Thursday, July 31, 2014

Tesla Reports, Market Yawns (TSLA)

After dropping $5.62 (to $223.30) during regular trade, the stock is up $3.45 to $226.75.
From the Company:
Form 8-K
Current Report
Filed Jul 31, 2014

Tesla Motors, Inc. – Second Quarter 2014 Shareholder Letter
•    Tesla and Panasonic announce Gigafactory agreement
•    Site preparation started in June for a potential Gigafactory location
•    Record Q2 Model S deliveries of 7,579 vehicles
•    Record Q2 Model S production of 8,763 vehicles
•    Net income of $16M and $0.11 EPS (non-GAAP), loss of $62M and $(0.50) EPS (GAAP)
•    New Model S/Model X assembly line planned to begin operation next week
•    On track for more than 35,000 deliveries in 2014
July 31, 2014
Dear Fellow Shareholders:
We have had an active first half of 2014, and the rest of the year is expected to be even busier. The development of our large-scale battery manufacturing facility, known as the Tesla Gigafactory, is proceeding well. We have formalized our agreement with Panasonic for cell manufacturing at the Gigafactory and remain on track with the site selection process. In addition, we are adding new production capacity at our Fremont factory that will allow us to meet the growing worldwide demand for our vehicles. The speed at which we are executing this capacity upgrade will allow us to exceed 35,000 Model S deliveries this year. Provided that we execute well and there are no serious macroeconomic shocks, Tesla’s annualized delivery rate should exceed 100,000 units by the end of next year.
Laying the Groundwork for Future Growth
Earlier today, Panasonic and Tesla entered into a formal agreement to partner on the Gigafactory. Panasonic will invest in production equipment that it will use to manufacture and supply Tesla with battery cells. Tesla will prepare and provide the land, buildings and utilities for the Gigafactory, invest in production equipment for battery module and pack production, and be responsible for the overall management of the Gigafactory. Additional Gigafactory partners for production of cell precursor materials will be announced in the coming months to create a fully integrated industrial complex. Processed ore from mines will enter by railcar on one side and finished battery packs will exit on the other.
In June, we broke ground just outside Reno, Nevada on a site that could potentially be the location for the Gigafactory. Consistent with our strategy to identify and break ground on multiple sites, we continue to evaluate other locations in Arizona, California, New Mexico and Texas. The final site for the first Gigafactory will be determined in the next few months, once we have full visibility and agreement on the relevant incentives and processes for enabling the Gigafactory to be fully operational to meet the timing for Model 3. We see these concurrent efforts as prudent. This vehicle will be our third-generation product and will substantially broaden the addressable market for Tesla, helping to accelerate the transition towards sustainable transportation. Any potentially duplicative investments are minor compared to the revenue that could be lost if the launch of Model 3 were affected by any delays at our primary Gigafactory site.
At the Fremont factory, we set a new record for vehicles produced this quarter, which came in tandem with substantial efforts underway to increase the factory’s capacity. Factory production reached 8,763 Model S vehicles during the quarter, up 16% from Q1. Recently, we have been producing about 800 cars per week. Panasonic’s increased cell production capacity in Japan has begun to reduce this critical constraint on vehicle production.

LOGO    To increase manufacturing capacity further, we are building a new final assembly line and adding more automation to our body shop. With advancements in automation and efficiency, our new assembly line has the capacity to produce more than 1,000 vehicles per week and the flexibility to build both Model S and Model X. Production on the new line begins next week after a shutdown for the transition. As planned, the transition will result in about 2,000 fewer units being produced in Q3, while having no significant impact on scheduled customer deliveries. After a short ramp up period in Q3, we foresee average Q4 production of slightly more than 1,000 cars per week, enabling us to meet our 2014 delivery guidance of more than 35,000 vehicles.
Model S/Model X Final Assembly Line – Fremont   
Expanding Model S Demand
At Tesla, we see a clear distinction between demand and deliveries. We measure demand by the number of cars that have been ordered. An order occurs when a customer selects their vehicle configuration and pays the nonrefundable cash deposit. Deliveries, on the other hand, are the fulfillment of those orders. The number of deliveries in a quarter is influenced by three main factors: our ability to increase production; the allocation of that production among our North American, European and Asian markets; and the need to fill the in-transit pipeline for future deliveries in each region. This quarter, for example, we delivered 7,579 Model S vehicles, slightly ahead of guidance and up by more than 17% sequentially. However, even though we increased both production and deliveries, average global delivery wait times increased because our production growth was unable to keep pace with increased demand.
Model S orders, and thus demand, continue to grow even in our most established markets. In both North America and Europe, Q2 Model S orders increased sequentially at a much faster rate than for the rest of the automotive industry. Accordingly, we believe these markets remain under-penetrated. We expect demand to continue to increase worldwide as we continue to grow our customer support infrastructure and broaden the appeal of our products, and as consumer awareness improves.
This year, we are doubling our total global addressable market by entering China and right hand drive (RHD) markets. Model S is off to a very encouraging start in China, especially considering that we are delivering cars only in the areas around Beijing, Shanghai, Shenzhen and recently Hangzhou where we can assure customers of service coverage. We are planning to launch service and deliveries in many additional cities in the upcoming months, including Chengdu and Guangzhou. China has almost 10 times as many cities with more than 1 million people compared to the United States, so we believe the opportunity is substantial.
RHD Model S is also being well received in the United Kingdom where it launched in June and in Hong Kong where it launched last week. Hong Kong is a unique market because Model S is exempt from registration tax that nearly doubles the cost of a comparable luxury car. We plan to begin RHD Model S deliveries in Japan and Australia later this year. Our customers have now driven the Model S for 394 million miles globally, saving nearly 18 million gallons of gasoline.
RHD Model S – United Kingdom