Most companies incur operating expenses, including research and development, rentals, property maintenance, payroll, marketing, advertising, and administrative to operate their businesses.
It’s no exception for Tesla (NASDAQ: TSLA).
In fact, Tesla has a huge number of operating expenses, totaling as much as $7 billion as of 4Q 2021 on a TTM basis.
For your information, Tesla’s operating expenses have been on a rise in the last few years, growing on an average of 30% year-over-year since 2016.
Tesla’s huge amount of operating costs are taking a toll on the company’s profitability.
For example, in fiscal 4Q 2021, Tesla’s operating costs alone consumed as much as 13% of the company’s total revenue.
Keep in mind that this figure alone has not taken into account the costs of revenue in addition to the interest expenses as well as taxes that the company may have to incur.
In general, Tesla’s operating expenses are broken down into the following 3 major components:
1. Research and development expenses
2. Selling, general and administrative expenses
3. Restructuring and others
Let’s start with the following topics.
Research and Development Expenses (R&D)
Tesla’s 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)
Tesla’s selling, general and administrative (SGA) expenses primarily consist of personnel and facilities costs related to stores, marketing and advertising, sales, executive, finances, human resources, information technology and legal organizations as well as fees for professional and contract services and litigation settlements.
Do note that Tesla’s marketing, promotional and advertising costs are part of the SGA or selling, general and administrative expenses.
In the year ended Dec 21, 2021, 2020 and 2019, Tesla stated that the marketing, promotional and advertising costs were immaterial, meaning that they were negligible.
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.
Tesla’s Operating Expenses (Quarterly)
In terms of the numbers, Tesla’s operating expenses have been on a rise, reaching as much as $2.2 billion as of 4Q 2021 on a quarterly basis.
Since 2016, Tesla’s operating expenses have increased on an average of 30% year on year.
Although Tesla’s operating expense has been on a rise, it stayed nearly flat from fiscal 2017 to 2020 at about $1 billion per quarter.
In fiscal 2021, Tesla’s operating expense rose again and exceeded $2 billion for the 1st time in the company’s history.
At a 30% growth rate, Tesla’s operating cost will be more than $2 billion per quarter on average by the end of fiscal 2022.
Tesla’s Operating Expenses (TTM)
The TTM plot above clearly displays the trend of Tesla’s operating expense on a long-term basis.
As seen, Tesla’s operating expense grew exponentially in the early years but the growth flattened between fiscal 2018 and 2020.
In fiscal 2021, Tesla’s operating expense growth came back and was seen rising significantly since the end of 2020.
As of 4Q 2021, Tesla’s operating expense reached $7 billion on a TTM basis, a record high since fiscal 2016.
Breakdown of Tesla’s Operating Expenses
The plot above shows the breakdown of quarterly operating expenses into 2 components from fiscal 2015 to 2021.
These components have been briefly mentioned at the start of this article and they are R&D and SGA expenses.
As seen from the chart, Selling, General and Administrative or SGA expense made up the biggest part of Tesla’s operating costs in most quarters, accounting for over 2/3 of the company’s total operating expenses.
On the other hand, research and development or R&D expense account for about 1/3 of the company’s total operating cost.
Restructuring and Other expenses existed in only a few quarters in 2018 and 2019 and have been insignificant. According to Tesla, 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.
Over the last 5 years, SGA expenses grew the fastest compared to other operating expenses.
Between fiscal 2015 and 2021, Tesla’s SGA expense grew 34% on average year-on-year. During the same period, Tesla’s R&D expense increased 29% on average year-on-year, slightly below that of the SGA expense.
Keep in mind that Tesla’s SGA costs also include the marketing, promotional and advertising costs as stated in the 2021 annual report.
While Tesla’s SGA expenses have shot through the roof, the company’s marketing, promotional and advertising costs have been immaterial.
In other words, Tesla spends relatively low or zero cost on marketing, promotional, and advertising activities.
