Tesla reached profitability in the first quarter of 2013 for the first time in its ten year history. According to the shareholder letter, the company exceeded its targets for deliveries; significantly expanded gross margin; and improved execution throughout the company.
Excluding non-cash warrant and stock option items, the company generated a profit of $15 million. Including those factors, its GAAP profit was $11 million. The company said it achieved profitability despite the benefit of a one-time accounting gain related to the US Department of Energy (DOE) warrant.
Total revenues for Q1 rose 83% from Q4 to $562 million, a new record for Tesla. In addition to record Model S deliveries in Q1, it continued to supply full electric powertrains and battery packs to Toyota for the RAV4 EV program. It also completed various deliverables under the Mercedes Benz B-Class EV program which contributed to total development services revenue of almost $7 million.
From Q4 to Q1, total gross margin rose from 8% to 17%, as a result of a higher Model S production rate, manufacturing efficiencies, part cost reductions and regulatory credit sales. Zero emission vehicle (ZEV) credits sold to other automakers amounted to approximately $68 million or 12% of revenues. Tesla said it expected this to decline significantly in future quarters, as ZEV credits will only apply to about 1/6 of worldwide deliveries, versus roughly half of US deliveries, and the price per credit has declined.
Tesla reaffirmed its prior guidance of a gross margin of 25% in Q4 2013, assuming zero ZEV credit revenue.
Research and development (R&D) expenses were $47 million on a non-GAAP basis and $55 million on a GAAP basis. R&D spending declined by 23% from Q4 on a non-GAAP basis, as very high expenses associated with the Model S launch declined substantially.
Selling, general and administrative (SG&A) expenses were $41 million on a non-GAAP basis and $47 million on a GAAP basis, up slightly from Q4. The increase was driven primarily by additional selling expenses related to the expansion of the store network and service infrastructure, and by increased information technology costs.
Total cash was $231 million at quarter end, an increase of $10 million from last quarter, despite making the second quarterly principal repayment of almost $13 million on our DoE loan. Total cash includes short term restricted cash set aside primarily for the next DOE loan payment due in June 2013, and excludes noncurrent restricted cash.
During Q1, Tesla consistently produced 400 or more Model S vehicles per week, for a total of more than 5,000 during the quarter. 4,900 vehicles were recognized as revenue, exceeding initial Q1 guidance of 4,500.
Tesla said it is currently receiving orders at a rate greater than 20,000 per year worldwide. Orders in a particular region increase proportionate to the number of deliveries—i.e., customers are selling other customers on the car. Given that it has not yet delivered any customer cars outside of North America, there would appear to be significant upside potential in Europe and Asia, the company said.
Outlook. Tesla said that it expected to build about 5,000 Model S vehicles in Q2, with some cars to be in transit to Europe for start of deliveries in Q3. As a result, it expects to deliver slightly more than 4,500 vehicles during Q2, all in North America. For the full year of 2013 it raised its guidance to about 21,000 deliveries.
The company expects to achieve gross margin in the high teens in Q2. This expectation includes the impact from lower ZEV credit sales, a lower average selling price due to a higher mix of 60 kWh cars, as well as limited sales of the now discontinued 40 kWh cars, which will have a range-limited 60 kWh battery pack.
The lease accounting treatment for cars sold through the new financing plan (earlier post) will have no impact on cash flows. The company expects to be roughly breakeven on cash flow from operations in Q2, despite launch costs in Europe and an increase in service centers, stores and Supercharger stations.
Deferred revenue recognition required by GAAP for lease accounting will lead to a net loss on paper in Q2.
Tesla expects operating expenses to increase moderately in Q2. R&D expenses are expected to increase slightly from Q1 as the pace of product development starts to pick up. SG&A expenses will continue to rise moderately, primarily due to the growth in our stores and service centers.