Tesla brings forward its 500k build plan to 2018

Tesla held today it's first quarterly report to its shareholders. Of course the highlight of the report revolves around the tremendous success the launch of the Model 3 gathered. Thanks to its 400,000 reservations and the Model X production ram pup, Tesla decided to advance its 500,000 total unit build plan (including Model S and X) that was scheduled for 2020 by two years to 2018. Confirming Model 3 production and deliveries to remain on track for late 2017 launch.

Furthermore Model S orders also accelerated globally by 45% in comparison to the first quarter of 2015, while the Model X from 507 in Q4 2015 to 2,659 in Q1 2016.
Tesla's cash balance went up to $245 million sequentially inclusive of ABL credit agreement and exclusive of Model 3.
Finally, Tesla concluded its report affirming this year's deliveries will be up to 90,000 units thanks to the growing demand for Model S and Model X, the improved rate of production projected for Q2, and the production increases planned for the back half of 2016.

Here's the full report's transcript:

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.

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.

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.

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.

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.

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 awayfrom-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.

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.

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.

Q1 Results

Our Q1 results reflect our initial efforts to manage cash more effectively. While we are in the early stages of significantly enhancing our systems and operations to improve working capital management, we are already seeing the benefits of improved inventory control, better vendor management, and more rapid collections.

With a careful eye on spending, we were able to reduce nonGAAP operating expenses sequentially for the first time in three years. Total Q1 operating expenses were $417 million on a nonGAAP basis, down 3% from Q4. Research and development expenses declined sequentially as Model X development work Model X New Look for Model S diminished during the quarter. GAAP operating expenses were $501 million and include $83 million of non-cash stock based compensation. Stock based compensation increased sequentially as achieving certain developmental and operational milestones became highly probable.

By improving our capital budgeting, we reduced capital expenditures by 47% from Q4 to $217 million, without compromising our future growth prospects. Q1 capital expenditures were primarily for increased production capacity, Gigafactory construction, and customer support infrastructure.

Cash and cash equivalents rose to $1.44 billion at quarter end aided by more effective cash management and $430 million drawn against our asset based credit line. The quarter end cash balance does not include any meaningful cash flow from Model 3 reservations. Almost all Model 3 reservations received on the last day of Q1 are recorded as receivables, pending cash receipt from various credit card banks. April cash receipts for vehicles in transit at quarter end plus Model 3 reservation deposits allowed us to pay back $350 million on the asset based line.

Our GAAP cash outflow from operations during the quarter was $250 million. After adding $242 million of cash inflows from vehicle sales to our bank leasing partners, our cash flow from core operations was nearly breakeven.

Total Q1 non-GAAP revenue was $1.60 billion for the quarter, up over 45% from a year ago, while GAAP revenue was $1.15 billion. Total Q1 gross margin was 21.7% on a non-GAAP basis and 22.0% on a GAAP basis.

Automotive revenue was $1.48 billion on a non-GAAP basis, and comprises $1.03 billion of GAAP Automotive revenue plus $455 million of net increase in deferred revenue resulting from lease accounting used for indirect leases and cars sold with a resale value guarantee. During the quarter, we delivered 14,810 vehicles, almost the same as what we estimated in our April announcement. Model S average prices improved 1.4% sequentially, as price increases and higher option take rates offset a slight mix shift to less expensive Model S variants. Average Q1 Model X prices were about 30% higher than for Model S.

The popularity of leasing increased again this quarter, as did the percentage of Tesla direct leases. Tesla directly leased 1,405 cars to customers in Q1, worth $149 million of aggregate transaction value.

After excluding $57 million of ZEV credit revenue, Q1 Automotive gross margin was 20.0% on a nonGAAP basis and 19.6% on a GAAP basis. Our warranty accrual rate on all new vehicles declined from Q4, based on projected warranty costs, as vehicle reliability continues to improve. Overall, our non-GAAP Automotive gross margin declined 90 basis points over Q4 due to an increase in delivery mix of Model X, which carries a lower margin during its ongoing production ramp phase.

Q1 Services and other revenue was $121 million, up 160% from a year ago. The strong growth was driven primarily by higher pre-owned Model S sales. Q1 Services and other gross margin increased sequentially to 4.7%, due mainly to increased margin on pre-owned vehicle sales and service.

Our Q1 non-GAAP net loss decreased 34% sequentially to $75 million, or $0.57 loss per share based on 133 million basic shares, while our Q1 GAAP net loss was $282 million or $2.13 loss per basic share. Both figures include a $9 million gain, or almost $0.07 per share, related mostly to unrealized gains from revaluation of our foreign currency transactions.

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.

Model 3 Unveiling 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.

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.

Signed by Elon Musk & Jason Wheeler