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Tesla Operating Expenses and Cost Breakdown Analysis

The interior of a Tesla Model S. Flickr Image.

The operating expenses of a company relate to all the overheads such as office rent, equipment, payroll, marketing and inventory costs that the company spends to run its day to day business operation. No matter what, the operating expenses are necessary and unavoidable even if the company does not have any sales. As a result, the operating expenses are worth examining especially for a company like Tesla where its operating costs not only eat up a large portion of its revenue but also has been increasing every quarter (shown in a chart below).

From the company quarterly and annual financial statements, Tesla total operating expenses are made up of the following 3 components:

1. Research and development expenses
2. Selling, general and administrative expenses
3. Restructuring and others

In this article, operating expenses and operating costs refer to the same thing and are used interchangeably.

Research and Development Expenses (R&D)

Based on the company 1Q19 financial statement, research and development expenses consist primarily of personnel costs for teams in engineering and research, manufacturing engineering and manufacturing test organizations, prototyping expenses, contract and professional services and amortized equipment expenses.

Selling, General and Administrative Expenses (SGA)

Based on the company 1Q19 financial statement, selling, general and administrative expenses primarily consist of personnel and facilities costs related to stores, marketing, sales, executive, finances, human resources, information technology and legal organizations as well as fees for professional and contract services and litigation settlements.

Restructuring and Others

Restructuring and other expenses are related to the following items:

1. Employee termination expenses
2. Losses from sub-leasing a facility
3. Disposal of tangible assets
4. Shortening of the useful life of a trade name intangible asset
5. Impairment losses
6. Court settlement fees

Restructuring costs have only appeared in recent quarters in 2018 and 2019 when Tesla carried out certain restructuring actions such as closing certain stores to reduce cost and improve efficiency.

Chart of Tesla Total Operating Expenses

tesla operating expenses

Tesla quarterly total operating expenses

The graph above shows Tesla total operating expenses for the past 5 years from 2015 to 2019. Starting 1Q15, total operating expenses have increased significantly from a low of $362 million in 1Q15 to a high of $1.24 billion in 2Q18. Since then Tesla operating expenses have declined slightly and have been fluctuating at the $1 billion level at the end of 2018 and early of 2019.

From a spreadsheet calculation which i did not show here, the average sequential growth rate of total operating expenses is around 7% for the period shown in the chart above.

All in all, the long-term trend of the chart above shows that Tesla operating expenses have been increasing over the 5-year period and will further increase in the future when the company expands.

Chart of Tesla Operating Expenses Components

breakdown of Tesla operating expenses

Tesla operating expenses breakdown

The plot above shows the breakdown of total operating expenses into individual components from 2015 to 2019.

The Selling, General and Administrative (SGA) expenses make up the biggest part of the operating cost, accounting for two third of total operating expenses. This is followed by research and development (R&D) expenses which have accounted for roughly one third of the total operating cost.

Restructuring and Other expenses existed only in the most recent quarters in 2018 and 2019. According to Tesla quarterly filing, restructuring and other expenses were primarily due to one-time employee termination fees, losses from sub-leasing facility, disposal of certain tangible assets and contract termination carried out to reduce costs and improve efficiency.

SGA expenses shows the fastest growth compared to other operating expenses whereas the R&D expenses have only increased slightly throughout the period.

Since 2015, SGA costs have increased by more than 300% from $200 million in 1Q15 and to more than $600 million in 2Q19 whereas R&D costs have only doubled from $160 million in 1Q15 to $320 million in 2Q19.

Chart of Tesla Operating Expenses As A Percentage of Revenue

Tesla percentage of operating expenses to revenue

Tesla percentage of operating expenses to revenue

The plot above shows the ratio of Tesla operating costs with respect to total revenue from 2015 to 2019. The ratio measures the amount of Tesla operating costs in percentage over total revenue. For example, if the figure is 40%, it means that the operating costs consume 40% of the company total revenue.

