Tesla’s second quarter, charted - Financial Times

When Tesla’s second-quarter results dropped over a week ago, Alphaville was in full panic-mode preparing for Vaudeville. So the whole thing kind-of passed us by.

But, as we never like to miss anything Musk-related, we thought it would it be worth opening up the hood to see if there’s anything of note in the numbers. Spanner please.

Tesla’s slipping service coverage

Tesla has sold a story of being the first vertically integrated automaker. From manufacturing to delivery to providing energy, Elon Musk has positioned the business to be the first, and last, port of call for customers.

Eschewing the dealer model to provide a better level of customer service was a gamble. In return for smaller margins, dealers provided the legacy automakers with a consistent source of demand. This meant inventory didn’t spend time stuck on a company’s balance sheet, clogging up its working capital. It also meant the customer servicing side of the business, with its different cultural and capital requirements, could be fobbed off to a third party.

Tesla, by all accounts, managed this brave new world of being a customer-facing business well when it was selling its niche, luxury electric vehicles, the S and X. However, the Model 3, as a car with mass-market ambitions, required Tesla to scale up its operations considerably to deal with tens of thousands of new customers.

Before this year, the electric car company never told us the exact number of its service locations, or the size of its mobile service fleet. So it was hard to know whether Tesla was making the necessary investments to keep up with a growing customer base.

Thanks to a new line item in its last two quarterly press releases, however, we now have an idea:

So, despite a small data-set, we thought it would be worth comparing the number of service locations to just how many Tesla cars there are gliding silently around the world.

To do so, we took Tesla’s cumulative total deliveries since the first quarter of 2014, and compared it to the total of the number of store and service locations, and vehicles in its mobile service fleet since the first quarter of 2018. (Do note that for 2018’s third quarter, which hasn’t been disclosed yet, we averaged the figure from the quarters before and after.)

Here’s how it looks:

To conclude, Tesla’s ability to service its vehicles has not kept up with the rapid expansion of its fleet. Indeed, there are now 626 cars on the road per service unit, versus 497 in 2018’s first quarter.

This might be a worry to both current and future owners.

Not least because Tesla’s cars are notoriously unreliable. A recent survey by UK-based publication What Car? found that Tesla is the most unreliable brand, with the newest version of the Model S the worst offender. Tesla, in a previous statement, called the survey “statistically meaningless” and at “at odds not only with our internal figures showing customer satisfaction scores for Model S and X at well over 90%, but with statistically valid surveys like our Net Promotor Score and Consumer Reports customer satisfaction survey, which we’ve topped every year since 2013”.

However, in the US, Consumer Reports withdrew its recommendation for the Model 3 in February citing “issues with its body hardware, as well as paint and trim”. All issues which would be fixed by the service team, if the customer wanted. However, it is worth noting that the Model 3, in the same survey, was rated as the most satisfying car. In a previous statement, Tesla also said, that since the survey, “these issues have already been corrected through design and manufacturing improvements.”

However, recently there’s been the chaotic restructuring of Tesla’s service centres, with many employees fired across the US in June, according to proxy investor relations site Elecktrek. On Thursday there were also reports on Tesla Motors Club, a popular forum for the Teslerati, that its live-chat support had been disabled. Alphaville tried to connect to the support feature in the UK. We did not manage to connect after 33 minutes of waiting despite being a customer.

However, Tesla owners may take comfort in the fact that its mobile service fleet is growing rapidly — 34 per cent quarter on quarter recently — a service which Elon Musk said on the fourth quarter conference call last year “results in higher customer satisfaction” due to its ability to come to the customer. The second quarter letter also revealed that, thanks to its mobile team, customer wait times “have improved considerably”. Tesla has also said that the service completely covers the US, with its European offering scaling fast over the past year.

Building out services, whether it be in the form of a mobile or a traditional centre, requires up front investment. Which brings us neatly on to the next chart.

