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Tesla Services Revenue, Gross Margin And Growth Rates

tesla gigafactory shanghai

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

While Tesla is mostly recognized as an automobile company, it derives its revenue from multiple streams, including that of the automotive as well as the energy sectors.

Aside from these 2 major revenue sources, Tesla also performs other revenue-earning services such as the sales of trade-in vehicles, repair and maintenance, insurance, sales of merchandise, etc.

All of these extra services that Tesla provides fall under the “Services And Other” category.

Despite having only a revenue share of 7% as of fiscal 2022, Tesla’s “Services And Other” is a business segment that shouldn’t be ignored and it is just about as large as the energy sector in terms of sales figures.

Moreover, Tesla’s “Services And Other” also provides a perfect complement to the company’s other businesses, be it automotive or energy.

In this article, we will look specifically at Tesla’s “Services And Other” from the perspective of revenue figures, gross margin, growth rates, and sales ratio.

Let’s start with the following topics.

Overview Of Tesla Services Business Segment

The following snapshot gives an overview of Tesla’s business segments and where the services sector is located.

Tesla business hierarchy

Tesla business hierarchy – Services and Other

As seen from the snapshot above, Tesla’s services segment is a stand-alone reportable unit and is placed at the same hierarchy as other business units such as the automotive and energy.

It gets its sales from a couple of activities.

These include repairs, warranty plans and sales of used cars as well as the newly added insurance as of 2022.

How Tesla’s Services Business Makes Money

Tesla’s “Services and Other” business unit derives sales from several activities which are 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
  • 7. Sales of insurance

The following explanations detail the 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

Revenues 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

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

Sales of insurance

Based on the 1Q22 filings, Tesla’s insurance business continues to expand with recent launches in Colorado, Oregon, and Virginia. As an insurance carrier, Tesla is the underwriter and bears all financial risk.

Tesla’s Services And Other Revenue (Quarterly)

Tesla's quarterly services revenue

Tesla’s quarterly services revenue

* Services revenue is a GAAP measure and is obtained directly from Tesla’s consolidated income statements.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

On a quarterly basis, Tesla’s services revenue has grown significantly over the years.

As of 2022 Q1, Tesla’s services revenue surged to $1.3 billion, a record high for the company in this business segment.

The 1Q 2022 result represents a year-on-year growth rate of more than 40%.

A trend worth mentioning is that Tesla made less than $100 million in sales in the services sector back in 2015.

However, this figure jumped more than 500% in fiscal 2020 and even more in fiscal 2021.

On average, Tesla’s services revenue grows 60% on a year-over-year basis which is comparable to that of the automotive sector.

While the services segment has exceeded the $1 billion threshold, it’s not a primary growth driver for Tesla, for the reason that it is only a by-product of the company’s automotive sector.

Without the automotive sector, Tesla’s services will not exist.

Therefore, Tesla’s services revenue grows primarily on the back of the company’s new vehicle deliveries and if new deliveries were to tumble, Tesla’s services segment will most likely follow suit.

Tesla’s Services and Other Revenue (TTM)

Tesla's TTM services revenue

Tesla’s TTM services revenue

* Services revenue is a GAAP measure and is presented here on a trailing 12-month (TTM) basis.
* TTM plot consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis and is used to smooth out the quarterly plot and to better show the trend of a curve.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

Tesla’s TTM services revenue has been on a rising trend for the last 6 years, growing at an average growth rate of more than 60% year-over-year.

As of 2022 Q1, Tesla’s services revenue totaled $4.2 billion, a new record for the company, and is nearly 60% higher than the figure reported a year ago.

Tesla’s Services Revenue Gross Margin (Quarterly)

Tesla's services revenue gross margin - quarterly

Tesla’s services revenue gross margin – quarterly

* Gross margin is a GAAP measure and is calculated by the author.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

Although revenue growth is extremely impressive in the services segment, the gross margin has suffered in most of the quarterly results and has only managed to become positive in fiscal 2022.

According to the chart, Tesla’s services gross margin has trended downward and plummeted to as low as -45% in 2018 before turning positive in 2022.

As of 1Q 2022, Tesla’s services gross margin reached -1% on a quarterly basis, a far better result compared to all prior quarters.

At a -1% gross margin, Tesla’s services revenue was still below costs, indicating that the services sector was barely profitable at the current gross profit level.

Despite the negative gross margin, Tesla’s services gross profit has improved tremendously over the year as seen in the chart above and should be on track to reach profitability soon.

