Elon Musk & Jason Wheeler Shareholder Letter Q4 2016 – Tesla

  • Q4 Model S and X orders reach record highs
  • Model 3 on track for initial production in July, volume production by September
  • Battery cell production started at Gigafactory 1
  • All Tesla vehicles in production have the hardware necessary for full self-driving
  • SolarCity and Grohmann integrations underway
  • Q3 to Q4 cash increased by over $300 million to $3.4 billion
  • 2016 revenue of $7 billion, up 73% from 2015

We start 2017 well positioned to scale our business significantly. Model S and X net order growth remains strong, as we are continually evolving our products by elevating performance, convenience, and safety. Our Model 3 program is on track to start limited vehicle production in July and to steadily ramp production to exceed 5,000 vehicles per week at some point in the fourth quarter and 10,000 vehicles per week at some point in 2018. To support accelerating vehicle deliveries and maintain our industry-leading customer satisfaction, we are expanding our retail, Supercharger, and service functions.

Our acquisitions of SolarCity and Grohmann Engineering were completed in November and in January, respectively. With the acquisition of SolarCity, we have created the world’s only integrated sustainable energy company, from generation to storage to transportation. Grohmann Engineering is a world leader in highly-automated methods of manufacturing, and this acquisition launches Tesla Advanced Automation Germany, which will help us innovate manufacturing processes to be used initially in Model 3 production.


In Q4, we received 49% more global net orders for Model S and X combined, compared to the same period in 2015, as both vehicles continue to win over new customers. Automotive experts share this enthusiasm. In November, Model X won the Golden Steering Wheel (Das Goldene Lenkrad), one of the most prestigious automotive awards in the world. In December, a Consumer Reports survey ranked Tesla as having the best owner satisfaction, with 91% of customers saying they would purchase from Tesla again. Our result was seven percentage points ahead of our next closest competitor. Then, in January, the Model S won a “Best Cars 2017” imported car award from Automotor and Sport in Germany.

These accolades have not stopped us from continuing to evolve Model S and Model X. Motor Trend just tested a Model S P100D and reported faster vehicle acceleration than any car they have ever tested, including million dollar, two-seat, gasoline-powered supercars with almost no cargo space. Model S posted a recordsetting 0 to 60 mph in only 2.275 seconds and covered a quarter mile in 10.5 seconds. We also introduced 100D versions of the Model S and Model X, each of which established new world records as the longest range all-electric production sedan and SUV, with estimated EPA ranges of 335 miles and 295 miles, respectively.

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Our new Autopilot hardware platform, deployed in Q4 2016, establishes a vehicle technology threshold that is unmatched by any other production car. This new hardware platform, combined with our growing vehicle fleet, means Tesla is collecting more data for autonomous driving than any other company, helping to further accelerate the evolution of Autopilot. Despite the complexities of implementing Autopilot hardware on both Model S and Model X, we still produced 77% more vehicles in Q4 2016 than in Q4 2015. In Q1 2017, we began pushing over-the-air software updates to all Autopilot-equipped cars to further increase performance and safety.

Autopilot’s positive safety impact was confirmed in a January report by the National Highway Traffic Safety Administration, which stated, “The data show that the Tesla vehicles crash rate dropped by almost 40 percent after Autosteer installation.” Solar Roof

We continue to evolve our service function as well. In Q4, we reduced service backlog in our busiest markets by 25%, and by year end we had increased the number of cars serviced per day by 45% since Q3’16, and by 95% since Q1’16. In fact, we are on track to reduce the global average wait time for vehicle service to less than one day by the end of the first quarter of 2017.

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Ahead of the Model 3 launch, we are reengineering and expanding our operations as we anticipate the needs of a much larger family of Tesla owners. In service, since more than 80% of our repairs are so minor that they can be done remotely, we are expanding our mobile repair service that allows Tesla to make vehicle repairs at an owner’s home or office. In February, we opened a 168,000 square foot vehicle delivery center in Hong Kong; and we plan to accelerate expansion of the Supercharger network this year, starting with doubling our number of North American Supercharger locations in 2017.

