Tesla Motors's Q1 2016 earnings report is in, and while revenue is up 45% from the year prior, the company is still operating at a loss. With the launch of the Model X SUV factoring into Tesla's quarter, they delivered a total of 14,810 vehicles between January and March — just 10 cars shy of their 3-months-ago estimate for the quarter. And while revenue was up 45% from the year prior to $1.147 billion (non-GAAP basis), Tesla still is still operating at a loss — $282 million this quarter (smaller than last quarter, but substantially more than the same quarter last year).

Cars, obviously Tesla's biggest business, represented the bulk of Tesla's revenue. Revenue from sales of the Model S saw a marginal 1.4% improvement in pricing thanks to higher base prices and customers checking the boxes for more upgrades. The average price of delivered Model X vehicles was about 30% higher than the Model S. The vast majority of the cars produced were the Model S — Tesla build 2,659 examples of the Model X during the quarter, though that's a substantial increase from the 507 Model X units delivered in the previous quarter.

Gross margin on automotive sales was actually 20% — Tesla is making money on the cars it sells, but has such huge costs in their roll-out (ramping up Model X production, constructing Gigafactory 1 in Nevada, building out the Supercharger network, etc).

For the current quarter, Tesla is upping their production estimate to about 20,000 vehicles, a substantial 30% increase over the previous quarter. Deliveries in the quarter are expected to be around 17,000, in part due to a large number of vehicles that will be in transit to customers in Europe and Asia at the end of the quarter as Model X production ramps up. For the full of 2016, Tesla expects to deliver between 80,000 and 90,000 vehicles with improved production rates in the latter half to of the year.

There's just one hitch: Tesla is moving up their 500,000 units per year production goal from 2020 to 2018, meaning that a substantial 50% increase to their $1.5 billion estimate for 2016 capital expenditures, hurting Tesla's push to become cashflow positive, even with expected year-end margins on the approaching 30% for the Model S and 25% for the Model X.

Tesla Q1 2016 Financial Results:

Tesla First Quarter 2016 Update

Q1 Results

Our Q1 results reflect our initial efforts to manage cash more effectively. While we are in the early stages of significantly enhancing our systems and operations to improve working capital management, we are already seeing the benefits of improved inventory control, better vendor management, and more rapid collections.

With a careful eye on spending, we were able to reduce non-GAAP operating expenses sequentially for the first time in three years. Total Q1 operating expenses were $417 million on a non-GAAP basis, down 3% from Q4. Research and development expenses declined sequentially as Model X development work diminished during the quarter. GAAP operating expenses were $501 million and include $83 million of non-cash stock based compensation. Stock based compensation increased sequentially as achieving certain developmental and operational milestones became highly probable.

By improving our capital budgeting, we reduced capital expenditures by 47% from Q4 to $217 million, without compromising our future growth prospects. Q1 capital expenditures were primarily for increased production capacity, Gigafactory construction, and customer support infrastructure.

Cash and cash equivalents rose to $1.44 billion at quarter end aided by more effective cash management and $430 million drawn against our asset based credit line. The quarter end cash balance does not include any meaningful cash flow from Model 3 reservations. Almost all Model 3 reservations received on the last day of Q1 are recorded as receivables, pending cash receipt from various credit card banks. April cash receipts for vehicles in transit at quarter end plus Model 3 reservation deposits allowed us to pay back $350 million on the asset based line.

Our GAAP cash outflow from operations during the quarter was $250 million. After adding $242 million of cash inflows from vehicle sales to our bank leasing partners, our cash flow from core operations was nearly breakeven.

Total Q1 non-GAAP revenue was $1.60 billion for the quarter, up over 45% from a year ago, while GAAP revenue was $1.15 billion. Total Q1 gross margin was 21.7% on a non-GAAP basis and 22.0% on a GAAP basis.

Automotive revenue was $1.48 billion on a non-GAAP basis, and comprises $1.03 billion of GAAP Automotive revenue plus $455 million of net increase in deferred revenue resulting from lease accounting used for indirect leases and cars sold with a resale value guarantee. During the quarter, we delivered 14,810 vehicles, almost the same as what we estimated in our April announcement. Model S average prices improved 1.4% sequentially, as price increases and higher option take rates offset a slight mix shift to less expensive Model S variants. Average Q1 Model X prices were about 30% higher than for Model S.

The popularity of leasing increased again this quarter, as did the percentage of Tesla direct leases. Tesla directly leased 1,405 cars to customers in Q1, worth $149 million of aggregate transaction value.

After excluding $57 million of ZEV credit revenue, Q1 Automotive gross margin was 20.0% on a non-GAAP basis and 19.6% on a GAAP basis. Our warranty accrual rate on all new vehicles declined from Q4, based on projected warranty costs, as vehicle reliability continues to improve. Overall, our non-GAAP Automotive gross margin declined 90 basis points over Q4 due to an increase in delivery mix of Model X, which carries a lower margin during its ongoing production ramp phase.

Q1 Services and other revenue was $121 million, up 160% from a year ago. The strong growth was driven primarily by higher pre-owned Model S sales. Q1 Services and other gross margin increased sequentially to 4.7%, due mainly to increased margin on pre-owned vehicle sales and service.

Our Q1 non-GAAP net loss decreased 34% sequentially to $75 million, or $0.57 loss per share based on 133 million basic shares, while our Q1 GAAP net loss was $282 million or $2.13 loss per basic share. Both figures include a $9 million gain, or almost $0.07 per share, related mostly to unrealized gains from revaluation of our foreign currency transactions.

