Final Examination – ACG6175 CMBA Summer 2015
By submitting this examination for grading I affirm that I have not discussed this examination
with any other person, nor accessed or employed any information not included in the materials
Write your answers in standard English.
Include any computations you make in completing your answers.
1) Decompose Tesla’s ROE for the annual periods 2012-2014. Note any trends you observe.
2) Tesla notes that Q1 automotive revenue includes $51 million from the sale of ZEV credits.*
Assuming that 2012-2014 annual revenues are comprised of the same percentage of ZEV
revenues as was the case in Q1 of 2015, re-compute Tesla’s income after removing the effect of
the ZEV sales and decompose ROE using the revised data.
3) Compare your new calculations to your ROE decomposition from question 1.
4) Comment on the quality of Tesla’s earnings.
5) Given that Tesla has consistently generated losses, how has the company managed to survive?
Read Tesla’s Stockholder Letter for the first quarter of 2015. Tesla repeatedly refers to “nonGAAP” results.
6) What are the specific departures Tesla makes from GAAP in computing these numbers?
7) Why do you think the company keeps referring to “non-GAAP” measures?
*Here’s how ZEV (zero emission vehicle) credits work: Every major auto manufacturer in the
U.S. is required to sell a given percentage of zero-emission vehicles (by 2025 it will reach 15%).
Failure to meet this standard results in a fine. Manufacturers receive zero emission vehicle
“credits” for each ZEV sold. ZEV sales were, however, only 1% of automotive sales in 2014.
This means many manufacturers fall below the threshold. They can, however, buy “credits” from
other companies in order to keep from paying the fines. Since Tesla only sells ZEVs it has “extra”
credits that it can sell.
Tesla Motors, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Cost of revenues
Total cost of revenues
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss per share of common stock, basic and
Weighted average shares used in computing net
loss per share of
common stock, basic and diluted
Year Ended December 31,
Consolidated Balance Sheets
(in thousands, except share and per share data)
Cash and cash equivalents
Restricted cash and marketable securities
Prepaid expenses and other current assets
Total current assets
Operating lease vehicles, net
Property, plant and equipment, net
Liabilities and Stockholders’ Equity
Capital lease obligations, current portion
Convertible senior notes
Total current liabilities
Capital lease obligations, less current portion
Deferred revenue, less current portion
Convertible senior notes, less current portion
Resale value guarantee
Other long-term liabilities
Commitments and contingencies (Note 11)
Convertible senior notes (Notes 6)
Preferred stock; $0.001 par value; 100,000,000
shares authorized; no shares
issued and outstanding
Common stock; $0.001 par value; 2,000,000,000 shares
authorized as of
December 31, 2014 and 2013,
respectively; 125,687,607 and 123,090,990
shares issued and outstanding as of December 31,
2014 and 2013, respectively
Additional paid-in capital
Total stockholders’ equity
Total liabilities and stockholders’ equity
Consolidated Statements of Cash Flows
Cash Flows From Operating Activities
Adjustments to reconcile net loss to net cash
provided by (used in)
Depreciation and amortization
Amortization of discount on convertible debt
loan origination costs
Change in fair value of DOE warrant liability
Fixed asset disposal
Other non-cash operating activities
Foreign currency transaction (gain) loss
Changes in operating assets and liabilities
Inventories and operating lease vehicles
Prepaid expenses and other current assets
Resale value guarantee
Other long-term liabilities
Net cash provided by (used in) operating
Cash Flows From Investing Activities
Purchases of property and equipment excluding
Withdrawals out of our dedicated DOE account,
(Increase) decrease in other restricted cash
Purchases of short-term marketable securities
Maturities of short-term marketable
Net cash used in investing activities
Cash Flows From Financing Activities
Proceeds from issuance of convertible debt
Proceeds from issuance of common stock in
Proceeds from issuance of warrants
Proceeds from exercise of stock options and
other stock issuances
Proceeds from issuance of common stock in
Principal payments on DOE loans
Year Ended December 31,
Purchase of convertible note hedges
Common stock and convertible debt issuance
Principal payments on capital leases and
Collateralized lease borrowing
Proceeds from DOE loans
Net cash provided by financing activities
Effect of exchange rate changes on cash and
Net increase (decrease) in cash and cash
Cash and cash equivalents at beginning of
Cash and cash equivalents at end of period
Tesla Motors – First Quarter 2015 Shareholder Letter
Produced 11,160 vehicles, exceeding plan while improving efficiency
Record quarterly deliveries of 10,045 vehicles
Achieved gross margin target, despite strong dollar
Launched All-Wheel Drive Model S 85D and 70D
Introduced Tesla Energy products
Model X on track for start of deliveries in late Q3
May 6, 2015
Dear Fellow Shareholders:
In 2015, we have already expanded our product portfolio with exciting new products and features while continuing to execute on
our long-term plans. We ramped the manufacturing and availability of All-Wheel Drive Model S 85D, introduced 70D, and are
building release candidate prototypes of Model X. Last week, we also launched our new Tesla Energy business, introducing a
suite of energy storage products with a vision that we believe will help to eventually transform the global energy paradigm. Both
our vehicle and Tesla Energy businesses will benefit from our Gigafactory project, which should start producing initial quantities
of battery packs in 2016.