Capital expenditure reaches parity with depreciation

Elon Musk is proud of Tesla’s future product line up. So much so that he’s referred to the unrealised electric-goodies as “the most exciting product road map of any consumer product company in the world”. The promised vehicles include the Model Y, the Semi-truck, the Pick-up truck and the next-generation Roadster.

A new vehicle requires large capital expenditures two-to-three years in advance of the product being ready. Yet, in the past year, Tesla has been pulling back investment, to the extent that in the past two quarters capital expenditure has dipped below depreciation:

In other words, the value of Tesla’s old capital investments is falling faster than its willingness to spend on new ones.

In the second quarter, Tesla also revised its capital expenditure guidance down for the year from $2.0bn to $2.5bn to $1.5bn to $2bn as it “continue to find opportunities to improve capital efficiency and shift cash outflows to future periods”.

Tesla’s parsimonious spending does not seem to be the behaviour of a company whose equity — which trades at a price to forward earnings of 185 times, according to S&P Capital IQ — is marked for future growth.

Yet Alphaville is not an expert on the minutiae of auto-investment, so we asked someone who is — Harald Hendrikse — an auto analyst at Morgan Stanley. First, we wanted to know the sort of costs involved bringing a new car to market, either via retooling an existing line or opening a new platform. He told us:

The cost of a retooling a line for a new model is around $300m, while a new platform is upwards of $2bn. Although it does depend on the model, regional and global sales volumes and the number of variants.

With capital expenditures of just $249.7m last quarter, which includes the money spent on its new Gigafactory in Shanghai, it is hard to see how Tesla can produce its new vehicles in the medium term without a significant step up in investment.

We also asked Hendrikse whether he’d expect capital expenditures and depreciation to reach parity at a company promising so much so soon:

The nature of accounting for these assets by definition means that depreciation will lag capex by up to 2-3 years. This occurs as initial capital investments in progress are not depreciated and defined research spending can be capitalised until production starts

Which is to say, it is more common for growth companies in capital intensive industries to have depreciation running below capital expenditure, something which is no longer the case at Tesla (as in the chart above) despite the fact its thought of as a growth company.

But perhaps Tesla has made a quantum leap in its capital efficiency. In its most recent 10-Q it stated:

that the capital spend per unit of Model 3 manufacturing capacity at Gigafactory Shanghai will be less than that of the ramp of our line in Fremont . . .[and] we believe that the production ramp of Model Y at the Tesla Factory will be significantly faster and cost less per unit of manufacturing capacity compared to that of the ramp of Model 3

However, it did also note that its “cost structure is difficult to predict with accuracy long-term”.

Yet, apart from the Model Y, none of its other future models were mentioned in the “liquidity and capital resources” section of the 10-Q.It seems customers who plonked down a $50,000 deposit in late-2017 for the $200,000 rocket-assisted Roadster might have to wait a little longer.

The implied cash balance

In early March, we spent some time looking at the possibility that Tesla’s cash balance didn’t quite represent its cash position over a quarter.

By reverse engineering the interest income from the profit and loss statement, we were able to come up with an implied cash balance for Tesla, versus what it reported at the end of a quarter. (The full methodology, if you’re interested, is in the article linked above.)

Now we’ve had two more quarters of data, we thought it be worth ending with an updated chart. So here you go:

So the gap still persists.

Do note, however, that Tesla raised $2.67bn from the sale of convertible notes and equity in early-May, around halfway through the quarter, so that might go some way to explaining the implied gap, as much of the money was not in its bank account over April. Ultra low rates in Europe, where Tesla is increasingly doing business, may also offer an explanation.

Yet despite $4.95bn cash and cash equivalents at the end of June, Tesla has once again deferred paying a $161.9m Term Loan which was due at the quarter’s end, according to the 10-Q. The loan was initially due last December, then January, then April, then June and has now been rolled to the end of the year.

For some reason, like so many of Tesla’s products, this tiny cash outlay just keeps getting delayed.