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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 segments

Tesla business segments

The above snapshot shows where the leasing business segment is located and how the segment generates its revenue.

In this article, we are going to talk about Tesla’s automotive leasing revenue and the respective gross margin. The gross margin determines how much gross profit the business makes after the costs of sales are accounted for.

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

A point worth mentioning is that the leasing business has been one of the most important business units for Tesla, even though the respective revenue contribution may not be as much as other business segments. As you will see below, Tesla’s automotive leasing has one of the highest gross profit among all different business segments, implying that the leasing business is one of 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 a 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 revenue recognition guideline: Tesla Revenue Recognition.

Other Revenue Segments

Also, for readers who are interested in knowing more about Tesla’s other revenue segments 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’s Automotive Leasing Revenue

Tesla automotive leasing revenue

Tesla automotive leasing revenue

The chart above shows Tesla’s quarterly automotive leasing revenue over the past 5 years from 2015 to 2020.

For your information, Tesla’s leasing business has only started since 2015 and that is the reason you see data from 2015 and onwards in the current chart. Before that, leasing revenue was probably negligible and Tesla had not specifically broken down leasing revenue in its financials.

Nevertheless, the trend of the leasing revenue plot above shows that Tesla’s leasing revenue had 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, Tesla’s leasing revenue declined sharply starting in 2018 but the numbers recovered slightly throughout 2019. The decline in leasing revenue was attributed to the adoption of new revenue recognition for leases beginning in 2018. The new revenue recognition for vehicle leasing has caused some of the leasing revenues to be re-classified to automotive sales.

Another root cause of the decline in leasing revenue can be explained by 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.

Fast forward to 2019, there was still no new automotive products available for leasing other than the legacy 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 data

Tesla Model S/X leasing data

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

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

Tesla Moel 3 leasing data

Tesla Moel 3 leasing data

Since Tesla started Model 3 leasing in the 2nd quarter of 2019, leasing revenue has set to improve and reach a new high in 1Q 2020 at $239 million, representing a year over year growth of 11.2%, or 6.2% if measured sequentially.

While the $239 million of leasing revenue reported in 1Q 2020 may seem like a major achievement, it was far from the record high of leasing revenue at $293 million reported in 4Q 2017.

As a result, there are still rooms for improvement in the leasing segment. Tesla needs to diversify its automotive products to boost leasing revenue.

Chart of Tesla’s Automotive Leasing Gross Margin

Tesla automotive leasing gross margin

Tesla automotive leasing gross margin

As discussed, the gross margin represents profitability by having revenue minus the costs of goods sold. A high gross margin indicates a higher chance of making a profit after accounting for other expenses such as r&d and SGA expenses.

To further illustrate, the chart above shows Tesla’s quarterly automotive leasing gross margin over the past 5 years from 2015 to 2020.

The average gross margin for the shown period in the chart is around 42%. This figure is the highest among all business segments. The result shows that the leasing business is one of the most profitable and makes the highest gross profit compared to other business segments.

As of 1Q 2020, Tesla’s automotive leasing revenue gross margin reached nearly 50% and it was a record high for the company since 2015. A 50% gross margin implies that Tesla makes $0.50 of gross profit for every $1.00 of sales.

Compared to other revenue segments such as the automotive sales, leasing revenue gross margin is 2X as much as that of automotive sales in 1Q 2020.

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.

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, leased vehicles may command a higher lease price compared to retail sales which explains the reason for the high gross margin.

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

Tesla’s Automotive Leasing Revenue to Total Revenue Ratio

Ratio of Tesla leasing revenue to total revenue

Ratio of Tesla leasing revenue to total revenue

The chart above represents the ratio of automotive leasing revenue to total revenue expressed in percentage for the last 5 years. The ratio measures the size of leasing revenue with respect to total revenue every quarter.

Accordingly, we can see that the ratio has decreased over the shown period from around 10% in 2015 to only 4% in 1Q 2020. The declining trend shows how insignificance the leasing revenue has become for Tesla over the years.

While Tesla’s leasing business may contribute to the highest gross margin for the company, its revenue contribution represents only 4% of total revenue as of Q1 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 to make a bigger impact on the company’s top-line growth. Moreover, higher leasing revenue also contributes to a higher gross margin to the company’s overall profitability.

Tesla’s 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 between 2015 and 2020.

From a spreadsheet calculation that 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, the sequential growth rate from 2015 to 2017 had been mostly positive in most quarters but the numbers started to turn negative for a few quarters in 2018 and 2019.

As of Q1 2020, the quarterly growth rate for automotive leasing revenue was up by a whopping 6.2% when compared to the previous quarter.

We can see that leasing revenue started to improve in 2019 when Tesla reported 3 consecutive quarters of positive quarterly growth from 3Q19 to 1Q20. The improvement shows that Tesla leasing business started to pick up after the introduction of the Model 3 leasing program.

In 2020 and beyond, I believe Tesla’s leasing revenue will improve substantially and there will be a lot of upsides when Tesla starts to deliver the Model Y which is expected to start by the end of 2020.

Besides, with the completion of the Gigafactory Shanghai in China and the setting up of a financial leasing unit in China, Tesla leasing revenue will undoubtedly accelerate in the future.

Tesla’s Automotive Leasing 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’s automotive leasing revenue year over year (YoY) growth rate from 2015 to 2020.

In line with the sequential growth rate, the YoY growth rate shows a similar trend where leasing revenue grew the most between 2016 and 2017. However, YoY growth for automotive leasing revenue reversed to negative in 2018.

Fortunately, Tesla’s automotive leasing revenue recovered steadily in 2019 when 2 out of 3 quarters recorded positive growth rates. The positive trend continued to 1Q 2020 when Tesla reported another positive year-over-year growth rate of 11.2%.

Therefore, if the momentum of an increasing leasing revenue can persist for a few more quarters consecutively, we will certainly be sure that Tesla’s automotive leasing business would not just be recovering but also expanding.

On a side note, from a spreadsheet calculation that averaged out all the YoY growth rates in the chart above, the calculated average number is about 32%. Comparing this figure with that of automotive sales, it’s still far below the growth rate of automotive sales where the reported average YoY growth rate was 69%.

Conclusion

Tesla’s automotive leasing revenue plays an essential role in the growth of the company even though its revenue contribution was less than 4% total revenue as reflected in the 1Q 2020 quarterly result.

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% in the Q1 2020 quarterly result.

The average gross margin for Tesla’s leasing revenue over the previous 5 years was around 40%. This figure was the highest of all the business sectors of the company.

Tesla needs to expand its lines of products to boost its leasing revenue, considering that only legacy products are available for leasing.

References and Credits

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

2. Featured image was used under Creative Common Licenses and obtained from Yasunari Goto and Jeff Cooper.

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