Tesla Didn't Make A Profit On Its Cars In Q1: Let's Be Clear

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2013 Tesla Model S

2013 Tesla Model S

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Tesla Motors has accomplished many remarkable things in its short life as a startup maker of electric cars.

But, to clear up a common misperception, its supporters should understand that it has not--yet--made a profit in its core business: designing, building, and selling the Model S all-electric luxury sport sedan.

The confusion seems to have come about because Tesla Motors [NSDQ:TSLA] reported a profitable first quarter, to the surprise of many and the elation of its shareholders.

It also took advantage a classic "short squeeze" in its stock to raise more than $1 billion in fresh equity, and used some of that money to pay off its entire low-interest loan from the U.S. Department of Energy.

But back to those Q1 financials: The company reported net income of $11 million on total revenue of $562 million.

Tesla was profitable because it earned $68 million from selling Zero-Emission Vehicle credits (which it earns under California state laws governing vehicle emissions) to other automakers, and a further $17 million from selling Greenhouse Gas emission credits.

It also logged $11 million in warrant liability reversals, along with $7 million in foreign currency adjustments.

Take away the revenue sources that are a byproduct of Model S sales--both enabled by legislation, as a testy OpEd in the Wall Street Journal points out--and the financial adjustments, and the company lost $91 million on building and selling its cars (along with building and selling powertrains for so-called compliance cars to other automakers as well).

On the Q1 earnings call, Tesla CEO Elon Musk and CFO Deepak Ahuja said that its financial planning assumes that revenue from selling emission credits would fall to zero by the end of the year, although it was possible that the number could be higher.

The pair also described the steps the company is taking to reduce the staff hours and parts costs that go into building a Model S.

Now that parts vendors are starting to believe that Tesla is actually building the volumes it claimed it would--perhaps 21,000 this year, against the 3,000 one vendor supposedly tooled up for--the  company will benefit from economies of scale that drive down parts prices.

It's also steadily cutting the number of worker hours that go into each car.

The problem is that these cost reductions don't show up in the financials until the cars they apply to have been sold--and financials are only reported every three months, per SEC rules.

So, Tesla suggests that Model S cars sold in the second and third quarters should have a lower Cost Of Goods Sold. That's how you get to profitability.

The company just didn't quite make it there in Q1.

Here endeth today's lesson on accounting for carmakers.


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Comments (28)
  1. The ZEV credits and GHGE credits are a direct consequence for selling Model S. So what is your point exactly?

  2. I think the point is that those credits will go away later. So to be profitable in later quarters, they will need to reduce cost of goods sold (as Voelcker has said).

  3. Huh?

    And gross margins will change too. So will product offerings.

    I see no value in pulling "eventually" into the Q1'13 earnings report.

  4. it's pointing out that Tesla is temporarily profitable.
    if California raises the ZEV guidelines to 2% they could increase that,
    if other manufacturers start selling electrics, they could lose it.
    I'd say Tesla needs to focus on dropping costs of goods.

  5. Ease up guys. Any time a company that makes, or losses, money based one-time-charges, it is going to be part of the discussion.

    Discussion of one-time-charges is standard financial reporting. Benefits from things like currency exchange and the like will not repeat from quarter to quarter, people want to know about that.

  6. Good write up, accurately stating that while the credits will go away, they SHOULD be replaced by more efficient manufacturing processes and economies of scale.

  7. Tesla Made A Profit On Its Cars in Q1: Let's Be Clear

    You know, Tesla's Q1 balance sheet shows $439M in long term debt, and as the instrument of debt is only "enabled by legislation", so let's discount it, too, shall we?

    Wow! Look at all the profit!! $348M in the black!!! (See the problems with creative accounting?)

    Tesla's credits were and are an integral and legal part of their business plan--they didn't fall from the sky the day before the earnings call. They couldn't have been earned without having made EV's such as the Model S.

    How exactly is this not making a profit from their cars??

  8. Because this is how John brings balance to the Force. I expect the Battle for Hoth to be replayed here shortly.

  9. Brad, I'm not sure what your beef is here, but the article is accurate. The profitability did not come from the cars alone, per se, it came from credits that will not necessarily be there in the future. The loans and long-term debt, however, despite your assertion, will be there, of course.

    The fact remains that the premise of the article is true, that Tesla will need to balance the coming loss of the credits by reducing costs elsewhere, specifically per-vehicle manufacturing costs. That's completely true, of course, Tesla Motors is aware of this, always has been, and is making progress toward this.

    Tesla has faced far bigger obstacles and succeeded, of course. Tesla will get better pricing from suppliers & become more efficient as well.

  10. tesla is currently losing 91 million on 560 million in sales.
    That means they need to either increase prices or decrease costs.
    it's 20%, it's not the moon, and battery prices are declining fast.

    if they can keep growing their charger network and hold their price point while improving the Model S, they will probably make it.

    Given the challenges they've surpassed, i think they have a fair shot now

  11. I would agree, Pat. Some of the negative financial results are tied, of course, to long-term expansion and development which are absolutely essential, even if they don't pay off immediately.

    As someone who works for a supplier, I'll just state again that Tesla has faced some unbelievable obstacles to get decent suppliers to this point. The company will have far better options from here on out and that will help them reduce costs. No, it's not a guarantee, of course, but it's a great start.

  12. Funny (or scary) I am beginning to recognize the articles that Mr. Voelcker posts just by reading their titles. Thanks for educating us and keeping some of us sober :)

  13. It is also worth noting that the building of cars is a profitable exercise, even in Q1 (the more cars they build and sell the higher the profit). That is very different from making more loss if you build more cars! The thing is, they also have large setup costs associated with servicing, "show rooms", super-chargers, etc... This is primary source of the operating loss.

