Tesla Has Unlocked Substantial Deferred Revenue Recognition by Expanding Its FSD Beta to 100,000 Additional Users
The Q2 2022 earnings prospects for Tesla just became substantially brighter as the EV company is now expanding its Full Self-Driving (FSD) beta program to 100,000 additional users, unlocking hefty deferred revenue recognition in the process.
To wit, Elon Musk has now announced via a tweet that Tesla's FSD Beta 10.12.2 was now being rolled out to 100,000 additional customers, bringing with it the ability to smooth out "intersection control, especially long lefts," as well as the capability to function on roads without any pre-mapped data. Bear in mind that Tesla is currently aiming for "volume production" of its robotaxis in 2024.
Also, FSD Beta 10.12.2 now expanding to 100k cars.
10.13 smooths out intersection control, especially long lefts, and starts to handle roads with no map data at all.
Last point is a big deal. Within a few months, FSD should be able to drive to a GPS point with zero map data.
— Elon Musk (@elonmusk) June 4, 2022
This brings us to the crux of the matter. Tesla's CFO, Zachary Kirkhorn, has already clarified that the company recognizes around 50 percent of its FSD cash inflow as revenue immediately upon receipt, with the balance continuing to reside as a liability on Tesla's balance sheet under the deferred revenue section.
Now that Tesla is expanding its FSD beta to 100,000 new users, a significant chunk of this deferred revenue stands to be recognized, boosting the prospects for the EV giant's upcoming Q2 2022 earnings. Conservatively speaking, Tesla might feasibly recognize around $300 million of deferred revenue, based on the assumption that it would recognize at least $3,000 from each eligible FSD-enabled customer.
Nonetheless, an exact computation of this metric is quite difficult at this stage due to a number of reasons. First, Tesla had priced the FSD functionality of its Autopilot ADAS at $8,000 back in 2016. Since January 2022, this functionality now retails at $12,000 as a lump-sum payment. Moreover, customers can also subscribe to the FSD functionality by paying $199 per month. Both of these factors obfuscate the exact magnitude of the deferred revenue that stands to be recognized based on the time and the mode of payment that a particular customer employed to subscribe to the FSD functionality.
Moreover, Tesla also continues to recognize incremental amounts of deferred revenue on the basis of the number and the utility of the OTA updates it delivers. This computation is based on Tesla's own internal assessment of the utility that a particular OTA update provides to the FSD capability. This factor introduces additional variation to Tesla's pool of deferred revenue.
As of the 31st of March 2022, Tesla had $1.594 billion in deferred revenue on its balance sheet. Back in February 2022, the company had announced that it would recognize $962 million of deferred revenue this year, down from the previous guidance of $1.39 billion. Of course, the recent tweet by Musk now means that Tesla would likely exceed its own much more subdued guidance given back in February.
Of course, Tesla's share price was hammered on Friday when Musk had cited a "super bad feeling" about the US economy in a leaked internal email to pave the way for a 10 percent cut in the company's global non-core workforce. Since then, Musk has tried to control the fallout by stating that Tesla's salaried headcount "will increase" over the next 12 months.
As we had covered on Friday, the Morgan Stanley analyst and a Tesla permabull, Adam Jonas, had cited Musk's apparent downgrade of the US economy to caution investors. Jonas noted that Tesla's gross margins likely peaked in Q1 2022 and that the company now faces several headwinds, including disruptions at the Shanghai Gigafactory due to China's zero-COVID policy, rising input costs, and production ramp-up costs related to the Austin and Berlin factories.
Against this backdrop, Tesla's FSD beta expansion could not have come at a better time. After all, the stock is now down over 41 percent on a year-to-date basis.