on OpEx in the 10Q, listen again to CC guidance, and the answers will begin to take shape. “This isn't a problem with basic accounting…” Sorry: it is. When, for example, someone says that the P/L miss reflects all the Q2 investment in tooling and facility, it shows they don’t understand the difference between Capital and Operating expense. When people don’t understand the source of the very solid cash on hand situation, it shows they don’t know how the convertible bond issue worked and why share value is VERY important to Tesla’s ability to execute. “Intelligent analyst's always talk about profit now AND future.” Exactly. So when you are looking to the future you need to understand where your performance needs to improve. And, yes, they DO talk about unit profitability. “I'm willing to discuss it all. You aren't.” Please TELL ME what you THINK is not being addressed and I will gladly do it. Simply yelling insults as Joe does, and implying evil intent as Kenny imagines does nothing. Ask specifically (paths to consistent positive cash from operations? sales expense to support explosive growth? What?) and I will happily paint a picture of how I think Tesla can meet their goals.
        itsme38269
        • 4 Months Ago
        @Pancakes
        It's also not correct, because they posted a gain.
      j
      • 4 Months Ago
      "In other words, deliveries for Q4 2015 should be around 25,000 EVs." Or perhaps an annualized rat of 100,000 - for production rates reached during the last day(s) of the year.
      purrpullberra
      • 4 Months Ago
      Great news. It's interesting that Tesla say they'll produce 2k less cars in Q3 but make that up in Q4; I've read that some see that as a negative. How is that negative? So what other things could they be working on? I know they are wasting, um spending time on an autonomous car. I still think a high-end interior design team is required to maximize profits. AWD for ModelS? Maybe a more powerful motor? It's not necessary but they could sell it for even more $. It couldn't be battery swapping could it? After all it is still on the radar for a lot of us. Better in car mobile connections? They may have to pay some cash for that. I'm not sure I understand the last point. It looks better to spend an amount on less known issues? What does better mean here? I'm very glad they addressed the powertrain replacement issue head-on. As I am that they were very clear about demand still increasing everywhere including the US. I absolutely love it when Elon and Tesla shoot down all the stupidity that likes to attach itself to Tesla stories. The powertrain issue wasn't trivial but I felt it was nowhere near as bad as the silly pundits claimed. I was certain that the engineering know-how hadn't suddenly disappeared from Tesla and that it was likely to have a relatively simple fix. Shooting down bullsh1+ is an important job for Tesla to do well, just as important as building world-class cars. How I wish some other companies would behave similarly. Tesla just keep doing the impossible. And they almost make it look easy. Just set incredible goals and surpass them time and time again. Don't forget simply impeccable timing. Easy.
      itsme38269
      • 4 Months Ago
      They posted a gain, not a loss.
        CeeJayABG
        • 4 Months Ago
        @itsme38269
        OK, itsme, let's look at the Shareholder Letter. Page 6, “Condensed Consolidated Statements of Operations” Go down to the “Net loss” line. You'll see it there: (61,902). The number is in thousands, and the parenthesis means a loss. Based on GAAP guidelines, which is the SEC required reporting standard, Tesla posted a $61.9M loss for Q2 '14. Now, on page 9, Reconciliation of GAAP to non-GAAP Financial Information In the first block of data, they restate their net results by taking OUT stock-based compensation and the non-cash interest (this is related to their $2B convertible note financing round), and add back IN deferred profit from lease accounting. That brings the net to a $16.1M gain. In normal consideration of earnings, particularly for a relatively young enterprise like TSLA, these sorts of non-cash adjustments to GAAP are considered a reasonable way to present performance in a different light. Mind you, there is no “non-GAAP standard” to apply, but TSLA isn't doing anything opaque here. It's all quite transparent. But the author of the article is correct in the $62M GAAP loss.
          jimmy_james44
          • 4 Months Ago
          @CeeJayABG
          The money is in their bank account, but it cannot be "accounted for" till the end of the lease. It's a strange real-world profit, and paper loss, until the lease is over.
          CeeJayABG
          • 4 Months Ago
          @CeeJayABG
          jimmy james: A few details are important. First, it genuinely isn't "real world profit". Profit can't be booked without revenue recognition, which is a very strictly defined event. In the case of Tesla's leases, some are conducted through Wells Fargo and US Bancorp, and some through Tesla's own financing arm. In the latter case, Tesla self-finances and could not possibly recognize revenue -- in fact the condition you referenced of "the money is in their bank account" is not true. In the case of WF/USB leases, most (but not all) of the sell price is transferred from the bank with some fairly pithy accounting for the tax credits, interest, and repurchase guarantee protection. Tesla takes a reasonable approach and defers revenue recognition to be commensurate with lease payment and the depreciation schedule. As far as I can tell it's not overly conservative nor optimistic. Once the finance world is comfortable with the residual value performance of the leased vehicles and Tesla can stop doing this repurchase guarantee business, then we'll probably see a more substantial fraction recognized. What everyone is forgetting is that the remaining margin from the lease population will be recognized over the lease period and so will contribute positively in future periods of performance.
        wtrmlnjuc
        • 4 Months Ago
        @itsme38269
        No, they actually posted a loss. Profits have increased, but so has spending (for Model X).
      Koenigsegg
      • 4 Months Ago
      Exciting!
      Joeviocoe
      • 4 Months Ago
      Way to get the headline wrong... unless you're a time traveler, it's only Q2
      goodoldgorr
      • 4 Months Ago
      im glad they don't have warranty problems.
        goodoldgorr
        • 4 Months Ago
        @goodoldgorr
        I found this article about tesla on a financial website. http://seekingalpha.com/article/2368455-tesla-the-high-cost-of-disruption?ifp=0
          Joeviocoe
          • 4 Months Ago
          @goodoldgorr
          Seeking Alpha is a stock pumping/dumping rag
          purrpullberra
          • 4 Months Ago
          @goodoldgorr
          I met a caveman recently who knew better than to simply cite a Seeking Alpha article since it is the most embarrassing admission of a persons useless antiquity. I've stopped being shocked. The opinions of sheltered folks from 1910 portrayed this way are a really low form of comic. :-(
      Grendal
      • 4 Months Ago
      156 Superchargers is really impressive considering the short time they've been building them. Considering the system is nothing but added cost, a less dedicated company would let this slide a bit. Tesla hasn't and you have to give them the credit for it.
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