We also significantly improved manufacturing efficiency and reduced per unit vehicle costs while achieving a higher average
weekly production rate during Q1. These efforts, combined with a favorable product mix, helped us reach our Q1 non-GAAP
automotive gross margin target, despite the significant negative impact of a strong dollar. We were also able to accelerate yearover-year revenue growth in Q1, while improving operational efficiency as reflected in lower than expected growth of operating
expenses. Overall, these achievements represent a strong start to a very big year at Tesla.
Expanding the Market for Model S
We continue to see growing Model S demand. In Q1, both North American and European orders were much higher than Q1 last
year, despite limited availability of 85D and before the announcement of 70D. While we still have work to do in China, we saw
encouraging signs of a return to growth in orders there as well.
Recently, order rates have accelerated even further with greater availability of 85D and the launch of 70D. This is especially
encouraging as potential customers in many markets have yet to experience these products first hand. 70D has only been
shown in North America, and our all-wheel drive cars will not be available in right hand drive markets until Q3. We remain
confident in our ability to deliver approximately 55,000 Model S and Model X vehicles combined in 2015, as increased availability
of all our Model S variants continue to drive demand. To sustainably scale for increased deliveries, our inventory of in-transit
customer-configured cars must increase, and in Q1 we added 1,100 such vehicles to the pipeline.
Our ability to continually innovate and reduce costs enabled us to
recently launch the new Model S 70D. As a very compelling value
in the premium sedan segment, the All-Wheel Drive 70D expands
the market for Model S. 70D has 240 miles of EPA-rated range,
superior all-weather performance, and a 0-60 mph time of 5.2
seconds. It also includes a comprehensive list of standard
features such as Autopilot safety technology, access to our
Supercharger network, and turn-by-turn navigation for $75,000,
before tax credits and fuel cost savings. So far we are pleased
with the increased demand that has been created by the 70D and
the little effect it has had on the demand for our other Model S
All-Wheel Drive Model S 85D
Model S customers benefit from our free data connectivity and unique over-the-air software updates, which allow us to improve
customer cars over time. In March, we introduced our second significant software update of Q1, enabling new active safety
capabilities, adding intelligent range and charge management features, and boosting performance by increasing acceleration
and top speed. Additional software updates are scheduled in Q2 that will include more Autopilot safety and convenience
features for appropriately equipped cars.
The expansion of our customer support network continues at a rapid pace. With 425 Supercharger locations and 100 service
locations globally, driving a Model S is becoming more compelling every day. So far, our customers have Supercharged 111
million miles globally.
Improving Production Capabilities
In Q1, we manufactured 11,160 vehicles, 10% better than guidance, as we averaged more than 1,000 cars per production week.
We successfully increased production on our new small drive unit line, which was critical to meeting the demand for our all-wheel
drive cars. Our production launches of 85D and 70D proceeded more smoothly than our prior launches, highlighting the
flexibility and increasing maturity of our manufacturing capabilities. With a more stable production cadence in Q1, we
implemented efficiency improvements and reduced labor hours by more than 20% per car by the end of the quarter.
During the quarter, we also made significant progress on the installation of a new body shop, paint shop and stamping presses
that will establish extra capacity for both Model X and Model S. We are now building and testing release candidate Model X
prototypes with increasing design maturity, and are pleased with the progress of this program.
These developments, along with our maturing production capabilities, boost our confidence in the launch and production ramp of
Model X, which is on track for start of deliveries in late Q3.
In addition, steady construction progress continues at the Gigafactory, and together with Panasonic, we now expect to start
complete battery manufacturing, from cells to modules to battery packs, in 2016.
In Q1, we made substantial progress on our 2 generation Tesla Energy
grid battery products. This led to our April 30 launch of the $250/kWh
industrial Powerpack and the $350/kWh residential Powerwall, and these
attractive prices include controls, cooling and DC/DC power electronics.
