Tesla Q2 Loss Narrower than Estimates, Deliveries Up 17%

Tesla Motors, Inc. TSLA reported adjusted loss (excluding one-time items other than stock-based compensation expense) of 14 cents per share in the second quarter of 2014, deteriorating from adjusted income of 5 cents in the year-ago quarter. The loss was, however, narrower than the Zacks Consensus Estimate of a loss of 24 cents.

Second-quarter 2014 adjusted results exclude the impact of non-cash interest expenses related to convertible notes of 17 cents per share and deferred gross profit of 13 cents for Tesla's Model S cars due to lease accounting. On the other hand, second-quarter 2013 adjusted results exclude the impact of early extinguishment of DoE loans of 13 cents per share, non-cash interest expenses related to convertible notes of 1 cent per share and deferred gross profit of 15 cents for its Model S cars due to lease accounting. Including these items, the company reported net loss of $61.9 million or 44 cents per share compared with $30.5 million or 23 cents per share in the second quarter of 2013.

Including the impact of Model S revenues deferred due to lease accounting, top line jumped 89.9% to $769.3 million in the quarter from $405.1 million a year ago. Revenues, however, lagged the Zacks Consensus Estimate of $802 million.

The year-over-year revenue growth was driven by higher vehicle deliveries. Tesla delivered 7,579 cars in the second quarter, surpassing the guidance of 7,500 deliveries and increasing more than 17% over the first quarter of 2014. The automaker also benefited from initiation of the delivery of powertrains to Daimler AG (DDAIF) for the Mercedes-Benz B Class Electric Drive, although the winding down of electric powertrain components sales to Toyota Motor Corp. TM for the RAV4 EV is hurting revenues.

Gross profit, including the impact of Model S gross profit deferred due to lease accounting and stock-based compensation expenses, amounted to $213.0 million in second-quarter 2014, against $100.5 million in the year-ago quarter.

Revenues (on a reported basis) from Automotive sales, jumped to $768.2 million in the quarter from $401.5 million a year ago. Reported revenues from Development services (producing electric vehicle powertrain components and systems for other automobile manufacturers) slumped to $1.1 million from $3.6 million a year ago.

Financial Position

Tesla had cash and cash equivalents of $2.7 billion as of Jun 30, 2014, compared with $845.9 million as Dec 31, 2013. Long-term debt was $2.4 billion as of Jun 30, 2014, versus $586.3 million as of Dec 31, 2013.

Cash flow from operating activities amounted to $57.1 million in the first half of 2014, compared with $28.8 million in the year-ago period. Capital expenditures increased to $317.0 million from $98.2 million in the first half of 2013.

Gigafactory Update

Tesla has signed a formal agreement with Panasonic Corp. PCRFY for partnership in the Gigafactory. Under the agreement, Panasonic will invest in production equipment for the manufacture of lithium-ion battery cells, while Tesla will invest in land, buildings and utilities for the Gigafactory as well as production equipment for battery module and pack production. Moreover, Tesla will be responsible for the management of the Gigafactory. Other partners will also be involved in the Gigafactory for manufacture of the required precursor materials.

In June, Tesla broke ground for the potential construction of the Gigafactory near Reno, NV. While the location of the Gigafactory has not been decided yet, Tesla is planning to hold ground-breaking ceremony for the factory at three sites to avoid any delay in construction. Construction work will begin at one of the three sites by the end of the year and will be wrapped up by 2017.

Outlook

Tesla expects to record a marginal adjusted profit in the third quarter of 2014. Production volume in the third quarter of 2014 is expected to be 9,000 cars, up 2.7% from 8,763 cars produced in the second quarter of 2014. This includes the impact of the two-week production shutdown at the Fremont factory for the transition to the new final assembly line, which is expected to result in production loss of about 2,000 cars in the third quarter. However, due to the enhanced factory capacity, Tesla expects production volume to increase to an average of 1,000 cars per week in the fourth quarter of 2014 from 800 cars at present.

Further, vehicle deliveries are expected to increase to 7,800 in the third quarter of 2014 from 7,579 cars in the second quarter. However, deliveries are expected to be lower than production due to increase in the number of vehicles in transit. Tesla also plans to lease about 300 vehicles in North America in the third quarter, which is expected to increase further in the fourth quarter. Further, the automaker anticipates to deliver more than 35,000 vehicles globally in 2014, up 55% over 2013.

Adjusted automotive gross margin, excluding ZEV credits, is expected to increase to 28% by the end of 2014. The company believes that declining parts prices and economies of scale will benefit its gross margin.

Operating expenses are expected to increase in the third quarter of 2014. The company believes that research and development expenses will increase 20% sequentially in the quarter. Selling, general and administrative (SG&A) expenses are projected to rise 15%.

Capital expenses for the year are expected to range between $750 million and $950 million, up from the previous projection of $650–$850 million. Tesla is investing heavily in increasing production capacity, development of Model S and Model X, the Gigafactory construction and expansion of sales, service and Supercharger infrastructure.

Our Take

Tesla faces a unique problem of demand exceeding supply. While the company is steadily increasing production, the demand is increasing at a much faster pace. Thus, revenue growth in the future depends significantly on the company's ability to increase production.

The recent introduction of the right hand drive Model S in the U.K. and Hong Kong should also boost revenues from the next quarter. Moreover, we expect revenues to increase rapidly once Model X enters the market.

Meanwhile, the company is investing significantly in infrastructure and product development, which is dragging the bottom line at present but should reap ample rewards in the long run.

Tesla currently carries a Zacks Rank #3 (Hold).