Elon announced a new 8-year drive train warranty applied retroactively to all Model S vehicles ever produced:
First, I applaud this decision as I think it's not only increases owner loyalty but also increases the appeal of the car, which increases demand. I also think the long-term expenses will be minimal for Tesla. However, there will be other posts to discuss this newly updated warranty in general.
The purpose of this post is to specifically discuss the new drive train warranty's impact on next quarter (Q3) earnings:
- What's Tesla's current warranty reserve per vehicle, and how much will that increase due to this warranty?
- How much money will Tesla need to put into warranty reserves due to this new warranty applied retroactively?
- How will the warranty expense for past cars be recorded? How does this affect Q3 earnings?
I haven't done the research on this yet, as I'd like to crowdsource this and see if folks can pitch in to nail down some numbers. But for the sake of keeping this thread manageable, let's not post opinions about the warranty in general but rather focus in on real numbers and research into the warranty reserves. And if you don't have hard data/facts/figures, then let's give room to those who will put in the research to post what they've found out.
8/19/14 Update:
I asked Tesla Investor Relations the following question and got the following response this afternoon.
Q: Can you shed any light on how much the extended drive train warranty will cost Tesla as a one-time expenses in Q3?
A: We have not provided any estimate of those costs. Analysts are generally estimating a 1-2% of revenue charge in Q3 for past vehicles and an ongoing 25-50 basis points (a quarter to half a percent) ongoing cost in future quarters.All of this will pass through cost of goods sold and lower gross margin.
---------------------------
Here are my personal thoughts on Tesla's response.
1. It appears that they haven't given guidance regarding the impact of the drive train warranties yet.
2. They've shared some analysts estimates, and this helps us form a rough range (although it might not be accurate).
3. "1-2% of revenue charge in Q3" - I'm personally forecasting about $880M in non-GAAP revenue for Q3, so 1% expense would be about $9M and a 2% expense would be $16M. There were about 40k cars sold prior to Q3 2014. So a one time $9M warranty charge would be $225/car. A one-time $18M warranty charge would be $450/car. This isn't too far off from my original estimates several days ago (I estimated about $400/car).
4. An "ongoing 25 to 50 basis points" works out to be roughly $250-500 per new car (ie., if ASP is around $100k). This hits gross margin about .25 to .50%. This might make it difficult to hit the 28% gross margin target by the end of the year.
Overall, if analysts estimates are correct then the drive train warranty will not add a huge expense to Q3 and it's impact to gross margin is minimal. However, it still might be difficult for Tesla to be non-GAAP profitable in Q3 unless they sell ZEV credits or they sell more cars than guidance.
However, in the bigger picture being slightly non-GAAP not-profitable in Q3 is not a big deal as long as Tesla continues to execute and continues to ramp production successfully to meet growing demand.
"The Tesla Model S drive unit warranty has been increased to match that of the battery pack. That means the 85 kWh Model S, our most popular model by far, now has an 8 year, infinite mile warranty on both the battery pack and drive unit. There is also no limit on the number of owners during the warranty period.
Moreover, the warranty extension will apply retroactively to all Model S vehicles ever produced. In hindsight, this should have been our policy from the beginning of the Model S program. If we truly believe that electric motors are fundamentally more reliable than gasoline engines, with far fewer moving parts and no oily residue or combustion byproducts to gum up the works, then our warranty policy should reflect that.
To investors in Tesla, I must acknowledge that this will have a moderately negative effect on Tesla earnings in the short term, as our warranty reserves will necessarily have to increase above current levels. This is amplified by the fact that we are doing so retroactively, not just for new customers. However, by doing the right thing for Tesla vehicle owners at this early stage of our company, I am confident that it will work out well in the long term."
Moreover, the warranty extension will apply retroactively to all Model S vehicles ever produced. In hindsight, this should have been our policy from the beginning of the Model S program. If we truly believe that electric motors are fundamentally more reliable than gasoline engines, with far fewer moving parts and no oily residue or combustion byproducts to gum up the works, then our warranty policy should reflect that.
To investors in Tesla, I must acknowledge that this will have a moderately negative effect on Tesla earnings in the short term, as our warranty reserves will necessarily have to increase above current levels. This is amplified by the fact that we are doing so retroactively, not just for new customers. However, by doing the right thing for Tesla vehicle owners at this early stage of our company, I am confident that it will work out well in the long term."
First, I applaud this decision as I think it's not only increases owner loyalty but also increases the appeal of the car, which increases demand. I also think the long-term expenses will be minimal for Tesla. However, there will be other posts to discuss this newly updated warranty in general.
The purpose of this post is to specifically discuss the new drive train warranty's impact on next quarter (Q3) earnings:
- What's Tesla's current warranty reserve per vehicle, and how much will that increase due to this warranty?
- How much money will Tesla need to put into warranty reserves due to this new warranty applied retroactively?
- How will the warranty expense for past cars be recorded? How does this affect Q3 earnings?
I haven't done the research on this yet, as I'd like to crowdsource this and see if folks can pitch in to nail down some numbers. But for the sake of keeping this thread manageable, let's not post opinions about the warranty in general but rather focus in on real numbers and research into the warranty reserves. And if you don't have hard data/facts/figures, then let's give room to those who will put in the research to post what they've found out.
8/19/14 Update:
I asked Tesla Investor Relations the following question and got the following response this afternoon.
Q: Can you shed any light on how much the extended drive train warranty will cost Tesla as a one-time expenses in Q3?
A: We have not provided any estimate of those costs. Analysts are generally estimating a 1-2% of revenue charge in Q3 for past vehicles and an ongoing 25-50 basis points (a quarter to half a percent) ongoing cost in future quarters.All of this will pass through cost of goods sold and lower gross margin.
---------------------------
Here are my personal thoughts on Tesla's response.
1. It appears that they haven't given guidance regarding the impact of the drive train warranties yet.
2. They've shared some analysts estimates, and this helps us form a rough range (although it might not be accurate).
3. "1-2% of revenue charge in Q3" - I'm personally forecasting about $880M in non-GAAP revenue for Q3, so 1% expense would be about $9M and a 2% expense would be $16M. There were about 40k cars sold prior to Q3 2014. So a one time $9M warranty charge would be $225/car. A one-time $18M warranty charge would be $450/car. This isn't too far off from my original estimates several days ago (I estimated about $400/car).
4. An "ongoing 25 to 50 basis points" works out to be roughly $250-500 per new car (ie., if ASP is around $100k). This hits gross margin about .25 to .50%. This might make it difficult to hit the 28% gross margin target by the end of the year.
Overall, if analysts estimates are correct then the drive train warranty will not add a huge expense to Q3 and it's impact to gross margin is minimal. However, it still might be difficult for Tesla to be non-GAAP profitable in Q3 unless they sell ZEV credits or they sell more cars than guidance.
However, in the bigger picture being slightly non-GAAP not-profitable in Q3 is not a big deal as long as Tesla continues to execute and continues to ramp production successfully to meet growing demand.
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