We published a customer-focused blog post announcing our new captive finance company, Tesla Finance LLC, and its initial product offering, a leasing program for small and medium sized businesses. Here is further information for investors and analysts about this announcement.
What is Tesla’s strategy in starting Tesla Finance? – We believe that a captive finance company is a natural extension of our strategy to offer great customer experience, including financing products important to customers. Consistent with this, Tesla Finance will offer a financing product that customers have been requesting but that has not available from our bank financing partners: a true leasing product intended for businesses. This will round-out the portfolio of financing options available to Tesla customers. This leasing program will be offered alongside traditional installment loan programs currently offered by our bank partners.
How will this program affect Tesla’s capital structure? – The leasing program is targeted just at small/medium-sized businesses and their owners, so volume is expected to be somewhat limited.
The leases will be funded with a combination of equity and a warehouse financing facility that will be announced shortly. Given Tesla’s solid cash position, strong cash flow from operations and the poor returns available on cash equivalents today, it makes sense for Tesla to use a portion of this cash to support growth by creating Tesla Finance now.
Should the program grow, it would be reasonable that additional layers of warehouse facilities would be added and eventually replaced with private and/or public asset-backed securitization transactions commonly utilized in the industry. Tesla has established the legal structures to support securitization transactions, but that approach is volume driven and not necessary until we begin to deploy Tesla’s capital to support the Gigafactory and Gen III initiatives in earnest.
How will Tesla account for the leased vehicles and how does that compare with other car companies? - Within the automotive industry, automakers typically sell their vehicles through a franchised dealer network in which sales to the independent dealers represent a full sale for GAAP purposes. Later, a portion of these same vehicles may be financed by the automakers’ financing affiliates where they also record the related leasing revenue. Since Tesla sells directly to customers, we cannot recognize full sales revenue for vehicles delivered under our captive leasing program. Therefore, we will not adjust our financials (GAAP or non-GAAP) to show leased vehicles as sold vehicles like we do for the Resale Value Guarantee program in our non-GAAP financials.
What info will Tesla disclose on these transactions? - To facilitate comparability with other automakers, we will include a supplemental quarterly and YTD table that summarizes the aggregate price of vehicles leased by Tesla. This should allow investors to evaluate the velocity of our vehicle business.
How will gross margins be impacted by the program? - There will be no material impact to our gross margin in either GAAP or non-GAAP financials.
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