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Investor Letters: Elon’s World

One of the most compelling companies with one of the most compelling leaders of our era, Tesla, writes a letter to their shareholders every quarter. In Elon Musks’ most recent letter, published just a week ago, it includes a number of interesting updates on the well being of the company; from the Model 3 to the Gigafactory.

With the recent reveal of the Model 3 and publicized issues with the Model X interest in Tesla is at a high all while we wait on the opening of the Gigafactory and growth of Tesla Energy. With the projections and predictions Musk mentions in his letter theres no doubt he will be getting plenty of use out of the sleeping bag in his office…

tesla first quarter performance

All of the charts, images, quotes, and emphasis below were added by us.

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The Q1-2016 Tesla Letter to Shareholders

May 4, 2016

Dear Customers and Fellow Shareholders:

The overwhelming demand for Model 3 confirms that compelling all-electric vehicles have mass-market appeal. In the first week of taking deposits for Model 3, we received more than 325,000 reservations despite no advertising or paid endorsements. This implies about $14 billion in future sales, making the Model 3 introduction the biggest consumer product launch ever. Since then, reservations have continued to grow to surpass even our expectations. With Model 3, our mission of accelerating the transition to sustainable transportation is more achievable than ever.

 

tesla model 3 salesJust how many cars is 325,000? To give you an idea there have been 450,000 plug-in electric vehicles sold in the United States… ever; the most of any country. Add up the lifetime sales of the top selling electric plug-in models in the US (Model S, Prius, Leaf, and Volt) and you are still not at 325,000. Keeping in mind that the Model 3 Reservations are at the global level it is still a remarkable number for being unveiled less than 6 weeks ago. 

Apart from the Model 3 launch, Model S demand grew globally and Model X production continued to ramp. Tesla Energy also expanded production and deliveries, with momentum continuing to build, and Gigafactory construction remains ahead of our original plan.

Our financial performance improved as well. We managed to drive down both non-GAAP operating expenses and capital expenditures. Combined with more focused working capital management, this allowed us to more effectively manage our cash outflows in the quarter. Looking ahead, we affirm our plan to deliver 80,000 to 90,000 new vehicles in 2016.

 

Advancing Build Plan

We are on track to achieve volume Model 3 production and deliveries in late 2017. Of course, in order to meet that timeframe, we will be holding both ourselves and our suppliers accountable to be ready for volume production in advance of that timing.

Additionally, given the demand for Model 3, we have decided to advance our 500,000 total unit build plan (combined for Model S, Model X, and Model 3) to 2018, two years earlier than previously planned. Increasing production five-fold over the next two years will be challenging and will likely require some additional capital, but this is our goal and we will be working hard to achieve it.

Screen Shot 2016-05-10 at 4.17.42 PM*Note: We were unable to find 2017 projections – we found anything ranging from 120,000-350,000

To no surprise, there are a number of skeptics for the 2018 projections. Tesla, notorious for missing deadlines, would have to deliver 10x the number of vehicles from 2015 and deliver 6x their projections for 2016 to meet their goals for 2018. 

We remain on plan to make the first cells at the Gigafactory in Q4 2016, and we are adjusting our plans there to accommodate our revised build plan.

Our objective with Model 3 is to create the world’s best car with a base price of $35,000, before any incentives, with a range of at least 215 miles on a single charge, and with strong gross margins. We plan to incorporate our best technology into Model 3, yet keep it relatively simple to build at high volume and with high quality.

 

Accelerating Global Demand

Q1 Model S net orders rose 45% compared to a year ago, and grew at a faster pace than last quarter. The more rapid pace of growth was driven by increased order growth in North America and Europe, and a more than 160% increase in orders from Asia compared to a year ago. Model S continues to be the market share leader in North America and Europe among all comparably priced four-door sedans. Model 3 The growth in Model S orders and the Model X reservation conversion rate support our plan of 80,000 to 90,000 deliveries in 2016. Notably, this demand level was reached ahead of the Model S refresh, before Model X could be seen in stores, and prior to the unveiling of Model 3, which we believe is stimulating demand for all of our vehicles.

With the introduction of the Model X and Model 3 numerous experts were concerned that the new models would cannibalize the sales of the Model S. Interestingly enough, the opposite has happened. The Model X and 3 have both driven the sales of the Model S. Both acting as a form of marketing and increasing demand for consumers who are too eager to wait for the new models. 

Could this be a positive sign for Electric Vehicles as a whole? Consumers readiness to buy EVs now is certainly headed north.  

We introduced the Model S refresh in April, with the largest single set of hardware changes (nearly 300 part changes in total) on Model S to date. Updates include an enhanced look for the front of the car, adaptive headlights, faster charging and more range, all for a minimal price increase. Air quality inside the car is just as important as it is outside, so we added the same HEPA air filtration system that Model X has. Now all of our new Model S and Model X customers can have access to Bioweapon Defense mode.

