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Tesla (NASDAQ:TSLA) knocked Q1 2013 out of the park. Expected revenue and EPS of $0.04 and $499M were crushed, when Tesla finally reported $0.12 and $562M.

Since Tesla's Q1 report, analysts have been consistently lowering estimates for Q2. As it currently stands, the street is expecting EPS of ($0.11) and revenue of $404.86M.

I believe these numbers are vastly underestimating Tesla's progress in the quarter, and will lead to another phenomenal earnings report in 2 months when the numbers are released.

Here are two tables showing the recent trend of the street's consensus on Tesla's earnings and revenue.

(click to enlarge)

(click to enlarge)

Breaking Down Q1 Numbers

In Q1, Tesla delivered 4900 Model S cars and recognized revenue of $555.2M from vehicle sales (the company also generated $6.6M from development services). That's an average of $113,306 per vehicle.

This metric was artificially boosted in Q1 due to a delivery mix skewed towards Tesla's higher end models. This was because of delays within Tesla's manufacturing process which didn't allow 60kWh deliveries possible until Q2.

For this reason, Tesla's revenue per vehicle will likely decline materially in Q2 before normalizing in Q3.

The $6.6M in development service revenue was derived from initial deliveries to Mercedes, for B Class drive-train production.

Tesla's Q2 Guidance Vs. Street Expectations

Tesla has given little financial guidance for Q2, but did set the goal for 4500 US Model S deliveries (with 500 more being shipped off to Europe). Revenue will only be recognized from the US deliveries in Q2 because of the shipping delay for European models.

The street's estimate of $404.6M for 4500 units would result in an estimate of $89,911 in revenue per unit. That's a difference of $23,395 per unit from Q1 results. Although this can be partially explained by a shift in product mix, it appears to be overdone.

This is an overview of Tesla's current retail prices, which shows the difference a higher cost battery pack would make.

ModelBase PriceAdditional Cost
Performance 85kWh$88,570$25,000
85kWh$73,570$10,000
60kWh$63,570Base

Below are my estimates (low/mid/high) for the potential product mixes that are being delivered in Q2.

QuarterQ1 ActualQ2 LowQ2 MidQ2 High
Units4900450045004500
Product Mix (P/85/60)50/50/05/10/8510/20/7015/25/60
Avg Rev Over Base Price*$17500$2250$4500$6250
Difference From Q1N/A($15250)($13500)($11250)

Even in the most extreme case, with the 60kWh model dominating the product mix (85% of deliveries in the Q1), revenue per unit would only be impacted by $15,250. This is significantly less than the street's projection of $23,395, and is assuming Tesla will generate 0 revenue from development services in Q2.

Although battery cost isn't the only factor in determining how much revenue Tesla receives per Model S, in this case it appears to be the most important.

VIN Production Numbers

Tracking most recent Model S VINs (Vehicle Identification Number) has proven to be a remarkably accurate way of getting up-to-date delivery data.

Tesla Motors Club (TMC), a forum for enthusiasts and owners, has been keeping constant tabs on new Tesla VINs. Recently, multiple customers have posted VINs in the high 12000s/low 13000s with late June delivery dates. From these metrics, we can extrapolate Tesla production and demand throughout the quarter.

Although the correlation between higher VIN numbers and later deliveries isn't perfect, it can give us ballpark figures. The last customers to receive vehicles in Q1 were receiving VINs in the low-to-mid 7000s. If Tesla can produce up through VIN 13500 in Q2, that will be between 5500-6000 vehicles for the quarter.

If we assume Tesla's production levels have remained steady from Q1 at 400-500 per week, then this seems very feasible.

Here are two tables of randomly pulled data points from TMC to illustrate the VIN number growth.

End of Q1

CustomerVIN #Midpoint of Delivery Range
166XX3/20
263XX3/20
370XX3/25
472XX3/29
Average67753/24

End of Q2

CustomerVIN #Midpoint of Delivery Range
1128XX6/24
2130XX6/11
3129XX6/25
4128XX6/24
Average128756/21

From the data on TMC, it appears as if Tesla produced about 6100 units from March 24th to June 21st.

I encourage readers to browse through these threads for more detailed VIN data (I, II, III).

