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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’s 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 less than 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.

This practice literally translates to subsidizing customers for the products and services.

Tesla Business Segments

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 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.

Tesla’s “Services and Other” Revenue (Quarterly)

Tesla services and other revenue (quarterly)

Tesla services and other revenue (quarterly)

The chart above shows Tesla’s “services and other” revenue or sales on a quarterly basis 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% in the last 5 years.

Accordingly, Tesla’s services revenue has grown from a mere $50 million in 1Q15 to nearly $600 million in 3Q20.

Tesla’s “services and other” revenue of $582 million reported in 2020 Q3 represents a year over year growth of 6%, largely driven by higher vehicle deliveries, specifically Model 3, over the same quarter a year ago.

Tesla’s “Services and Other” Revenue (TTM)

Tesla services and other revenue (ttm)

Tesla services and other revenue (ttm)

From a trailing 12-months (TTM) perspective, Tesla’s services revenue grew the most between 2015 and 2019, with sales reaching over $2 billion in 3Q 2019.

However, revenue from the services segment stayed stagnant throughout most of 2020 at slightly more than $2 billion on a TTM basis.

As of 2020 Q3, Tesla’s services revenue totaled $2.2 billion for the past 4 quarters, representing less than 1% year on year growth.

Tesla’s Services Revenue Gross Margin (Quarterly)

Tesla services revenue gross margin (quarterly)

Tesla services revenue gross margin (quarterly)

Although revenue growth has been impressive for the “services and other” segment, the gross margin has suffered in most of the quarters.

From the chart, the quarterly gross margin has trended downward and plummeted to as low as -45% in 2018 before recovering to -11% in 2020 3Q.

At -11% gross margin, Tesla’s services revenue was still below costs, indicating that the services business sector has already incurred heavy losses when only costs of sales were accounted for.

In other words, Tesla bleeds money for every part, component and used vehicle that it sells under the service business sector.

Tesla may have been subsidizing the service business segment considering that the gross margin never recovers to profitability since 2017.

Tesla’s Services Revenue Gross Margin (TTM)

Tesla services revenue gross margin (ttm)

Tesla services revenue gross margin (ttm)

From a TTM perspective, Tesla’s service and other gross margin hovered around -2% throughout most of 2018 and 2019.

However, the services revenue gross margin improved slightly to -1% in 2020 and reached -1.1% as of 3Q 2020 on a TTM basis.

Again, the negative gross margin may have been attributed to the sales of some items that Tesla wants to get rid of quickly.

For example, the used vehicles item is one such item that Telsa certainly wants to get rid of quickly.

There are significant costs associated with keeping used car inventory as they take up a lot of spaces and depreciate fairly quickly.

For this reason, Tesla has been losing money in the services segment as it tends to charge below costs for most of the parts, components and used vehicles.

Ratio of Tesla Services Revenue to Total Revenue

Tesla services revenue to total revenue ratio

Tesla services revenue to total revenue ratio

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

As seen from the plot, this business segment used to contribute roughly 7% of revenue to total sales back in 2015. And that percentage has slowly increased to about 9% in 2019 on a TTM basis.

As of 3Q 2020, Tesla’s “services and other” revenue segment contributed about 8% of sales to total revenue, illustrating the growing importance of this business segment towards revenue generation.

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

Again, the reason for the consistent losses in the “services and other” business units may have been due to the fact that Tesla never intended to make any money in the first place.

Comparatively, the losses in the services business unit are extremely minimal compared to the automotive revenue that Tesla has been making.

Tesla Services Revenue Sequential Growth Rate

Tesla services revenue QoQ growth rates

Tesla services revenue QoQ growth rates

From a spreadsheet calculation that I did not show here, the average sequential growth for the past 20+ quarters had been about 14%.

The quarterly growth for services sales was particularly impressive in 2018 when Tesla was ramping the production and delivery of Model 3.

However, the quarterly growth rate for services revenue tapered down in 2019 and subsequently dropped to -13% in 2Q 2020.

The sequential growth rate recovered to 19% in 2020 Q3, driven mainly by a record vehicle delivery in the same quarter.

Tesla Services Revenue Year On Year Growth Rate

Tesla services revenue YoY growth rates

Tesla services revenue YoY growth rates

From a spreadsheet calculation, the average year on year (YoY) growth rate for the past 20 quarters totaled more than 60%.

The double-digit YoY growth rates highlighted the strong consumers’ interest in the automotive sector and thus the increasing services revenue.

As of 2020 3Q, Tesla’s services revenue grew 6% year over year, illustrating the slowing of the services revenue throughout 2020.

Comparatively, Tesla’s services revenue grew 68% year over year in 3Q 2019, which was significantly higher than the growth rate reported in 3Q 2020.

Conclusion

Tesla has been consistently losing money in the “Services and Other” business segment as reflected from the negative gross margins.

However, the “services and other” gross margin has improved tremendously between 2018 and 2020, growing from -45% in 1Q18 to -11% in 3Q20 on a quarterly basis, 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 nearly $600 million in 3Q20, representing a year on year growth of 6%.

One thing is clear, Tesla may have never intended to make money in the services sector in the first place.

That said, Tesla has used the services business to help the company to sell more new vehicles by subsidizing used vehicles and vehicle parts.

In short, Tesla losses only little bit of money in the services sector but gains significantly in the automotive sector.

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 Commons Licenses and were obtained from Wes Gill.

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