However, as of 2022, Tesla’s services still bleed money for every part, component, and used vehicle that got sold.

Tesla’s Services Revenue Gross Margin (TTM)

Tesla's services revenue gross margin - TTM

Tesla’s services revenue gross margin – TTM

* Gross margin is a GAAP measure and is presented here on a trailing 12-month (TTM) basis.
* TTM plot consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis and is used to smooth out the quarterly plot and to better show the trend of a curve.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

From a TTM perspective, Tesla’s services gross margin is roughly the same as that of the quarterly plot.

According to the chart, Tesla’s TTM services gross margin dived significantly prior to fiscal 2019 but the figures have recovered in recent years.

As seen, Tesla’s services gross margin has improved steadily since fiscal 2019 and reached about -1% as of 1Q 2022 on a TTM basis, the best figure the company has ever reported.

While the services gross margin has improved significantly over the years, it was still unprofitable at -1% on a TTM basis.

Tesla’s services gross margin may have been negatively impacted by items that need to be sold quickly.

For example, Tesla’s used or trade-in vehicles is one such item that it certainly wants to sell quickly.

The reason is that there are significant costs associated with keeping used car inventory as they take up a lot of inventory spaces and depreciate fairly quickly.

As such, Tesla may have been selling used vehicles at or even below costs and thereby leading to the unprofitable nature of the services segment.

Tesla Services Revenue To Total Revenue Ratio

Tesla's services revenue to total revenue ratio

Tesla’s services revenue to total revenue ratio

* Ratio is calculated by the author based on Tesla’s TTM services revenue and TTM total revenue and is presented on a TTM basis in the chart above.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

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

As seen from the plot, the percentage has remained rather flat for the period from fiscal 2015 to 2022.

Between 2015 and 2022, Tesla’s services contributed about 7% of revenue on average to the company’s total sales.

As of 1Q 2022, Tesla’s services revenue ratio stood at 6.7%, illustrating the modest role that this business segment plays in revenue generation.

Although Tesla’s services sales have been on an increase and even exceeded $1 billion on a quarterly basis or $4 billion on a TTM basis as of 1Q 2022, its revenue ratio has maintained at 7%, a rather modest figure.

The relatively stable ratio shows that Tesla’s other revenue segments, including the automotive, have grown at a much faster growth rate than the services revenue.

Tesla Services Revenue Sequential Growth Rates

Tesla's services revenue sequential growth rates

Tesla’s services revenue sequential growth rates

* Quarterly growth rates are calculated by the author.

Tesla managed to achieve an average sequential growth rate of about 14% since fiscal 2015.

As of 2022 Q1, Tesla reported a quarterly growth rate of 20% for the services segment, highlighting an above-average sequential growth rate in the first quarter.

Tesla Services Revenue Year On Year Growth Rates

Tesla's services revenue year-on-year growth rates

Tesla’s services revenue year-on-year growth rates

* Year-on-year growth rates are calculated by the author.

Year over year, Tesla managed to generate an average sales growth rate of 61% for its services business unit.

This figure demonstrates the strong year-on-year growth of Tesla’s services segment.

Of all the fiscal quarters, Tesla reported only a single quarter of negative growth for the services sales which happened in 2Q 2020.

This was actually during the onset of the COVID-19 pandemic.

As of 2022 1Q, Tesla’s services revenue grew 43% year over year, illustrating the resilience of the automotive sector in a post-pandemic world which also faces some of the most challenging headwinds, including a supply chain disruption.

In short, Tesla’s services sales growth has been massively impressive at over 60% on average.

Conclusion

Tesla has been consistently losing money in the “Services and Other” business segment due to the negative gross margin.

A negative gross margin implies that Tesla is selling below costs.

However, the services gross margin has improved tremendously between 2018 and 2022, narrowing from -45% in 1Q18 to -1% in 1Q22 on a quarterly basis, indicating the growing trend over the years.

Despite being non-profitable, the “Services and Other” revenue growth has been trending upward and reached a record high of $1.3 billion or $4.2 billion on a TTM basis in 1Q22, representing year-on-year growth of around 40%.

Sequentially, Tesla’s services sales growth averages about 14% while its year-on-year growth averages 61%.

On a long-term basis, Tesla’s services revenue has been expanding, driven mainly by the growing vehicle deliveries in the last 6 years.

References and Credits

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

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

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Disclosure

The content in this article is for informational purposes only and is neither a recommendation nor a piece of financial advice to purchase a stock.

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