Multiple New Demand Drivers

  1. Financing Product: Tesla's new financing product has made the Model S affordable to an entirely new set of consumers. Prior to Q2 2013, every purchase of a Model S was either paid for upfront by the customer, or through an unaffiliated loan program. Elon Musk has stated numerous times that Tesla's new financing product will make the Model S affordable to the top 10 million households in the US, as opposed to just 1 million before.
  2. New Retail Locations: Because Tesla spends no money on advertising, its retail locations are crucial drivers of demand and exposure for the brand. Tesla has ambitiously been expanding its retail network, and set a goal of 25 new showrooms in 2013. The company is also planning to open its first store in China this spring.
  3. European Sales Go Live: Tesla is planning to start delivering vehicles to the EU in Q3 of this year. If this is executed with a similar approach to initial US deliveries, it will result in a rapid reduction in wait time for new orders from Europe. With less of a wait time, customers are more inclined to order on the spot, and the rate of cancellations will decrease. Up until this point, Tesla hasn't recognized revenue for the sale of any European Model S. This is a massive market where gas prices are double what consumers pay in the US.
  4. More Test Drive Vehicles: Although this may seem like only a minor improvement, it should have a material impact on demand. Elon Musk claims that approximately 25% of people who test drive a Model S become a buyer. This is an extraordinarily high ratio and is a strong testament to the quality of the vehicle. Giving every consumer the ability to test drive a Model S will vastly increase Tesla's potential market. Prior to Q2, test drives were almost exclusively given to reservation holders. With more test drive vehicles being made available everyday, more consumers will have a chance to experience and enjoy the product.
  5. Capital Raise/Increased Press: Tesla managed to capitalize on the stock's huge May move by raising $1B through a secondary offering. This gives the company the financial stability to guarantee its existence for at least a couple more years, ensuring any kind of warranty will be in place at least for the near future.

Tesla Comments On Demand

Not only do Tesla's fundamentals point to increasing demand, but management has confirmed this on numerous occasions.

For example, in Tesla's Q1 Shareholder Letter one of the main bullets is "U.S. demand expected to exceed 15,000/year; global demand likely above 30,000/year."

Tesla also increased its guidance from 20,000 Model S units delivered in 2013 to 21,000. This is already a great feat, but may still be vastly underscoring Tesla's sales potential in 2013, if production is able to scale.

In an even more recent CNBC interview, Elon Musk says US demand is just under 20,000 units per year. Already a 20% increase from the 15,000 run rate that was mentioned in the Q1 letter. In that same interview, Musk extrapolates that this could mean global demand is near 50,000 units per year. These numbers are most likely counting European and Asian demand, which has yet to be fully gauged.

Even with macroeconomic headwinds, Europe may be a market as big as the US for Tesla. Gas prices are generally twice as high and there are a lot of government EV incentives. In fact, Norway is set to be on par with California in Model S per capita by the time 2013 has ended.

Possible Q2 Scenarios

In Q1, Tesla guided to deliver just 4,500 units, but ended up hitting 4,900 for the quarter. I believe something similar will happen in Q2, because of VIN data and Tesla's historically underwhelming sales guidance (especially in Q1).

Based on VIN data, Tesla may produce a little over 6,000 units in Q2. The company guided to only produce 5,000 units, with 500 of those being shipped off to Europe. If we assume Tesla will split the extra 1000 units between European and US sales, then it seems Tesla will most likely deliver close to 5,000 vehicles in the quarter. After all, if 5,000 units were produced in Q1, after 2,700 were produced in Q4, wouldn't it seem logical for Tesla to continue expanding production if demand allowed for it?

Below is a table with revenue estimates using the Street's current expectation of $89,911 in revenue per vehicle.

Units Sold40004500470049005100
Automotive Sales Rev ($M)359.6404.6422.6440.6458.5
Development Services Rev ($M)00000
Total Rev ($M)359.6404.6422.6440.6458.5

Here's another table using my low case estimates from above, which indicates a drop of $15,250 in revenue per vehicle from Q1 (based on a product mix tilted towards the 60kWh). This means the average revenue per vehicle would be about $98,000 (113,306-15,250). I also decided to include 7M in development service revenue, which is the same amount Tesla received in Q1.

Units Sold40004500470049005100
Automotive Sales Rev ($M)392441460.6480.2499.8
Development Services Rev ($M)77777
Total Rev ($M)399448467.2487.2506.8

Based on the tables above, it seems like Tesla will handily beat the Street's consensus, especially if it is able to deliver the 5,000 units recent VIN data indicates.

Q3 Guidance

If Tesla's production in Q1 really can scale to 6,000 units, and 1,000 are indeed on their way to Europe to start Q3 (5,000 delivered in the US), then Q3 guidance may also need a serious upwards revision.

As it stands now, the Street is estimating $453M in revenue for Q3. With a normalized product mix that will result in a higher average revenue per unit, this estimate appears to be reflecting anticipated Q3 production of just 3,500-4,000 units. If 4,500 units with artificially depressed pricing (by 10-15%) can generate $404.6M in revenue, then 4,500 units with normalized selling prices should generate about $450M.

This seems particularly confusing when adding in the European deliveries that will be carried over from Q2. If US demand stays constant in Q3 (at 4,500 units, despite management comments that it's growing) then Tesla should deliver between 5,000-5,500 vehicles in Q3. At 5,500 units, $453M insinuates revenue per vehicle of $82,364. This would be a ~10% decrease from Q2, which makes little sense. For this reason, it would appear as if Q3 revenue estimates are far too low.

Conclusion

Judging by VIN data and comments from CEO Elon Musk, Tesla has scaled production in Q2 to meet growing demand. Although it's impossible to know by how much, and what the real average revenue per vehicle will be, it seems clear the Street is taking a conservative approach to Q2 & Q3 estimates.

If Tesla is able to produce 6,000 units in Q2 and continue that pace of production in Q3, the Street's revenue estimates will have to be revised upwards.

Source: Tesla Q2 Preview: Huge Upside Potential For Results And Guidance