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Tesla Motors, Inc: Key Things Investors Should Know

 May 10, 2013 12:18 PM


(By Mani) Tesla Motors, Inc. (NASDAQ: TSLA) first quarter results in all probabilities could be a landmark in the company's operational performance as the electric car maker reported first profit in its 10-year history. However, there are certain things that investors should focus on.

Gross margin for the quarter was 17 percent, double the 8 percent reported in the previous quarter. Tesla reaffirmed its guidance of a gross margin of 25 percent in the fourth quarter.

The company took up fiscal 2013 delivery estimate to 21k units from 20k. More importantly, management conveyed strong confidence in getting to a 25 percent gross margin (ex regulatory credits) near the end of the third quarter and averaging 25 percent for the fourth quarter.

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"While this appears to be a very high hurdle (we est. the need to reduce costs by ~$18k per unit), management comments implied that the Q1 exit rate was much higher than the quarterly average and that they have high visibility on the improvements," Deutsche Bank analyst Rod Lache wrote in a note to clients.

In terms of orders, the company stated that current flow is more than 20k units annualized. In terms of the Zero Emission Vehicle (ZEV) Credits, Tesla believes benefit will dwindle throughout 2013 and the market will be saturated by the fourth quarter.

Gross margin for the second quarter is expected to be in the high teens versus 17.4 percent in the first quarter, but revenues will be significantly lower due to lower deliveries (4,500 units guide vs 4,900 in Q1) and the impact of lease accounting. The company will be shipping a significant part of late second quarter production to Europe which will constrain actual customer deliveries.

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"This timing issue will lead to an increase in inventory, which, along with lower net income will move operating cash flow to neutral (from +$65MM in Q1)," Lache said.

The other complicating factor in the second quarter and looking forward is that approximately 30 percent of U.S. deliveries (penetration likely increasing over time) will now be handled under lease accounting. In essence, due to Tesla's residual value guarantee on its U.S. pseudo-lease program, revenue and gross margin on these vehicles will be spread over 39 months.

Importantly, only approximately 50 percent of the revenue will be booked over the 39 months (with the residual value booked at the end), but 100 percent of the gross profit will be booked over the 39 months, providing a boost to quarterly gross margin.

At the end of the 39 months, if the customer chooses to keep the vehicle, Tesla will book the residual value at 0 gross profit. If the customer returns the vehicle, Tesla will book the difference between the residual value and what they recoup by selling the vehicle.

"We believe this "contingent liability" could be ~$500MM by the end of 2014, making future Model S residual values a key risk to the Tesla investment thesis," Lache said.

In terms of demand outlook, management noted that order flow is currently at a rate greater than 20k per year. Bearish investors appear to be very focused on what remains of Tesla's 15k unit backlog of orders as of 2012. Anecdotal evidence of current US order-to-delivery times of about 8 weeks is leading many to believe that the US piece of that backlog has evaporated.

However, the current Refundable Membership Fee account of $130 million is evidence that a significant number of people within that backlog are still considering a Tesla.

"And all that really matters is forward flow and we take Tesla's statement of >20k annualized order rate at face value and supportive of continued strong demand for the vehicle," Lache said.

With vehicles not yet widely available for a test drive in Europe and Asia, demand is expected to remain sufficient in the medium-term to at least maintain current production levels.

Meanwhile, a large part of Tesla's current investor base is not basing its investment decisions on traditional valuation techniques as they believe that Tesla has the potential to be significantly disruptive to the automotive industry and massively profitable as a result.

Palo Alto, California-based Tesla reported first-quarter profit of $11.2 million or breakeven a share, compared to a loss of $89.9 million or 86 cents a share last year. Excluding items, it earned 12 cents a share, tripling Street view of 4 cents a share.

Tesla, founded by billionaire Elon Musk, said it sold 4,900 Model S cars in the quarter. Tesla's revenues for the quarter surged to $561.8 million from barely $30 million last year while analysts expected revenues of $492.02 million.

Tesla expects to build about 5,000 Model S vehicles in the second quarter, and to deliver over 4,500 vehicles in North America.

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