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Tesla Has Been Losing Money In This Business Segment

tesla gigafactory shanghai

Tesla Gigafactory Shanghai, China. Source: Tesla 3Q19 Update Letter.

The “Services and Other” is one of Tesla business segments that contributes the least amount of revenue and is also one that has been losing money for several years. As you will see in the following charts, this segment of revenue makes up about 10% of total revenue and has been having negative gross margin over the past 3 years.

A negative gross margin implies that Tesla is selling below or at costs for its products and services in this particular business segment. Selling at or below cost literally translate to subsidizing customers for the products and services.

The following snapshot gives an overview of Tesla’s business segments and where the “services and other” segment is located. Moreover, the snapshot also highlights a few activities that generate revenues for the “services and other” business segment.

Tesla business hierarchy

Tesla business hierarchy – Services and Other

Before diving further into the detail of the “Services and Other” segment, let’s take a quick look at what this business segment is about and how it makes money.

Tesla “Services and Other” Business Segment

The “Services and Other” business segment derives sales from several activities shown as below:

  • 1. Repair and maintenance services
  • 2. Extended service plans
  • 3. Sales of merchandises
  • 4. Sales of used Tesla vehicles
  • 5. Sales of electric vehicle components to other manufacturers
  • 6. Sales of non-Tesla vehicle trade-ins

The following explanations detail about revenue recognition and how sales are recorded in the income statement for some of the activities shown above.

Repair and maintenance services

Revenue recognition for repair and maintenance services is done as soon as the services are provided to customers.

Extended service plans

Revenue for extended service plans are recognized over the performance period of the service contracts as the obligation represents a stand-ready obligation to the customers.

Sales of merchandises, used vehicles, components and trade-in vehicles

Revenue are recognized when payments for merchandises, used vehicles, components and vehicles trade-ins are received at the point when control is transferred to the customers or in accordance with payment terms customary to the business.

Revenue Trend, Gross Margin and Growth Rate

In the following series of charts, we will talk about revenue trend of “Services and Other” and find out how profitable the business unit is. For example, the gross margin is one variable that is worth analyzing across a few quarters for this business segment

From the gross margin, readers can find out the profitability, specifically the gross profit made before deducting other expenses such as research and development as well as selling, general and administrative costs.

Moreover, we will also look at the ratio of “Services and Other” revenue to total revenue. This ratio measures the proportion of revenue contributed by this business segment with respect to total revenue.

Finally we will track the quarterly growth rate and year on year growth rate of the revenue generated by the “Services and Other” business segment.

Tesla’s “Services and Other” Revenue Trend

Tesla services and other revenue

Tesla services and other revenue

The chart above shows Tesla’s “services and other” revenue segment over the past 5 years from 2015 to 2020.

From the chart, Tesla’s “Services and Other” revenue has grown significantly, increasing by more than 1000% for the last 5 years. Accordingly, revenue has grown from a mere $50 million in 1Q15 to nearly $600 million in 1Q20.

As of 1Q 2020, Tesla’s “services and other” revenue of $560 million represents a year over year growth of 13.6%, largely driven by higher vehicle deliveries, specifically Model 3, over the same quarter a year ago.

Tesla’s “Services and Other” Gross Margin

Tesla services and other revenue gross margin

Tesla services and other revenue gross margin

Although revenue growth has been impressive for the “services and other” business unit for the last 5 years, gross margin has suffered in most of the quarters. From the chart, gross margin has trended downward and plummeted to as low as -45% in 2018 before recovering slightly to -20% in 2019.

Subsequently, “services and other” gross margin further improved to -16% as of 1Q 2020, indicating that gross margin has been improving since 2018 and may soon reach profitability by the end of 2020 at this rate.

While gross margin has improved tremendously for the “services and other” business unit between 2018 and 2020, it was still in the red as of 1Q 2020, meaning that Tesla has been bleeding money all this while. For every car that Tesla serviced, every component and used vehicle that it sold within the “services and other” business unit, the company lost about 16% of revenue to cost of sales during the 1st quarter of 2020.

