Tesla Motors reported strong sales results for the second quarter, posting 5,150 units of the battery-electric Model S in North America, along with a significant improvement in automotive non-GAAP gross margin. Tesla had projected deliveries of 4,500 units.
Q2 revenues were $551 million on a non-GAAP (Generally Accepted Accounting Principles) basis and $405 million on a GAAP basis. While deliveries increased by 5% from Q1, overall revenues were flat due to an expected drop in ZEV credit revenue, falling to $51 million in the second quarter from $68 million in the first. On a non-GAAP basis, net income was 26 million or $0.20 per share, excluding one-time and non-cash items, and the effect of lease accounting. Including those, GAAP net loss for the quarter was $31 million or $(0.26) per share.
Q2 results, GAAP and non-GAAP reporting. Tesla introduced its lease-sale hybrid financing product for the Model S through one of the company’s specified banking partners at the beginning of Q2. (Earlier post.) More than 30% of vehicles delivered in Q2 took advantage of the financing program.
Although the company receives full payment for these cars upfront, GAAP requires treating the sales as leases and spreading the recognition of revenue and cost over the term covered by the resale value guarantee—approximately three years. GAAP reporting thus obviously can have a significant impact on Tesla’s reporting, given the hybrid leasing/sale model. For example, on a GAAP basis, automotive revenue in Q2 dropped 26% to $401.535 million from $555.203 million in Q1, with a Q2 net loss of $31 million compared to a Q1 net profit of $11 million.
To facilitate closer comparability with the first quarter, Tesla said, it presented non-GAAP financials excluding the effect of lease accounting by adding back all deferred revenues and related costs for Q2 Model S deliveries.
In Q2, the vehicle average selling prices (ASPs) also declined slightly as Tesla sold 60 kWh range limited cars at a $10,000 lower price point to honor orders for the now discontinued 40 kWh battery pack. This temporary unfavorable product mix impacted its automotive non-GAAP gross margin in Q2 by about 1 percentage point, the company said.
Tesla continued to supply full electric powertrains to Toyota for the RAV4 EV and completed various deliverables under the Mercedes Benz B-Class EV program which contributed to development services revenue of $3.6 million in the second quarter, down 45% from $6.6 million in the first quarter.
R&D expenses were $44 million on a non-GAAP basis and $52 million on a GAAP basis. R&D spending declined from Q1 on a non-GAAP basis, as Model S related development expenses continued to decline.
Total cash on hand was $747 million at the end of the quarter, an increase of $516 million from last quarter. During the quarter, Tesla raised a little over $1 billion through the issuance of 4.5 million shares of common stock and $660 million of convertible debt. About $450 million of the offering proceeds were used to pay off its DOE loan, including an $11-million fee for early payment.
Operations and margin. During Q2, Tesla improved its production rate by 25% from 400 to almost 500 vehicles per week. During the quarter, it produced several hundred more Model S vehicles for use as service loaners, for customer test drives and for deliveries to European customers in Q3.
Total non-GAAP gross margin improved to 22%, up from 17% last quarter. Despite an expected unfavorable product mix in Q2, non-GAAP automotive gross margin excluding zero emission vehicle (ZEV) credits improved by 8 percentage points.
Tesla said that it expects to further improve non-GAAP automotive gross margin via cost reduction to a target level of 25% (excluding ZEV credits) in Q4 this year. The company is cautiously optimistic that it may outperform that number in future quarters.
Outlook. Tesla plans to deliver slightly over 5,000 Model S vehicles in Q3, and remain on plan to deliver 21,000 vehicles worldwide for 2013. It expects that Q3 ASPs will rebound from the Q2 level as it delivers European Signature Series cars and demand for 85 kWh cars remains strong.
If demonstrated demand in North America and Europe is matched by similar demand in Asia, annualized global sales for Model S could exceed 40,000 units per year by late 2014, the company suggested.
Tesla expects Q3 non-GAAP gross margin to remain in the low 20% range, with continuing improvements in Model S vehicle margin, offset by significantly lower ZEV credit revenue.
R&D expenses will increase significantly in Q3 as it accelerates product development efforts on Model X, Model S right hand drive, and localization of Model S for international markets. SG&A expenses will also rise, driven by the growth in retail locations, service centers and Supercharger facilities.
Tesla said it expects to be non-GAAP profitable and generate positive cash flow from operations every quarter this year excluding any benefit from ZEV credits.