As seen from the following snapshot of Tesla income statement, Tesla automotive revenue comes from two major business segments: (1) automotive sales and (2) automotive leasing.
To make a long story short, the majority of revenue recognized under automotive sales comes from new vehicles deliveries to customers. In addition to new vehicles deliveries, automotive sales also include revenues recognized when features and services such as access to Supercharger network, internet connectivity, autopilot and self-driving capabilities as well as software updates are delivered to customers.
On the other hand, automotive leasing are revenues recognized under Tesla direct leasing program and leasing with resale value guarantee and buyback options. Under direct leasing, Tesla offers all vehicles models for leasing and customers can return these vehicles or may opt to purchase them for a pre-determined residual values at the end of the lease term.
For leases with resale value guarantee and buyback option, these transactions are more or less similar to direct leasing program and all revenues under these programs are recognized as automotive leasing revenue.
Before diving into the topic of which revenue segment makes the most profit, let’s take a look at the revenue history over a 5-year period.
I have created a few charts below that compare the revenue of automotive sales and automotive leasing.
Tesla Automotive Sales vs Automotive Leasing Revenue
The first chart shows Tesla quarterly automotive sales revenue from 2015 to 2019. As seen from the chart, automotive sales has grown tremendously and hit a record high of $6 billion in Q4 2018. The remarkable growth in revenue which you saw in 2018 is in line with Tesla Model 3 delivery ramped during that period of time.
Since then, automotive sales began to taper off its record high and reached a value of around $5 billion as of Q3 2019. The slight decline in automotive sales revenue in 2019 does not really mean any slowdown for Tesla. In fact, it’s just the beginning for the company as Model 3 has only been around for 2 years. Moreover, mass production of Model Y is already in the pipeline and Tesla will begin launching Model Y by the end of 2020 or early 2021 as stated in its website: Model Y FAQ.
The second chart above shows Tesla quarterly automotive leasing revenue from 2015 to 2019. Compare to automotive sales, automotive leasing revenue does not grow as remarkable as automotive sales. In fact, if you have noticed, the highest revenue that automotive leasing was able to reached was only $300 million in Q4 2017. After that, automotive leasing revenue began to drop significantly since 2018, mainly due to the company adoption of new revenue standard related to leasing revenue as shown in the snashot below.
What happened was that some leasing revenue was reclassified to automotive sales revenue starting 2018 when the adoption of new revenue standard took effect in Q1 2018.
Although 2018 ended with the success of Model 3 record delivery, automotive leasing revenue remained more or less flat. One reason was that Model 3 leasing has only started in Q2 2019 as shown in the snapshot below.
On top of this, there is a lack of new automotive products for leasing. The existing leasing revenue mainly came from Model X and Model S in which they are not intended for mass production. For the reasons discussed, automotive leasing has not been able to take off like what the automotive sales has done.
Nevertheless, automotive leasing was still able to grow off its record low in Q1 2018 to around $220 million as of Q3 2019.
When i combined both automotive sales and automotive leasing revenue into a single chart above, the difference in terms of absolute value is very obvious. From a dollar to dollar comparison, automotive sales is the clear winner, outgrowing its counterpart by more than 20X as of Q3 2019.
Besides, the automotive sales plot shows that the curve has been trending upward whereas the automotive leasing plot is kind of flat over the shown period. You can see from the comparison in the chart that most growth of automotive sales occurred in 2018 when the delivery of Model 3 was at record high.
Although automotive sales has outgrown automotive leasing by several miles, if it does not make any profit, it’s useless. As such, I have created the following chart that compares the gross margin of both revenue segments.
The gross margin basically measures the profitability before other expenses such as sales, general and administrative costs are accounted for. With this in context, the higher the gross margin, the higher the gross profit the company can derive from the product.
Let’s take a look at the gross margin of both automotive sales and automotive leasing in the chart below.
Gross Margin Comparison: Automotive Sales vs Automotive Leasing
The plot above shows that automotive leasing gross margin has almost always been higher compared to automotive sales in the shown period. This trend has been the most obvious in 2018 and 2019 when automotive leasing gross margin was more than double that of automotive sales.
For example, as of Q3 2019, automotive leasing gross margin was close to 50%, meaning that for every $1 the company collects, as much as $0.50 goes to gross profit. On the other hand, automotive sales gross margin was only in the ballpark of 20% in the same quarter, which is much less than that of automotive leasing.
For this reason, automotive leasing is much more profitable than automotive sales.
I do not exactly know the reason for the higher margin. My best guess is that it has something to do with the ownership of leased vehicles. Leased vehicles are recognized as asset in the balance sheet for Tesla. As such, Tesla retained the ownership of the leased vehicles and recognized a residual value by the end of the lease term.
As a result, the depreciation expenses for the leased asset may be lower compared with the cost of revenue for vehicle sales because of the residual value in the leased asset.
Another reason could be due to the higher leasing revenue for leased vehicles. Here is an article that talks about the high prices of leasing a Tesla vehicle: Tesla leased vehicles price.
In short, for a Model S that has a retailed price of $94k, a 3-year and 36k-mile lease in California can set you back by roughly $62k within just 3 years. That’s because of the high down payment of $8k and a monthly lease payment of $1.5k.
In summary, a combination of accounting practices and a higher leased price has made automotive leasing to be much more profitable than automotive sales.
Automotive sales revenue has reached the $5 billion milestone whereas automotive leasing revenue is still way off the $500 million threshold. Both revenue segments are showing positive growth but automotive sales is growing more compared to automotive leasing revenue.
Although automotive leasing grew a lot less compared to automotive sales, its gross margin is twice as much as that of automotive sales. This shows that automotive leasing is a very high margin business segment.
1. Financial figures in all charts and tables were obtained from Tesla Quarterly Results.
2. Featured image was obtained from Steve Jurvetson.