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 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.
These extra services that Tesla provides fall under the “Services And Other” category.
Despite having only a revenue share of 7.5% as of fiscal Q4 2022, Tesla’s “Services And Other” is a business segment that shouldn’t be ignored and it is even larger than the energy sector in terms of sales figures.
Apart from being just an independent sector, Tesla’s “Services And Other” makes a perfect complement to the company’s other businesses, be it automotive or energy.
In this article, we will look at Tesla’s “Services And Other” from the perspective of revenue numbers, gross margin, growth rates, and sales ratio.
That said, let’s start with the following topics.
Tesla’s Services Revenue Topics
1. Overview Of Tesla’s Services Segment
2. How The Services Segment Makes Money
3. Quarterly Services Revenue
4. TTM Services Revenue
5. Quarterly Services Gross Margin
6. TTM Services Gross Margin
7. Services Revenue To Total Revenue Ratio
8. Services Revenue Sequential Growth Rates
9. Services Revenue YoY Growth Rates
10. Conclusion
11. References and Credits
12. Disclosure
Overview Of Tesla Services Business Segment
The following snapshot gives an overview of Tesla’s business segments and where the services sector is positioned.
Tesla business segments – Services and Other
As seen from the snapshot above, Tesla’s services segment is a stand-alone reportable unit and is placed in the same hierarchy as other business units such as automotive and energy.
It gets its sales from multiple 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 Make Money
Tesla’s “Services and Other” business unit derives sales from several activities which are shown 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 merchandise, 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 risks.
Tesla’s Services And Other Revenue (Quarterly)
Tesla’s quarterly services revenue
On a quarterly basis, Tesla’s services revenue has grown significantly over the years.
As of 2022 Q4, Tesla’s services revenue surged to $1.7 billion on a quarterly basis, a record high for the company in this business segment.
The 4Q 2022 result represents a year-on-year growth rate of more than 50%.
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 is closing in on the $2 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 cease to 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 has been on a rising trend for the last 8 years, growing at an average growth rate of more than 60% year-over-year.
As of 2022 Q4, Tesla’s services revenue totaled $6.1 billion, a new record for the company, and is more than 60% higher than the figure reported a year ago.
Tesla’s Services Revenue Gross Margin (Quarterly)
Tesla’s services revenue gross margin – quarterly
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 4Q 2022, Tesla’s services gross margin reached 5.6% on a quarterly basis, a far better result compared to all prior quarters.
At 5.6% of gross margin, Tesla’s services revenue was slightly profitable, generating about $0.06 of gross profit out of $1.00 of sales.
Despite the tiny 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 greater profitability in the future if the current trend continues.
Bear in mind that prior to 2022, Tesla’s services still bleed money for every part, component, and used vehicle that got sold as reflected by the negative gross margin.
Tesla’s Services Revenue Gross Margin (TTM)
Tesla’s services revenue gross margin – TTM
From a TTM perspective, Tesla’s services gross margin is slightly lower compared to 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 totaled 3.5% as of 4Q 2022 on a TTM basis, a record number the company has ever reported.
While the services’ gross margin has improved significantly over the years, it was only slightly profitable at 3.5% on a TTM basis.
There are multiple reasons for Tesla’s low gross margin in the services segment.
First, Tesla’s services’ low 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 space 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
The plot above shows the ratio of services and other revenue to total revenue expressed in percentages.
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 4Q 2022, Tesla’s services revenue ratio stood at 7.5%, 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 $1.5 billion on a quarterly basis or $6 billion on a TTM basis as of 4Q 2022, its revenue ratio has maintained at roughly 7%, a rather modest figure.
The relatively stable ratio shows that Tesla’s other revenue segments, including 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 managed to achieve an average sequential growth rate of about 14% since fiscal 2015.
As of 2022 Q4, Tesla reported a quarterly growth rate of 3.4% for the services segment, highlighting a below-average sequential growth rate in the 4th quarter.
Tesla Services Revenue Year On Year Growth Rates
Tesla’s services revenue year-on-year growth rates
Year-over-year, Tesla managed to generate an average sales growth rate of 60% for its services business unit.
This figure demonstrates the strong year-on-year growth of Tesla’s services segment in the past.
Of all the fiscal quarters, Tesla reported only a single quarter of negative growth for services sales which happened in 2Q 2020.
This was actually during the onset of the COVID-19 pandemic.
As of 2022 4Q, Tesla’s services revenue grew 60% year over year, illustrating the resilience of the automotive sector in a post-pandemic world that also faces some of the most challenging headwinds, including supply chain disruption.
In short, Tesla’s services sales growth has been massively impressive at 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 5.6% in 2Q22 on a quarterly basis, indicating the growing profitability over the years.
Despite being non-profitable, the “Services and Other” revenue growth has been trending upward and reached a record high of $1.7 billion or $6 billion on a TTM basis as of 4Q22, representing year-on-year growth of around 60%.
Sequentially, Tesla’s services sales growth averages about 14% while its year-on-year growth averages 60%.
On a long-term basis, Tesla’s services revenue has been expanding, driven mainly by the growing vehicle deliveries in the last 8 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.
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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