Outlook

In Q2, we expect to produce about 20,000 vehicles, representing a sequential increase of nearly 30%, and will deliver as many of these cars as we can in Q2, with the rest being delivered in Q3. Due to a large number of vehicles in transit to customers in Europe and Asia at end of quarter, Q2 deliveries are expected to be approximately 17,000 vehicles. Importantly, now that supply chain constraints have been resolved, we plan to exit Q2 at a steady production rate of 2,000 vehicles per week, thus laying the foundation for a strong Q3 delivery number.

Looking out beyond Q2, we remain confident that we can deliver 80,000 to 90,000 new Model S and Model X vehicles in 2016. This is due to the growing demand we are seeing for Model S and Model X, the improved rate of production that we project for Q2, and the production increases planned for the back half of 2016.

Model S cost reductions and improving Model X manufacturing efficiency should cause Automotive gross margin to increase. We are on plan for Model S non-GAAP gross margin to approach 30% and Model X non-GAAP gross margin of about 25% by year-end, with higher Model X gross margin in 2017.

Total non-GAAP operating expenses in Q2 should increase slightly from Q1 as we grow our customer support infrastructure while maintaining our focus on expense management. Then, as we accelerate Model 3 development work in the back half of 2016, operating expense growth should increase, so that full year 2016 total non-GAAP operating expenses should increase by about 20-25%.

Given our plans to advance our 500,000 total unit build plan, essentially doubling the prior growth plan, we are re-evaluating our level of capital expenditures, but expect it will be about 50% higher than our previous guidance of $1.5 billion for 2016. Naturally, this will impact our ability to be net cash flow positive for the year, but given the demand for Model 3, investing to meet that demand is the best long-term decision for Tesla.

The overwhelming demand for Model 3 and our improving financial results in Q1 represent a strong start to 2016. We are looking forward to bringing Model 3 to market as together we advance the world's transition to sustainable transportation.

Non-GAAP Financial Information

Consolidated financial information has been presented in accordance with GAAP as well as on a non-GAAP basis. On a non-GAAP basis, financial measures exclude non-cash items such as stock-based compensation, the change in fair value related to Tesla's warrant liability, non-cash interest expense related to Tesla's convertible senior notes. Non-GAAP financial measures also exclude the impact of lease accounting on related revenues and cost of revenues associated with Model S and Model X deliveries with the resale value guarantee and similar buy-back terms, as this perspective is useful in understanding the underlying cash flow activity and timing of vehicle deliveries. Management believes that it is useful to supplement its GAAP financial statements with this non-GAAP information because management uses such information internally for its operating, budgeting and financial planning purposes. These non-GAAP financial measures also facilitate management's internal comparisons to Tesla's historical performance as well as comparisons to the operating results of other companies. Non-GAAP information is not prepared under a comprehensive set of accounting rules and therefore, should only be read in conjunction with financial information reported under U.S. GAAP when understanding Tesla's operating performance. A reconciliation between GAAP and non-GAAP financial information is provided below.

Condensed Consolidated Statements of Operations

(Unaudited)
(In thousands, except per share data)

Three Months Ended Mar 31, 2016 Dec 31, 2015 Mar 31, 2015
Revenues
Automotive $1,026,064 $1,117,007 $893,320
Services and other $120,984 $97,372 $46,560
Total revenues $1,147,048 $1,214,379 $939,880
Cost of revenues
Automotive $779,316 $896,441 $631,745
Services and other $115,264 $99,374 $48,062
Total cost of revenues (2) $894,580 $995,815 $679,807
Gross profit $252,468 $218,564 $260,073
Operating expenses
Research and development $182,482 $190,243 $167,154
Selling, general and administrative $318,210 $288,654 $195,365
Total operating expenses $500,692 $478,897 $362,519
Loss from operations $(248,224) $(260,333) $(102,446)
Interest income $1,251 $750 $184
Interest expense $(40,625) $(38,617) $(26,574)
Other income (expense), net $9,177 $(17,149) $(22,305)
Loss before income taxes $(278,421) $(315,349) $(151,141)
Provision for income taxes $3,846 $5,048 $3,04
Net loss $(282,267) $(320,397) $(154,181)
Net loss per common share, basic and diluted $(2.13) $(2.44) $(1.22)
Shares used in per share calculation, basic and diluted 132,676 131,100 125,947

Condensed Consolidated Balance Sheets

(Unaudited)
(In thousands)

Three Months Ended Mar 31, 2016 Dec 31, 2015
Assets
Cash and cash equivalents $1,441,789 $1,196,908
Restricted cash and marketable securities - current $23,980 $22,628
Accounts receivable $318,056 $168,965
Inventory $1,301,961 $1,277,838
Prepaid expenses and other current assets $153,757 $115,667
Operating lease vehicles, net $2,244,210 $1,791,403
Property and equipment, net $3,593,014 $3,403,334
Restricted cash - noncurrent $47,783 $31,522
Other assets $67,152 $59,674
Total assets $9,191,702 $8,067,939
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $1,452,008 $1,338,945
Deferred revenue $1,206,040 $1,006,896
Customer deposits $391,363 $283,370
Long-term debt and capital leases $3,119,615 $2,649,019
Other long-term liabilities $2,009,686 $1,658,720
Total liabilities $8,178,712 $6,936,950
Mezzanine equity $42,626 $47,285
Stockholders' equity $970,364 $1,083,704
Total liabilities and stockholders' equity $9,191,702 $8,067,939