2012 Annual 10K is out

[Curt Renz]

That's actually the one thing they should be fine with. They're only using something like 20% of the current factory and it used to produce something like 300,000+ cars a year, so they've at least got the space.

Thanks, ckessel, that's good to know. Of course my comments still stand regarding the usefulness of new capital. I now viewed the factory roof on Google maps. It's indeed huge!

A bulletin from the Chicago Tribune just now arrived in my inbox. It indicates that President Obama will be in Chicagoland next week to promote his energy policies: Obama to visit Argonne next Friday - chicagotribune.com

 

[vfx]

The report says 2650 Model S's sold last year. That's a little over $15,250 per car. If they sell 20,000 this year that's over 300 million dollars in extra revenue. There's been speculation on how much Tesla would get per car, but as far as I know this is the first data directly from Tesla.

Those were all sigs or 85ps.

 

[kenliles]

I think the timeline smorg lays out is closer to reality - Gen3 will use the next gen battery tech as well- that and big production will take a lot time and capital to spread over the years. I think we are 4 years from now al least to see Gen III production (intro of course 18 months or so in front of that).
Reading the Elon contractual arrangement (option ramp and compensation etc.) and reading between the lines of his statements, I think he's pretty locked in until GenIII launches successfully. That appears to be the goal he set out to achieve making Tesla a mainstream automaker that effects the entire industry. With that accomplished, he could focus on his first love- SpaceX and mars, while pulling off Tesla to Board-head and periodic consulting ala SolarCity. Those are just my conjectures of course- no inside or other info involved...

 

[smorgasbord]

The report says 2650 Model S's sold last year. That's a little over $15,250 per car. If they sell 20,000 this year that's over 300 million dollars in extra revenue.

It doesn't work that way. The money they get from ZEV credits is limited by demand, not Tesla's supply. They didn't sell all their credits in 2012, so with more cars in 2013 they certainly won't sell all their credits.

However, the federal GHG credits are apparently another story - Tesla did sell all of the ones they had in 2012. So, they should be able to sell more in 2013.

In any case, however, the profit per car will drop as Tesla produces more cars. As other companies make EVs, they'll not need credits and may even have some to sell. Supply and demand says the value of a credit will fall.

 

[JRP3]

You are way too optimistic:

Probably, I vacillate between optimistic 2016 and probably more realistic 2017 for G3. However there may be pressure to push it out sooner rather than later if some of the big boys begin to wake up and offer a compelling product.

"Few" is at least 3, maybe 4 years. So that's end of 2017 for Gen3 at the earliest, probably 2018. And that probably means Roadster is more like 2020, if at all. And, that's all assuming Musk doesn't move on after a successful Gen3 launch.

In the recent vid from Norway Musk reiterated his commitment to staying with Tesla as long as he can imagine. He's quite passionate about this business, obviously, and as time goes on it should run more smoothly with less time required of him.

 

[Norbert]

In any case, however, the profit per car will drop as Tesla produces more cars. As other companies make EVs, they'll not need credits and may even have some to sell. Supply and demand says the value of a credit will fall.

Not sure how much the ZEV credit is per car, but otherwise Tesla's profit per car in 2013 will significantly increase, as they optimize production and get proper supplier volume prices.

 

[anticitizen13.7]

Probably, I vacillate between optimistic 2016 and probably more realistic 2017 for G3. However there may be pressure to push it out sooner rather than later if some of the big boys begin to wake up and offer a compelling product.

The transition from designing Model S to designing G3 will probably be easier than going from the Roadster to the Model S. They've got all the hardware fundamentals down: powertrain, battery, electronics, suspension, body, and whatever else goes into a car. The challenge will be meeting the new, lower price point.

Steady production and sales of Model S and X will prove to suppliers that the company is viable in the long-run, and should win them some lower costs and better contract terms.

 

[smorgasbord]

BTW, did anyone else notice the EIP with Daimler explanation?