Model 3 vehicle development, supply chain, and manufacturing are on track to support volume deliveries in the second half of 2017. In early February, we began building Model 3 prototypes as part of our ongoing testing of the vehicle design and manufacturing processes. Initial crash test results have been positive, and all Model 3-related sourcing is on plan to support the start of production in July. Installation of Model 3 manufacturing equipment is underway in Fremont and at Gigafactory 1, where in January, we began production of battery cells for energy storage products, which have the same form-factor as the cells that will be used in Model 3. Later this year, we expect to finalize locations for Gigafactories 3, 4 and possibly 5 (Gigafactory 2 is the Tesla solar plant in New York).


  • 201 MW of solar energy generation deployed in Q4
  • 98 MWh of energy storage deployed in Q4

We are working to make solar energy generation even more compelling with improved products and even better value. With our acquisition of SolarCity complete, we plan to reduce customer acquisition costs by cutting advertising spending, selling solar products in Tesla stores, and shifting from leasing to selling solar energy systems. During this transition, we plan to prioritize cash preservation over growth of MW deployed.

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As this transition progresses, we see a return to growth of MW deployed later this year to help us generate the cash and realize the cost synergies we projected prior to the acquisition. As evidence that we are on plan, our solar operations added $77 million of cash during the six weeks following the close of the acquisition, with 28% of solar capacity deployed during Q4 sold rather than leased, up from 13% sold in Q3, and up from less than 4% sold in Q4 2015.

At a Q4 event, we unveiled our second generation of energy storage products, Powerpack 2 and Powerwall 2. These products are priced at a significantly lower cost/kWh and have more than double the volumetric energy density of our first-generation products. At the same event, we also revealed our solar roof, which we plan to begin selling and installing later this year. Compared to regular roofs, we expect our solar roof to last longer, look better, and cost less than a traditional tile roof plus the cost of electricity. To support solar roof production, we announced a solar cell manufacturing partnership with Panasonic. Production is scheduled to begin in Buffalo, N.Y. this year. Gigafactory 1 Expansion in Progress

Our grid-scale energy storage projects demonstrate how utilities can safely and effectively use Tesla battery technology on a large scale to help meet customers’ energy needs, especially during times of peak demand. Several of our recent projects include the Southern California Edison Mira Loma substation, the American Samoa installation, and the Kauai Island Utility Cooperative project.

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At the Mira Loma substation we installed a 20 MW / 80 MWh energy storage system for Southern California Edison. Comprised of nearly 400 Powerpacks and 48 Tesla inverters, this project was completed in only 90 days from order to customer acceptance. In November, we completed a solar power and battery storage-enabled microgrid for the island of Ta’u in American Samoa. With 5,300 solar panels and 60 Powerpacks the microgrid can supply 1.4 MW of solar generation capacity with 6 MWh of battery storage to sustainably meet nearly 100% of the island’s electrical power needs. For the Kauai Island project, we are deploying solar panels and energy storage Powerpacks on a 65-acre solar power farm to displace generators.


Our Q4 financial statements include the results of SolarCity’s operations from the close of the acquisition on November 21 to December 31, 2016. For comparative purposes, references to MW of solar energy generation deployed and the mix of solar systems that were sold or leased are presented for the full quarters presented.

To calculate non-GAAP results we eliminate non-cash stock-based compensation (SBC), one-time acquisition-related transaction costs and the gain on the acquisition of SolarCity. When calculating non-GAAP automotive gross margin, we eliminate the sale of Zero Emission Vehicle (ZEV) credits as well as SBC. For all references to non-GAAP measures, please see the Reconciliation of GAAP to Non-GAAP Financial Information at the end of this letter.

Starting in Q4, we have reclassified the revenue and cost of revenue of our energy storage products from ‘Services and other’ into ‘Energy generation and storage’ for all periods presented. Classification of automotive revenue and cost of revenue are unchanged.

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  • Total gross margin in Q4 2016 improved compared to Q4 2015, while sequentially gross margin declined primarily due to lower ZEV credit sales in Q4 2016.