The negative gross margin may have been mainly due to the sales of some items that Tesla needs to get rid of quickly in this business segment. For example, used vehicles is one such item that the company may try to get rid of quickly. The reason can be attributed to the significant cost of keeping used car inventory as they take up a lot of spaces and depreciate fairly quickly.

Ratio of Tesla Services and Other to Total Revenue

Ratio of Tesla services and other revenue to total revenue

Ratio of Tesla services and other revenue to total revenue

The plot above shows the ratio of services and other segment revenue to total revenue expressed in percentage.

As seen from the plot, this business segment used to contribute roughly 8% of revenue to total sales back in 2015. And that percentage has slowly increased to about 10% in 2019.

As of 1Q 2020, Tesla’s “services and other” revenue segment contributed 9.4% of sales to total revenue, illustrating the growing importance of this business segment towards revenue generation.

While the percentage figure has been steadily increasing over the years, Tesla still failed to squeeze any profit out of this business segment.

Again, the reason of the consistent loss in the “services and other” business unit has been due to one of revenue sources that came from the sales of trade-in vehicles. Tesla has to accept trade-in vehicles in exchange for its products. Otherwise, Tesla would be losing a lot of customers. But we all know that Tesla is not in the business of selling used vehicles.

For Tesla, the company has to get rid of these used vehicles as fast as it possibly can. A slow sales can spell very serious trouble for the company as these vehicles take up inventory spaces and their respective prices could depreciate significantly in a short period of time.

Moreover, these used vehicles need to be re-furbished before they can be sold and this process further eats into cost of sales.

For this reason, Tesla may have resorted to selling these used vehicles at cost or even at below cost. This may have explained the reason the “Services and Other” business segment consistently losing money in most of the quarters shown in the chart above.

“Services and Other” Revenue Sequential Growth Rate

Tesla services and other revenue QoQ growth

Tesla services and other revenue QoQ growth

The chart above shows the “services and other”revenue sequential growth rate from 2015 to 2020.

From a spreadsheet calculation which i did not show here, the average sequential growth for the past 20 quarters was about 12.6% which is not bad considering that it is growing quarterly at this rate.

Besides, quarterly growth was particularly impressive in 2018 when Tesla was ramping the production and delivery of Model 3. As seen from the chart, sequential growth rate in 2018 has trended higher in 3 consecutive quarters, going from negative growth rate in 1Q18 to 63% in 4Q18.

However, quarterly growth rate tapered down in 2019 and dropped to -3.4% in 1Q 2020.

“Services and Other” Revenue Year On Year Growth Rate

Tesla services and other revenue YoY growth

Tesla services and other revenue YoY growth

The chart above shows the quarterly revenue year on year growth rate from 2015 to 2020.

From a spreadsheet calculation, the average year on year growth rate for the past 17 quarters was roughly 62%. The result was quite exceptional considering the high double digits YoY growth rate for the past 5 years.

Besides, year on year growth rates were all positive between 2015 and 2020, indicating that the “services and other” revenue segment has been growing year on year without fail in all quarterly results.

Moreover, year on year growth was specifically strong in 2019 when most quarters were close to reporting triple digits growth rates.

However, YoY growth rate declined to only 13.6% as of 1Q 2020.

Conclusion

In short, Tesla has been consistently losing money in the “Services and Other” business segment as reflected from the negative gross margin for the past 3 years. However, the “services and other” gross margin has improved tremendously between 2018 and 2020, growing from -45% in 1Q18 to -16% in 1Q20, indicating the narrowing losses over the years.

Despite non-profitable, the “Services and Other” revenue growth has been trending upward and reached a record high of $560 million in 1Q20, representing a year on year growth of 13.6%.

The consistent losses of the “services and other” business segment may have been mainly due to the used vehicles that Tesla has been desperately trying to get rid of. For this reason, Tesla may have resorted to selling these used vehicles at cost or even below cost, causing gross margin to suffer over the years.

References and Credits

1. All information including financial figures in this article was obtained and referenced from the financial statements available in Tesla Investor Overview.

2. Featured images were used under Creative Common Licenses and were obtained from Wes Gill.

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