 

Just in case you ever find yourself in an apocalyptic scenario…

 

We are also pleased that despite these product upgrades, demand for used Model S vehicles remains strong and residual values are in line with our expectations.

With respect to Model X, greater production has led to greater availability. In April, we launched online Model X configuration in North America and began to deploy Model X to many of our stores in the United States. Model X will be in the rest of our stores by year end.

Originally slated for an early 2014 ship date the Model X was not delivered until fall of 2015. In addition to missing their initial ship date by over a year their has been a slew of other issues; from the gull-wing doors to visibility issues with its curved windshield. 

To support the rapidly growing fleet of Tesla vehicles, we continue to expand our network of sales, service, and Superchargers worldwide. We remain on plan to open more than 70 additional retail and service locations in 2016, to bring our total to nearly 300 locations. We also energized 29 Supercharger locations and 311 Destination charging locations during Q1, bringing our total away from-home charging locations to almost 615 and 2,200, respectively. Global Supercharger and Destination connectors now total over 3,600 and 3,700, respectively.

Tesla Energy posted strong growth in the quarter as well. During Q1, we delivered over 25 MWh of energy storage to customers in four continents. We delivered over 2,500 Powerwalls and nearly 100 Powerpacks in the quarter throughout North America, Asia, Europe and Africa.

Often overlooked, Tesla Energy, is a compelling aspect of the brand. In short, the Powerwall allows consumers to store extra energy from their solar panels. Currently, most energy companies practice net-metering – a program where they “buy” the extra energy from those using renewable energy sources.

Tesla also offers the Powerpack, basically a larger version of the Powerwall for commercial and utility use. For you ski fans, Squaw Valley has partnered with Tesla to eliminate the use of coal from their grid. They plan on building a solar array at their base and store the energy using a Tesla storage system.

The ultimate Tesla utopia? Charging your Model S with the energy stored in your Powerwall from your Solar City panels of course! 

models-powerwall-626x382

 

Enhancing and Increasing Production Capacity

In Q1, we reached a new quarterly production record of 15,510 vehicles, up 10% from Q4. Q1 Model S production of 12,851 vehicles met plan, but Model X production of 2,659 vehicles was insufficient to meet our projected level of deliveries. Our Q1 delivery announcement explained the Model X production challenges and the reasons for them. We are making significant progress in increasing production and plan to continue increasing total vehicle production to support over 50,000 deliveries in the second half of this year. Continuing to ramp high quality production is the top priority at Tesla right now.

Interesting to note the delivery numbers for the second half of 2016 (when initial battery cell production at the Gigafactory is expected to start) are expected to total all of the deliveries in 2015. 

Gigafactory construction and implementation continues at a pace consistent with our plans for cell production by year end. This will result in battery cell production in 2016, in preparation for the revised build plan.

 

Outlook

In Q2, we expect to produce about 20,000 vehicles, representing a sequential increase of nearly 30%, and will deliver as many of these cars as we can in Q2, with the rest being delivered in Q3. Due to a large number of vehicles in transit to customers in Europe and Asia at end of quarter, Q2 deliveries are expected to be approximately 17,000 vehicles. Importantly, now that supply chain constraints have been resolved, we plan to exit Q2 at a steady production rate of 2,000 vehicles per week, thus laying the foundation for a strong Q3 delivery number.

Looking out beyond Q2, we remain confident that we can deliver 80,000 to 90,000 new Model S and Model X vehicles in 2016. This is due to the growing demand we are seeing for Model S and Model X, the improved rate of production that we project for Q2, and the production increases planned for the back half of 2016.

Model S cost reductions and improving Model X manufacturing efficiency should cause Automotive gross margin to increase. We are on plan for Model S non-GAAP gross margin to approach 30% and Model X non-GAAP gross margin of about 25% by year-end, with higher Model X gross margin in 2017.

Total non-GAAP operating expenses in Q2 should increase slightly from Q1 as we grow our customer support infrastructure while maintaining our focus on expense management. Then, as we accelerate Model 3 development work in the back half of 2016, operating expense growth should increase, so that full year 2016 total non-GAAP operating expenses should increase by about 20- 25%.

Given our plans to advance our 500,000 total unit build plan, essentially doubling the prior growth plan, we are re-evaluating our level of capital expenditures, but expect it will be about 50% higher than our previous guidance of $1.5 billion for 2016. Naturally, this will impact our ability to be net cash flow positive for the year, but given the demand for Model 3, investing to meet that demand is the best long-term decision for Tesla.

Reporting their 12th straight quarter losing cash many shareholders are growing weary. The question on the minds of many; Will the Model 3 make or break Tesla?

The overwhelming demand for Model 3 and our improving financial results in Q1 represent a strong start to 2016. We are looking forward to bringing Model 3 to market as together we advance the world’s transition to sustainable transportation.

 

Elon Musk, Chairman & CEO

Jason Wheeler, Chief Financial Officer

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