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Tesla Highly Profitable Automotive Leasing Business

Charging a Tesla Model S. Flickr Image.

Tesla gets its revenue from multiple business segments. These business segments are divided into two major categories which are automotive and energy products. In the automotive segment, the business is further divided into automotive sales and automotive leasing.

The following snapshot illustrates Tesla business hierarchy:

Tesla business hierarchy

Tesla business hierarchy

In this article, we are discussing exclusively about automotive leasing revenue and its respective gross margin. The gross margin determines how much gross profit the business makes before other operating expenses such as R&D costs, employee salary and administrative expenses are accounted for.

In other words, gross profit equals revenues minus cost of goods sold. In general, a business segment that has high gross margin will usually make money for the company.

A point worth mentioning is that Tesla leasing business has been one of the most important business units even though the respective revenue contribution may not be as much as other business segments. As you will see below, Tesla automotive leasing has one of the highest gross profit among all other business segments, implying that the leasing business is the most profitable.

Automotive Leasing Revenue

According to the company financial, automotive leasing revenue is recognized under lease accounting guidance and comes from the following sub-segments:

  • 1. Direct Vehicle Leasing Program
  • 2. Vehicle Sales to Leasing Partners with a Resale Value Guarantee and a Buyback Option
  • 3. Vehicle Sales to Customers with a Resale Value Guarantee where Exercise is Probable

I will not go into detailed discussion of the above revenue recognition for leasing revenue. For readers who are interested in revenue recognition, please visit this page which talks a little about the guideline: Tesla Revenue Recognition.

Other Revenue Segments

Also for readers who are interested in knowing more about other Tesla revenue segment such as automotive sales revenue, you can visit this page: Tesla Automotive Sales Revenue (Inclusive of regulatory credits).

For comparison between automotive sales and automotive leasing revenue and gross margin, please visit this page: Tesla Automotive Sales vs Automotive Leasing.

Let’s start with analyzing Tesla automotive leasing revenue and then followed by its gross margin.

Chart of Tesla Automotive Leasing Revenue

Tesla automotive leasing revenue

Tesla automotive leasing revenue

The chart above shows Tesla quarterly automotive leasing revenue over the past 5 years from 2015 to 2019.

Tesla leasing business only started in 2015 and that is the reason that sales data from 2015 only existed in the chart above. Before that, leasing revenue was probably negligible and Tesla had not specifically broken down leasing revenue in its financials.

Nevertheless, the trend of the revenue plot above shows that Tesla leasing revenue exploded since the business started in 2015. In Q3 2015, quarterly leasing revenue was only $80 million but the figure increased as much as 400% and reached a staggering figure close to $300 million in Q4 2017.

Since then, leasing revenue declined sharply starting 2018 but the numbers recovered slightly in 2019. One of the explanations for the decline is the adoption of new revenue recognition for leases starting 2018. The new revenue recognition for vehicle leasing has caused some leasing revenue to be shifted to automotive sales.

Another explanation for the decline in leasing revenue can be attributed to the lack of new products in the automotive segment. At the start of the leasing program in 2015, vehicles such as Model S and Model X were the only major automotive products available for leasing.

Moving forward to 2019, there is still no new automotive products available for leasing other than Model S and Model X. Leasing of Model X and S has been around for far too long before Model 3 was introduced. Moreover, Model S and X leasing has also declined since 2018 as shown in the snapshot below.

Tesla Model S/X leasing

Tesla Model S/X leasing

To make matter worst, leasing of Model 3 has only started in 2Q 2019 according to Tesla Q2 2019 Update Letter even though the company has started delivering Model 3 in the early of 2018.

The following snapshot shows Tesla Model 3 leasing started in Q2 2019.

Tesla Model 3 leasing

Tesla Model 3 leasing

Coming back to the revenue plot, Tesla leasing revenue sequential growth as of Q3 2019 was roughly 6% compared to prior quarter and year over year growth was up by a mere 1%.

Although leasing revenue has been sort of flat in 2019, I believe automotive leasing revenue will increase significantly in 2020 when the leasing of Model 3 runs at full throttle.

Chart of Tesla Automotive Leasing Revenue Gross Margin

Tesla automotive leasing gross margin

Tesla automotive leasing gross margin

The chart above shows Tesla quarterly automotive leasing revenue gross margin over the past 5 years from 2015 to 2019.

The average gross margin for the shown period in the chart above is around 40%. This figure is the highest among all business segments. The result shows that the leasing business is the most profitable and makes the most gross profit compared to other business segments.

Compared to automotive sales revenue, leasing revenue gross margin is 2X as much as that of automotive sales.

Readers can find out more about the automotive sales gross margin and energy segment revenue gross margin here: Tesla Automotive Sales Gross Margin and Tesla Energy Segment Revenue.

As discussed in prior paragraphs, business segment that derives the most gross profit will have better chance at making net profit when all other expenses such as operating costs, taxes and interest payments are accounted for at the bottom line.

The high gross margin in leasing revenue can be explained by the fact that the assets (leased vehicles) are still under Tesla ownership. As a result, the costs of revenue for leasing revenue are primarily the depreciation of the leased asset over the leased term.