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  • Average transaction prices increased 1% from Q3 2016, primarily driven by continued mix shift to Model X. This was partially offset by unfavorable foreign currency changes during the quarter.
  • Non-GAAP automotive gross margin decreased sequentially for three primary reasons with a combined unfavorable gross profit impact of more than 3 percentage points of gross margin:
    • despite continued strong demand for Autopilot, we recognized almost no new Autopilot-related revenue in Q4, as software updates were delayed until Q1
    • unfavorable exchange rate changes during the quarter
    • a sequential increase in fixed asset dispositions
  • Deliveries subject to lease accounting dropped to 25% of total deliveries, down from 32% in Q3 2016, and down from 42% in Q4 last year.

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  • Q4 Energy generation and storage gross margin was lower than planned as we scaled production capacity in Q4 for our energy storage products to accommodate future growth. Long term, gross margin is expected to be similar to Automotive, but with a significantly higher revenue growth rate.

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  • During Q4, customers asked us to repurchase fewer than 3% of vehicles eligible for buy back under our resale value guarantee program. Still, pre-owned vehicle sales drove most of the increase in Q4 Services and other revenue.
  • Service and other gross margin was affected by negative vehicle service gross margin in the quarter, as we ramp up our service capability ahead of the launch of Model 3.

Operating Expenses and Net ResultsTesla Shareholder 9

  • We increased total Q4 GAAP operating expenses to support our growing business and added $85 million of solar-related operating expenses since the acquisition of SolarCity.
  • Research and development (R&D) expenses, which are mainly related to our automotive activities, increased primarily because of Model 3-related development work, while sales, general and administrative expenses (SG&A) increased as we expanded operations to support our growing customer base.

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  • The Q4 2016 share count amounts reflect six weeks weighted impact of shares issued related to the acquisition of SolarCity. Cash Flow and Liquidity

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  • In Q4, we increased cash by $309 million. Cash used in operating activities was unusually high as we paid down trade payables and had an elevated number of vehicles-in-transit at quarter end. As designed, our funding arrangements scaled with our operating cash flow needs as receipts from our bank leasing partners and draws on our asset-backed line and credit facility increased our liquidity position. We also received $214 million in cash from the acquisition of SolarCity.
  • We invested $522 million in capital expenditures for Model 3 manufacturing capacity, Gigafactory 1, and expanded customer support infrastructure. Our capital expenditures came in below plan as we continue to negotiate more favorable payment terms with our capital equipment suppliers, pushing some payments closer to the start of Model 3 production and some payments beyond the start of production.
  • During the quarter, we added three new lender commitments under our asset-backed line and vehicle lease warehouse credit facility, increasing our credit agreements by $500 million, for a total of $1.80 billion in commitments. At quarter end, we had $1.36 billion drawn against these commitments.



We are excited about 2017, as we expect to see significant advances across our transport, energy generation and storage product lines. Most notably, the Model 3 and solar roof launches are on track for the second half of the year. However, since even a couple week shift in timing could have a meaningful impact on total deliveries and installs, we are focusing our guidance on the first half of the year.

We expect to deliver 47,000 to 50,000 Model S and Model X vehicles combined in the first half of 2017, representing vehicle delivery growth of 61% to 71% compared with the same period last year. In addition, both GAAP and non-GAAP automotive gross margin should recover in Q1 to Q3 2016 levels and then continue to expand in Q2 2017.

As for our energy generation and storage business, we plan to prioritize profitability and cash preservation over total MW deployed ahead of the solar roof launch. We are on track to generate $500M in cash (including growth of non-recourse project financing) by 2019 and achieve the cost synergies we committed to upon acquiring SolarCity. Specifically, we plan to reduce customer acquisition costs by cutting advertising spending, selling solar products in Tesla stores, and shifting away from leasing solar systems.

We expect to invest between $2 billion and $2.5 billion in capital expenditures ahead of the start of Model 3 production. We continue to focus on capital efficiency while also investing in battery cell, pack and energy storage production at Gigafactory 1.

Tesla continues to execute against its mission of accelerating the world’s transition to sustainable energy, and we look forward to hitting the 2017 milestones that are critical to our long-term plan.

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Elon Musk, Chairman & CEO                   Jason Wheeler, Chief Financial Officer