Tesla Inc (TSLA)

[DiscoverGold]

Tesla services margin smells fishy, analyst says
By: MarketWatch | June 22, 2018

Bernstein analyst wonders if Tesla is shifting automotive costs to services to boost segment that is investors’ main focus

Shares of Tesla Inc. dropped 3% on Friday, when a Bernstein analyst questioned whether the car maker’s automotive margins are telling the whole story.

Of concern to Bernstein’s Toni Sacconaghi is a drop in Tesla’s TSLA, -3.99% “services and other” margins over the past few quarters. Margins for this segment, which consists of servicing infrastructure and used-car sales, are listed separately in Tesla’s financials from the company’s automotive margins.

Tesla’s financial statements show a services gross margin of -45% for its most recent quarter, whereas Tesla showed a slightly positive gross margin for the segment in the third quarter of 2016.

“The worry/key question, of course, is whether [cost of goods sold] that should be (or historically have been) booked in the Automotive Segment are now being booked in the ‘Services and Other’ reporting segment, given that investors focus nearly exclusively on Automotive GMs & generally disregard ‘Services and Other’ GMs,” Sacconaghi wrote.

In other words, the analyst wonders whether Tesla is pulling what were traditionally seen as automotive costs into the services segment, which gets less attention from Wall Street.

From the middle of 2016 until “at least” the third quarter of 2017, the main cause of the services gross-margin drop seemed to be “maintenance and service” costs, according to Sacconaghi. “We estimate that the COGS of maintenance and services grew $267 million in FY17, versus just $65 million in FY16, despite no commensurate acceleration in revenue growth.”

Tesla says that service revenue relates to out-of-warranty jobs, which helps explain why it hasn’t increased much, and that the costs of adding service capacity are often being counted in the cost of goods sold, not in operating expenditures.

The company provided some detail on the rising services costs in its latest investor letter, saying they were “a result of the continued growth and maturation in our service infrastructure.” The company expects a reduction in its losses here “in the coming quarters as our service infrastructure becomes significantly more utilized with the ramp of our Model 3 fleet size.”

Tesla shares are down 12% in the past 12 months, while the S&P 500 SPX, +0.19% has gained 13%.

https://www.marketwatch.com/story/tesla-services-margins-smell-fishy-analyst-says-2018-06-22

• DiscoverGold