The customer response to these products and the Tesla Energy vision
broadly has been extremely positive.
We are now preparing our supply chain and production teams to start
volume builds on these new products in Q3. Production will begin at the
Tesla Factory in Fremont, and in Q1 2016 will expand into the
Gigafactory and accelerate significantly.
The total addressable market size for Tesla Energy products is enormous
and much easier to scale globally than vehicle sales. We are pursuing
product certification in multiple markets simultaneously and plan to ramp
deliveries in the US, EU and Australia in Q4. When combined with low
cost renewable energy, Tesla Energy batteries provide an achievable
pathway to a 100% zero carbon energy system.
Starting this quarter, our income statement reflects the new classifications of revenues and costs of revenues to segregate our
new vehicle business from our other business activities. “Automotive” revenue and related costs now reflect activities related to
the sale or lease of new vehicles including regulatory credits, data connectivity and Supercharging. “Services and other”
revenues and related costs include activities such as powertrain sales, service revenue, Tesla Energy and pre-owned Tesla
vehicle sales. As usual, we have presented both GAAP and non-GAAP financial information in this letter. A full explanation of
our non-GAAP information and reconciliation to GAAP are included in the tables and accompanying footnotes.
Total non-GAAP revenue was $1.10 billion for the quarter, up 55% from a year ago, while GAAP revenue was $940 million. We
achieved a Q1 total company gross margin of 28.2% on a non-GAAP basis and 27.7% on a GAAP basis.
Automotive revenue was $1.06 billion on a non-GAAP basis, and is comprised of GAAP Automotive revenue of $893.3 million
plus a net increase of $163.7 million in deferred revenue and other long-term liabilities as a result of lease accounting. 10,045
Model S vehicles were delivered in Q1, in line with our April announcement of approximately 10,030 deliveries. The average
selling price of Model S increased slightly during the quarter, reflecting a full quarter of sales of P85D and the introduction of 85D.
This mix improvement was partially offset by the effect of the strong dollar, which negatively impacted both our average selling
price and thus revenue by slightly more than 3% from the prior quarter. As in previous quarters, we offered small discounts
when selling vehicles used for either marketing or as service loaners. These discounts were consistent with last quarter. Q1
Automotive revenue included $66 million of total regulatory credit revenue, of which $51 million came from the sale of ZEV
credits. In Q1, Tesla directly leased 592 cars to customers, which was worth $63 million of aggregate retail value.
Q1 Automotive gross margin excluding ZEV credits was on plan at 26.0% on a non-GAAP basis, and 25.0% on a GAAP
basis. The 330 basis points of sequential improvement in non-GAAP gross margin was driven by lower manufacturing costs and
richer mix, offset partially by the strong dollar, expedited shipping costs related to port delays and an increase in warranty
reserves of about $200 per car.
Q1 Services and other revenue was $46.6 million, up 47% from a year ago. This includes $22 million of powertrain sales to
Daimler and $20 million of service revenue. Q1 Services and other gross margin was negative 3.2%, as compared to 12.1% last
quarter. This sequential reduction in gross margin was primarily driven by a planned price reduction for powertrain sales to
We improved our operational efficiency in Q1, achieving record deliveries and developing new products while managing to grow
operating expenses at a slower rate than expected. Our operating expenses in Q1 were $324 million on a non-GAAP basis, up
9.1% from Q4, and $363 million on a GAAP basis.
Our Q1 non-GAAP net loss was $45 million, or a loss of $0.36 per basic share based on 125.9 million basic shares, while our Q1
GAAP net loss was $154 million or a loss of $1.22 per basic share. Both figures include a $22 million loss, or $0.17 per basic
share, related to mostly unrealized losses from revaluation of our foreign currency holdings due to the strong dollar.
Cash and cash equivalents were $1.51 billion at the end of the
quarter, down $396 million sequentially, as capital expenditures
were $426 million in the quarter. Capital expenditures were
primarily for the capacity expansion and tooling associated with
Model X and all-wheel drive vehicles, as well as the Gigafactory.
Our Q1 GAAP net cash outflow from operations was $132
million primarily due to the $78 million in cash inflows from
vehicle sales to our bank leasing partners which we are required
to classify as a financing activity, and a $63 million increase in
inventory from customer-configured cars that were in transit for
deliveries in Q2.
Gigafactory Construction Progress
During the quarter, we closed on a $100 million warehouse line
in connection with our direct leasing program, and drew down
$78 million of the line by quarter end. We anticipate closing on
additional financing lines in the coming months.
