40 Highlights — Tesla’s 2nd Quarter Letter & Conference Call

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Originally published on EV Obsession.

Tesla Motors released its latest quarterly shareholder letter and hosted its quarterly financials call late last night (European time, since that’s where I live). As always, there were many interesting tidbits that could by themselves be individual articles. However, in the interest of not irritating the Tesla haters too much — and, more so, in keeping everything in one place for easy reference later on — I’m sticking everything I found particularly interesting in this one article. Have a gander:

Tesla Model X

The X is almost here. It’s like Christmas Eve — the wait is agonizingly tantalizing now. Here are the tidbits about the X that stood out to me:

• Elon emphasized again how cool the second-row seats will be. Honestly, with a few statements emphasizing that point, I’m afraid I’m really going to be let down if they don’t turn out super duper awesome… like, time-traveling awesome.
• X production looks like it might present more challenges than previously anticipated, particularly due to supply chain issues. As Elon has stated a few times, you can’t ship a car if it is missing a part or two. You have to have everything lined up really well to get to mass production, and it’s hard to know what might go wrong in one thread of the blanket beforehand. In the shareholder letter, Tesla writes, “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.”
• As such, to be conservative, Tesla is now targeting 50,000–55,000 vehicle deliveries in 2015. (Previously, the target was ~55,000.)
• While Elon noted that the Model X may be the toughest vehicle in the world to build (slight hyperbole, perhaps), it’s going to blow people away. Count me ready to be blown.
• Model X launch is still set for September. Configuration should begin in 2–3 weeks, and it will be live on the website by the end of August.
• “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.” >500 robots?!
• Following a short factory shutdown to upgrade various things on the line and in the Model S, Tesla had a bit of preparatory fun. “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.”

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Tesla Model 3

Ah, the car everyone is really waiting for. Even if you have a Model S P90D and a Model X P150D and have no personal interest in a Model 3, you care a great deal about this vehicle. This is the vehicle that will get Tesla to 500,000+ cars a year. This is the vehicle that will really, really, really disrupt the auto industry. This is the vehicle Tesla has been patiently but feverishly working towards for nearly a decade. So, what’s the news on the 3? (That’s basically a requisite question in any Tesla conference call, btw.)

• The Model 3 design will be revealed in the first quarter of 2016. (Woohoo!)
• First deliveries are still expected in late 2017.
• Basically, the 3 is still on schedule, but there’s not much more to say at this point.
• Tesla thinks it is still on track for 500,000 cars a year by 2020, and that it might even go beyond that. 500,000 is based on Fremont factory production capacity, but Tesla may localize production in some places in 3–5 years. (I’m guessing Australia and China are under consideration.)

Tesla Model S

Let’s not forget the world-leading, record-shattering Model S in all this hype about the Model X and Model 3, eh?

• “Globally, Model S orders increased following the launch of 85D and 70D. In the US, 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.”
• More details on the thoughts and aims behind the Model S referral program came out, indicating yet again that Tesla is actually cooler than we think: “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.”
• Tesla’s new certified pre-owned program brought in $20 million of revenue in Q2. On the call, Deepak noted that they are selling cars faster than they are receiving them in. And, at the moment, Tesla is only accepting trade-ins when the owner is buying a new Model S.
• And if you haven’t seen this yet, “a recent study by the North American Dealer Association… showed that Model S retains the highest residual value of any premium sedan in North America.”
• 12,807 vehicles were produced in Q2, a few hundred more than the company’s target of 12,500. “This represents a 15% sequential increase in production and a 46% increase from a year ago,” Tesla writes.
• Don’t confuse production with deliveries, though. “We delivered 11,532 Model S vehicles in Q2, in line with our July announcement of approximately 11,507 deliveries,” Tesla writes.
• “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.”

Autopilot

• Early-access Model S drivers will get autopilot on August 15.
• Broader release is set for 1–2 months later, depending on how well things go.
• This is just the beginning. Don’t treat the initial release like it’s the final one.

Tesla Energy

• Tesla Energy production will start this quarter (Q3) and ramp up in Q4.
• Over $1 billion worth of Powerwall and Powerpack “reservations” have come in so far. (Note: they aren’t real reservations, so we’ll have to wait to see how many turn into sales.)
• Despite strong Powerwall demand, Tesla is estimating ~70% of Tesla Energy demand will come for the Powerpack (driven by utility-scale installations).
• Elon noted that, theoretically, we could shut down ~50% of the world’s power plants simply using stationary storage (not even taking into account the growth of renewable energy).
• Tesla has found ways to be much more space efficient, and efficient in general, in the Gigafactory as the project has developed, so it may be able to produce a lot more batteries than initially intended… even without expansion.
• Despite weird criticism to the contrary, Elon noted when asked about Tesla Energy’s competitive advantage, that it’s the fact that Tesla is offering a turnkey solution. “Plug and play works even at the megawatt scale,” he said.

$$$

The money stuff is quite straightforward, so I’m just highlighting key lines from the shareholder letter here:

• “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.”
• “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.”
• “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 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.”
• “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.”
• “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.”

Other Tidbits

• Elon Musk declined commenting on a question about Uber CEO’s wish to buy 500,000 self-driving Teslas if the company can make them in 2020. Speculation as to why Elon declined to comment include that, A) Tesla plans to launch a competing program, and B) Tesla is considering the request. I haven’t seen much speculation that Elon simply didn’t want to comment on such an absurd statement and unlikely possibility, but that’s where my money is (figuratively speaking).
• “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.”
• While Tesla’s production capacity should reach 2,000 vehicles per week by 2016, it is being conservative with its production target in order to guard against the real-world challenges that occur from time to time, so it is guiding production of 1,600–1,800 vehicles a week next year. That would more or less be split between the X and S, but due to pent up demand for the X, Tesla will probably produce more of the X (60% of production) at the beginning of the year. When asked why Tesla couldn’t hit 2,000 vehicles per week, Elon noted, “We don’t want to set high expectations, and the only way for us to feel good about our future is if we beat those high expectations. Winning needs to feel like winning. Could we do 2000? Aspirationally, yes. Do we want to commit to that? Ideally, not.”
• From TeslaMondo: “Five years ago, Tesla produced 800 cars per year. Now it can produce 800 in three days.”
• There are now 487 Superchargers in place globally, and a new one is opening nearly every day (literally). That’s insane… ly awesome. Competitors’ knees should be shaking.