Instead, the company relies heavily on media coverage and word of mouth as the primary drivers of sales leads.
Nevertheless, as of fiscal 4Q 2021, Tesla’s SGA expense came in at nearly $1.5 billion per quarter, a new high for the company.
During the same quarter, Tesla’s R&D expense clocked only $740 million, only half of what the company spent on SGA.
Operating Expense Vs. Total Revenue
The chart above shows the comparison between Tesla’s total revenue and operating expense from a trailing 12-month (TTM) perspective.
At first glance, the 2 plots shown in the chart are creating a huge contrast.
For example, Tesla’s total revenue has already surpassed $50 billion on a TTM basis as of fiscal 2021 Q4 while the operating cost was not even $10 billion.
This scenario is actually an advantage for Tesla as it shows that the company’s revenue has grown at a much faster rate than operating costs.
Ratio of Tesla’s Operating Expenses to Revenue (Quarterly)
The operating expense to revenue ratio measures the changes in operating costs with respect to total revenue expressed in percentage over a period of time.
From the chart, the trend is quite clear that the ratio has declined over the last 5 years.
The quarterly ratio was 40% back in 2015 but has since declined steadily and hit the lowest level at only 13% as of 4Q 2021.
The declining trend of the ratio indicates a leveling operating expense but a surging revenue, which bodes well for Tesla’s investors.
This scenario is again to Tesla’s advantage as it shows that the company’s revenue growth has been much faster than that of operating expenses.
Ratio of Tesla’s Operating Expenses to Revenue (TTM)
To smooth out the curve, I created the TTM (trailing 12-months) chart which is shown above.
The downtrend is even more obvious in the current chart.
Over the last 5 years, Tesla’s expenses with respect to revenue have declined quite tremendously.
On a TTM basis, the ratio was at the lowest level at 13% as of fiscal 2021 Q4 despite having an operating expense figure that hit $7 billion.
The declining trend of the ratio is good for Tesla and Tesla’s investors as it shows a much faster surging revenue.
R&D And SGA Expenses To Revenue Ratio
The current chart shows Tesla’s SGA and R&D expenses with respect to total revenue. Again, the chart is plotted on a TTM basis.
The downtrend for both expenses, R&D and SGA, is also quite clear in the current chart.
As of 2021 Q4, both ratios have declined to their lowest level at 8% and 5% for SGA and R&D expenses, respectively.
Both ratios seem to be declining at about the same rate.
Nevertheless, the trend in the current chart reinforced the idea that Tesla’s revenue has outgrown operating costs by a very large margin.
While revenue has surged past $50 billion in Q4 2021 on a TTM basis, Tesla’s operating costs have only gone $7 billion.
The gap between the revenue and operating expense was at a historical high of more than $40 billion as of fiscal 2021 4Q.
Again, the declining trend of both the R&D and SGA costs with respect to total sales is good for Tesla.
Tesla had successfully maintained its operating expense at about $1 billion per quarter or $4 billion on a TTM basis for a number of years in the past.
However, those numbers have slowly crept higher going into fiscal 2021 and reached as much as $2.2 billion as of 2021 Q4 on a quarterly basis.
In the same quarter, Tesla’s TTM operating expense reached nearly $7 billion as of Q4 2021, a new high for the company.
On average, Tesla’s operating expense grew 30% year-on-year since fiscal 2016, led primarily by SGA expenses which grew at an average of 34% during the same period while R&D’s average growth rate was around 29%.
Although Tesla’s operating costs have ticked higher, the ratio of operating expense to revenue has been on a decline and reached as low as 14% as of 4Q 2021.
This scenario indicates that Tesla’s revenue has grown at a much faster rate than that of operating cost and it is good for the company as Tesla has been able to maintain its operating expenses.
References and Credits
1. All financial figures in this article were obtained and referenced from quarterly and annual filings available in Tesla 4Q 2021 Earnings Release.
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