In Q2, we expect to produce about 12,500 vehicles, representing a 12% sequential increase. We plan to deliver 10,000 to
11,000 vehicles in Q2, and we are still on track to deliver approximately 55,000 Model S and X cars in 2015. As part of our
strategy to optimize operational efficiency while scaling for higher deliveries, we are shipping cars using less expensive rail,
rather than by truck, to more regions in the United States and Canada. Also, we are now producing cars based on a uniform
regional production mix throughout the quarter. This enables a more stable cadence of deliveries and in turn improves customer
satisfaction while reducing cost. Both of these actions should lead to an increase of in-transit customer-configured finished
In Q2, we expect to directly lease about the same percentage of cars that we did in Q1. As always, we will use lease accounting
for these cars leased directly through Tesla even in our non-GAAP financial results, as such treatment is consistent with the cash
collected on these transactions. We expect to sell about $15 million of our regulatory credits in Q2, including about $5 million of
ZEV credit sales.
We expect the Model S average transaction price to decline in Q2 as the dollar has strengthened by about 4% against the euro
from the time we last adjusted Model S pricing. This will impact our Q2 gross margin by slightly more than 100 basis points. As
a result, we expect non-GAAP automotive gross margin, excluding ZEV credits, to be just under 25% for the quarter at current
exchange rates. We also expect some average price pressure from a less rich product mix, but our continuing efforts to improve
efficiency and reduce manufacturing costs should offset this impact on gross margin.
In response to the continued strength of the dollar, we have just announced a price increase of about 5% in most European
markets. Since this price increase applies to new orders to be delivered in Q3 and beyond, it will not impact our Q2 results.
We expect Services and other gross margin to be slightly better than breakeven in Q2, and continue to improve to about 5% by
Q4. The improvement will come from cost reductions on Daimler powertrains as well as increased sales of Tesla Energy and
pre-owned Model S vehicles.
Our operating leverage is expected to improve this year, with revenue and gross profit both growing more quickly than operating
expenses. Operating expenses should grow roughly 10% sequentially in Q2, and 45-50% for the full year as we invest in
product development, including the Model 3, and expand our sales capability.
We still plan to invest about $1.5 billion in capital expenditures this year as we expand production capacity, purchase Model X
tooling, continue to build the Gigafactory, and expand our stores, service centers and the Supercharger network.
2015 is off to a strong start, and we are excited about the many opportunities ahead. We expect to continue to develop many
more innovative and exciting products in the coming years.
Elon Musk, Chairman & CEO
Deepak Ahuja, Chief Financial Officer
Tesla will provide a live webcast of its first quarter 2015 financial results conference call beginning at 2:30 p.m. PT on May 6,
2015, at ir.teslamotors.com. This webcast will also be available for replay for approximately one year thereafter.
Certain statements in this shareholder letter, including statements in “Outlook” section; statements regarding gross margin and
profitability, statements relating to the progress Tesla is making with respect to product development, including future Autopilot
features and Model X development and launch plans; statements regarding growth in the number of Tesla store, service center
and Supercharger locations; statements relating to the production and delivery of Tesla Energy products, as well as future
products; growth in demand and orders for Tesla vehicles and the catalysts for that growth; the ability to achieve vehicle demand,
volume, production, delivery, revenue, leasing, gross margin, spending, capital expenditure and profitability targets; productivity
improvements and capacity expansion plans; Tesla Gigafactory timing, partnerships, plans and output expectations, including
those related to cell and battery pack production; and our ability to secure additional financing lines for our leasing programs are
“forward-looking statements” that are subject to risks and uncertainties. These forward-looking statements are based on
management’s current expectations, and as a result of certain risks and uncertainties, actual results may differ materially from
those projected. The following important factors, without limitation, could cause actual results to differ materially from those in the
forward-looking statements: Tesla’s future success depends on its ability to design and achieve market acceptance of Model S
and its variants, as well as new vehicle models, specifically Model X and Model 3; the risk of delays in the manufacture,
production and delivery of Model S and Model X vehicles, and production and delivery of Model 3 vehicles; adverse foreign
exchange movements; the ability of suppliers to meet quality and part delivery expectations at increasing volumes; any failures by
Tesla vehicles to perform as expected or if product recalls occur; Tesla’s ability to continue to reduce or control manufacturing
and other costs; consumers’ willingness to adopt electric vehicles; competition in the automotive market generally and the
alternative fuel vehicle market in particular; Tesla’s ability to establish, maintain and strengthen the Tesla brand; Tesla’s ability to
manage future growth effectively as we rapidly grow,…