For this reason, certain costs of revenue may have been excluded such as the depreciation of tooling and machinery. Besides, I believe that the leased vehicles may command a higher lease price compared to retail sales which explains the reason of the high gross margin.

A note to readers: I do not have enough information to back up my claims above. Therefore, readers are encouraged to do their own research on the subjects above.

Furthermore, you may have noticed from the graph above that the quarterly gross margin has been trending higher all the way from 2016 to 2019 even though leasing revenue has been flat or even declined during the same period.

As of Q3 2019, automotive leasing revenue gross margin has reached a record high of nearly 50%. At 50% gross margin, for every $1 dollar of leasing revenue, Tesla brings home $0.50 of gross profit.

All in all, Tesla automotive leasing is a high margin business.

Tesla Automotive Leasing Revenue to Total Revenue Ratio

Tesla leasing revenue to total revenue ratio

Tesla leasing revenue to total revenue ratio

The chart above represents the ratio of automotive leasing revenue to total revenue expressed in percentage. The ratio measures how big the portion of leasing revenue contributes to total revenue on a quarterly basis.

From the plot above, we can see that the percentage of automotive leasing to total revenue has been decreasing over the shown period from around 10% of revenue in 2015 to about 4% of revenue in 3Q 2019. The declining trend shows how insignificance the leasing revenue is to total revenue for Tesla.

While Tesla leasing business makes the most money for the company as seen from its high gross margin, its revenue contribution to Tesla total revenue is only 4% as of Q3 2019.

Consequently, automotive leasing will not make much impact on the company revenue growth no matter how profitable the business is.

Tesla needs to increase its leasing revenue in order to make bigger impact on the company top line growth. Moreover, higher leasing revenue also will contribute higher gross margin to the company overall profitability.

Tesla Automotive Leasing Revenue Quarterly Growth

Tesla leasing revenue qoq growth rate

Tesla leasing revenue qoq growth rate

The plot above represents automotive leasing revenue quarterly growth from 2015 to 2019.

From a spreadsheet calculation which I did not show here, the average quarterly growth rate for all of the quarters shown in the chart is around 8%. This figure is less than twice the number of automotive sales with an average growth rate of 19%. Readers can read about the automotive sales sequential growth rate in the same article as mentioned above.

If you have noticed in the plot, automotive leasing revenue got most of its growth in the early stages of the leasing program. For example, sequential growth rate from 2015 to 2017 had been positive in most quarters but the numbers started to turn negative for a few quarters in 2018 and 2019.

As of Q3 2019, quarterly growth rate for automotive leasing revenue was up by a whopping 6% from the previous quarter which is not too bad.

We can see that leasing revenue started to improve in 2019. For example, Q1 2019 shows a quarterly growth rate of -14% and the figure slowly reversed to a positive number in Q3 2019. The improvement shows that Tesla leasing business started to pick up which is partly due to the introduction of Model 3.

Moving forward to 2020, I believe Tesla leasing revenue will improve substantially and there will be a lot of upside when Tesla starts to deliver the Model Y. Besides, with the completion of the Gigafactory Shanghai in China and the setting up of a financial leasing unit in Shanghai, Tesla leasing revenue will certainly accelerate in future.

Tesla Automotive Leasing Revenue Year Over Year Growth

Tesla leasing revenue yoy growth rate

Tesla leasing revenue yoy growth rate

Other than the sequential growth rate plot, I have also created a plot that shows Tesla automotive leasing revenue year over year (yoy) growth rate from 2015 to 2019.

In line with sequential growth rate, the yoy chart above shows similar trend where leasing revenue grew the most in 2016 and 2017. However, yoy growth for automotive leasing revenue started to reverse to negative in 2018.

Fortunately, we are seeing improvement in yoy leasing revenue in 2019 when 2 out of 3 quarters recorded positive growth rates. The trend of an increasing leasing revenue is in line with the trend seen in the quarterly growth rate chart. Therefore, if the momentum of an increasing leasing revenue can keep up for a few more quarters consecutively, we will certainly be sure that Tesla automotive leasing business would not just be recovering but also expanding.

On a side note, from a spreadsheet calculation which averaged out all the yoy growth rates in the chart above, the calculated average number is about 37%. Comparing this figure with that of automotive sales, it’s still far below the growth rate of automotive sales where its yoy growth rate is 69%.

Conclusion

Tesla automotive leasing revenue plays an important role in the growth of the company even though its revenue contribution is less than 4% to total revenue.

While automotive leasing revenue is small relative to other revenue segments, it has been one of the most profitable business segments for Tesla which is seen from its whopping gross margin of nearly 50% as of Q3 2019.

Average gross margin for Tesla leasing revenue over the previous 5 years was around 40%. This figure is the highest among all the business sectors of the company.

The leasing revenue chart shows that automotive leasing is still expanding at an impressive rate when the average value is measured over a 5-year period, both sequentially and year over year at 8% and 37% respectively.

References and Credits

1. All financial figures in charts and snapshot were obtained from Tesla SEC Filings.

2. Featured image was obtained from Yasunari Goto and Jeff Cooper.

Disclosure

Readers, investors or visitors are free to use, copy, quote, distribute, modify, edit, share and link any materials in this webpage such as the charts, snapshots, texts, paragraphs and so on. All you need to do is provide credits such as a link or mention the name of this website.

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