  14. The conservative weeinies with whom we are stuck with having in this world are always going to find fault with anything Progressive or Liberal because they are just mentally and emotionally sick. That is why they support America having hundreds of millions of guns the highest murder rate in the world no reasonable controls. They also fight for disenfranchisement and zero immigration tolerance when in fact their ilk were the perpetrators of Native American genocide and black slavery. They also deny man causes climate change and are pro "right to work" (=worker exploitation) so of course these unseemly characters will find any kind of twisted fault they can with Tesla. The FACT is the "Tesla Company" did indeed make a profit!!

  15. For someone who claims to be Progrssive and Liberal, you don't seem to be very tolerant of others. People are allowed to have their own thoughts and opinions, without being cast as racists haters.

    Anyone who has followed the Tesla story closely (including moderates like myself) understand the zero-emission credits pushed them to a 1Q profit. This isn't breaking news or even controversial. Telsa did what any smart business would do and took advantage of every opportunity available to them. The shareholders obviously approved.

  16. While I agree with all of the facts you describe, this is not the appropriate place for a political rant. The article has nothing to do with politics, it's simply a review of auto manufacturing accounting as applied to Tesla.

  17. This Q1 shareholders letter is like a financial Rorschach test. The fans will see profit, the sceptics will see losses. Both groups have a point. It's all about how you pick your cherries. One can see profit and ignore it had a lot to do with incidental or fading income sources. One can claim that the carmaking business was not profitable by ignoring that car production did in fact have a positive gross margin, even discounting ZEV credit income and that high ongoing investment is counted as losses for accounting reasons.

    It's a mixed picture but I think there is real money in building these cars once production is rationalised but of course only if they can be sold in the right sort of numbers. Time will tell.

  18. The CFO at Tesla did the right thing. Show a profit in Q1. It was perfectly timed, along with tons of accolades including "Car of The Year" to generate a large stock bump. That stock bump has enabled further stock sales which will solidify Tesla's financial well being.

  19. Fair article. It's absolutely true that Tesla didn't make a profit on the core business in Q1.

    But the reasons for that are understandable, and my own process analysis was showing major increases in process speed/efficiency towards the end of Q1. They've started Q2 with drastically higher efficiencies than they started Q1 with, so its certain we'll see major improvements.

    And it should be important to note that, Q4 of 2012 had big "one time" revenue boosts from regulatory credits and whatnot. They still lost over $90 million in the quarter. So in Q1 they obviously made massive strides towards profitability in their core business. That really oughta've been included in the "lesson on accounting" as well, but its not a major issue.

  20. True Tesla didn't make profit on their core business at 17% margins, as predicted. Though the leaders at Tesla were bright enough to pull off a small profit with sales and one time financial accounting... And they are predicting even as margins rise, they will not reach profitability in Q2. And the new lease terms will be a bigger drag on Tesla (earnings) in Q2 than expected. Though as margins rise and ZEV credits dry up they expect to be profitable by Q4. If this happens then it will prove two things that we already know. Tesla is graced with luck skill and an ability to understand their target markets. And analysts cannot read, since this whole Tesla story seems to constantly catch the by surprise. Luckily John can read this stuff for em.

  21. Blah, Blah, Blah....all of you BLAH! Have any of you seen, sat in, drove, or currently own a Tesla vehicle? I'm going to go out on a limb here with a giant, ummmmmm No.
    Are you serious with the, "Tesla didn't make a profit from it's cars in Q1." nonsense? Last I checked, a profit is a profit.
    How many companies do you know can "turn a profit" from revenues generated NOT from their core business? Genius, just genius. Q2 is going to be punch all of the crazy, extreme jihadist, anti-american, gas guzzlin' GWB lovin' nutbags right in the sack.
    Tesla is here and here to stay, so all of you Romneys should stop hating.
    Yes, I have seen, sat in, drove, designed, and am the owner of a Tesla Model S. The revolution has begun, KCCO. 750 Char suck.

  22. The plan all along has been to build cars more efficiently and raise margins. Tesla has stated the ZEV credits will diminish as more cars produced are bound for Europe. Nothing to see here folks, time to move on home.

  23. "Here endeth today's lesson on accounting for carmakers."

    And what a good lesson it was! Thank you for teaching it.

  24. You must be logged in to post your comment.only in Tesla's case would such nit picking be mentioned. its a common practice to determine profits simply based on money coming in and money going out... wow!! that makes sense!

    how many companies would have lost money had they not taken a "write down" of a tax credit that they could have taken over several years but took it at that time? or other companies reducing profit by recording infrastructure improvement loans meant to be booked over X years in X/2 or X/3 years?

    manipulating the buck is the norm, not the exception. Tesla has a product with value (ZEV credits) so why not sell them? they sure as heck cant use em

  25. Does it matter?

    TSLA stock price says "profit!!!"

  26. Though I understand the gist of argument that Tesla didn't make profit directly from vehicle sales; the connotation is a bit negative. The connotation is that they are somehow using creative, unsavory, or government funds to account for this profit that real profitable companies don't use. Which of course, is hogwash. I think Tesla is playing by the rules as designed by entities external to them to the best possible advantage. To say their profit isn't from their cars would imply that their "real" product is a ZEV credit. Imagine, Tesla announces a new ZEV credit for you to buy (for $80k) ... and you magically get a Model S as a "free gift".

  27. That's like saying they ran their car plant using their own windmill and didn't have to pay for power so that's why they turned a profit. The credits are part of selling an EV.


  28. Without building and selling the Model S there are no ZEV credits, so technically they did make a profit on their core business.

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