From the chart, it is very obvious that the percentage of operating costs with respect to total revenue has been steadily declining over the 5-year period. There are a few situations where the respective trend in the chart above can occur. For example, one of the scenario is when the revenue has grown at a rate faster than that of operating expenses. On the other hand, another scenario is when operating expenses have declined while revenue has stayed flat. Another scenario would be when both operating expenses and revenue have declined but operating expenses have declined at a rate faster than that of revenue.

But we have seen that operating costs have been increasing over the 5-year period from the first graph. So the scenario when this can occur is when the revenue has been growing at a rate faster than that of operating expenses.

With that said, this is actually a very good trend seen in the chart above. What most investors want to see is that the company managed to keep costs down if not flat while growing revenue at a pace faster than the respective costs.

In short, Tesla has managed to efficiently use working capital to grow its revenue even though operating costs have been increasing over the years.

Chart of Tesla Revenue and Operating Costs Comparison

Tesla quarterly operating expenses and revenue comparison

Tesla quarterly operating expenses and revenue comparison

The chart above shows the comparison between revenue and operating costs. On a dollar to dollar basis comparison, you can see how much revenue has grown with respect to operating costs.

The curve of the revenue has grown exponentially starting 2018 before tapering down in 2019. During the same period, Tesla has managed to keep operating expenses flat.

You may notice that from 2017 to 2019, operating expenses have stayed at the $1 billion level without any significant increment.

Chart of Tesla R&D Expenses vs SGA Expenses (As Percentage of Revenue)

Tesla R&D costs and SGA costs

Tesla R&D costs and SGA costs

The graph above is similar to the operating expenses to total revenue ratio in percentage. The difference is that the graph above is based on the operating expenses components, namely: (a) SGA expenses and (b)R&D costs.

The operating expenses components to revenue ratio is a measure of how much operating costs have consumed in percentage with respect to revenue. Investors can find out from the ratio whether revenue and operating costs are expanding at the same rate or they go in opposite direction.

The chart above shows that both expenses as a percentage of revenue are showing a trend of a decline over the 5-year period. In other words, revenue is growing at a faster rate than both R&D and SGA expenses are growing. This is the same trend that we have observed in the ratio of operating cost to total revenue chart.

Since revenue is expanding at a faster rate, that is causing both operating expenses components to revenue ratio to decline throughout the period. Both SGA and R&D costs are exhibiting similar pattern shown in the chart above.

Furthermore, you may notice that SGA expenses have always been higher than R&D costs during the 5-year period. For example, SGA expenses have consumed roughly 25% of revenue during 2015 whereas R&D costs have consumed about 15% of revenue during the same year. These numbers have declined to about 10% and 5% respectively in 2019.

Again, the trend in the chart above reinforced the idea that Tesla has managed to efficiently use working capital to grow its revenue even though operating costs components have been increasing over the years.

Conclusion

Tesla operating expenses consists of two major components: (a) SGA expenses and (b) R&D costs.

The long-term trend of the chart of Tesla operating expenses show that the expenses have increased significantly over the 5-year period from 2015 to 2019. The figure in 1Q19 was only $362 million whereas the figure in 2Q19 was more than $1 billion.

SGA costs are the largest components, making up 2/3 of total operating expenses. Besides, SGA costs have increased at a much faster rate compared to R&D costs over the 5-year period.

Tesla revenue has grown at a much faster rate compared to operating expenses, causing the ratio of operating expenses to total revenue to decline over the 5-year period from 2015 to 2019.

Tesla has been using working capital efficiently to grow revenue at a much faster pace during the time when operating expenses have also grown but at the slower rate.

Disclosure:

The authors wrote this article themselves, and it expresses their own opinions. The authors are not receiving compensation for writing the article. The authors have no business relationship with any company whose stocks are mentioned in this article.

References:

1. All financial figures were obtained from Tesla Stock Information.

2. Featured images are obtained from Maurizio Pesce and Steve Jurvetson.

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