Most of the analysis about electric-car maker Tesla Motors' (NASDAQ:TSLA) business surrounds the company's sales of its Model S and Model X, or its new car sales. This makes sense -- new car sales currently represent about 91% of the company's total revenue. But there's another segment to Tesla's business that's also worth some analysis, and it's categorized under the name "services and other."
Here's a close look at this revenue segment.
Services and other
First, some quick facts:
- Revenues and related costs filed in this segment include powertrain sales, service revenue, Tesla Energy, and pre-owned Tesla vehicle sales.
- Gross profit margin for "services and other" has soared from negative 3.2% in the first quarter of Q1 to 9.1% in Q3.
- Revenue for the segment is on the rise as well, rising from $46.6 million in Q1 to $85 million in Q3. And third-quarter revenue for the segment was up 62% from the year-ago quarter.
- Tesla operates its service business at break-even, as it's the company's policy to make money from selling new cars instead of servicing the products it sells. This means investors shouldn't expect service revenue to positively contribute to Tesla's bottom line.
Now here's a closer look at two particular aspects of this segment: pre-owned sales and Tesla Energy.
Tesla's pre-owned business is still new. Made up of sales of used Tesla vehicles the company accepts as trade-ins for new car sales, the business didn't launch until Q2.
Tesla's pre-owned business looks like it is shaping up to be a positive for the company. Demand is robust, sales are growing, and the company is hopeful about its long-term potential.
During the first quarter of Tesla's pre-owned business, the company captured about $20 million in sales during the quarter, or about 26% of the company's revenue. Pre-owned sales jumped 65% between Q2 and Q3 to $33 million, representing about 39% of the "services and other" revenue.
So far, Tesla is even having trouble keeping up with demand for used Tesla vehicles.
"The number of pre-owned Tesla vehicles that we sold in Q3 exceeded the number of customer trade-ins that we received," management explained in the company's third-quarter shareholder letter, "leading to a 17% sequential reduction in trade-in unit inventory."
What's in store for the future of this business? Tesla said during the company's Q2 earnings call that while management is still hesitant to make predictions related to its pre-owned business, Musk noted, "there's room for optimism in the future," citing the capital efficient model of a pre-owned business.
Tesla is already producing its Tesla Energy products, which include stationary energy storage products for consumers and for large-scale commercial clients. But the ramp-up is only just beginning.
And investors shouldn't expect much from Tesla energy in the fourth quarter either, as the company relocated production of Tesla Energy products during the fourth quarter from its Fremont Factory to a new automated assembly line at its Gigafactory.
"While this will allow us to better accommodate our expected growth," Tesla said in its third-quarter 10Q filing, "we expect it will cause short-term disruption in Tesla Energy production and deliveries during the fourth quarter of this year."
But going into 2016, the company expects to rapidly ramp production and deliveries of its Energy products. So, it may be worthwhile for investors to keep an eye on the company's updates for the sub-segment throughout the year.
Overall, there are a lot of fluctuating parts to Tesla's services and other segment. No wonder Tesla said in its third-quarter shareholder letter that while the company expected its gross margin in services and other to remain positive, it also expected it to "vary within a relatively wide band given the diversity of businesses reflected in this measure."
Despite the expected quarter-to-quarter fluctuations in its services and other business, growth and improving gross profit margin should be a common theme in this segment on a trailing-12-month basis. If the company's nascent energy storage business goes as planned, its improving revenue and scale should help beef up the "services and other" segment into a formidable portion of the company's overall business.