Apparently, it's a first right of refusal to let Tesla sell their tech to be used in other company's cars. If Diamler refuses to let Tesla do it for the other company, then they have to put it in one of their cars. It expires July 2013, unless renewed with a tech to Diamler before then. Interesting.

 

[Zzzz...]

The transition from designing Model S to designing G3 will probably be easier than going from the Roadster to the Model S. They've got all the hardware fundamentals down: powertrain, battery, electronics, suspension, body, and whatever else goes into a car. The challenge will be meeting the new, lower price point.

The transition from Roadster to Model S was ~25x increase in production, from 800 units a year to 20,000.

Transition from S to GenIII would be only 10x increase, from 20,000 to 200,000.

Moreover Roadster to S transition was fundamental change of the way car is produced - from hand assembly to an assembly line. And from outsourcing one of the major component, glider to be hand build by 3d party to actually producing it themselves, like big automakers do....

Plus cherry on top, their supply chain would not need to be as extensively expanded in S--> Gen3 switch as it was the case in Roadster-->S, they already got suppliers for every of 2000 parts Model S made of...

 

[kenliles]

BTW, did anyone else notice the EIP with Daimler explanation?

Apparently, it's a first right of refusal to let Tesla sell their tech to be used in other company's cars. If Diamler refuses to let Tesla do it for the other company, then they have to put it in one of their cars. It expires July 2013, unless renewed with a tech to Diamler before then. Interesting.

good catch- that's a little different than what I had in my head; will be interesting to see if they renew it

 

[CapitalistOppressor]

It doesn't work that way. The money they get from ZEV credits is limited by demand, not Tesla's supply. They didn't sell all their credits in 2012, so with more cars in 2013 they certainly won't sell all their credits.

However, the federal GHG credits are apparently another story - Tesla did sell all of the ones they had in 2012. So, they should be able to sell more in 2013.

In any case, however, the profit per car will drop as Tesla produces more cars. As other companies make EVs, they'll not need credits and may even have some to sell. Supply and demand says the value of a credit will fall.

One thing I haven't researched is the potential for credits in Europe. Anyone looked into this?

Edit - Might as well answer my own question.

First Google pass -

Carmakers to win from low-emission vehicles | EurActiv

 

[blakegallagher]

interesting thought .... I had not considered credits from other countries .... although I think some sort of big EV incentive could come out of China's new government .... out of neccesicity after recent terrible pollution

 

[VoltAir]

The guidance on this item was very clear, though: Tesla isn't counting on future ZEV revenues to meet its margin forecasts. Pure gravy.

Yes, but is it not clear to everyone here that Gross margin on 2012 Model S was far worse than some of us had thought? Did we all think that around (7.5-8%) was the 2012 average number? Just break down Automotive Sales revenue and Gross Profit by making a few very accomodating assumptions:

"Automotive Sales" revenue: $386 M Gross Profit: $14M

...consisting of...

Roadster revenue: 250 x $140k = $7M Gross Profit (@20%): $1.5M
Drivetrain sales to TM: 600 x $12.5k = $7.5M Gross Profit (@20%): $1.5M
Regulatory credits: $40.5M Gross Profit (@90%): $36.5M

Subtract these to get Model S numbers.

Model S revenue: $331M Gross Profit: ($25.5M)

So the actual average 2012 Model S GM was around (7.7%). Tesla have to progress from:
... LOSING about $10k on $125K of revenue per delivery in 2012 to...
... GENERATING $25k Gross Profit on about $100k per delivery (at most -- that means everyone is buying 85 and P85) by the end of 2013. Roughly a 30% cost reduction on a design that is by all indications stable and essentially frozen?

Yes, it's great to have the "gravy", but are you sure there's going to be "meat"? I'm fairly shaken by this news, frankly, and I have been worried it might be coming. I asked for some better understanding of the ZEV Credit structure in the Q4 Earnings Report thread because I was concerned about where this revenue stream was headed; I don't think many people here really know. BTW, it probably sounds like I'm here to be disagreeable. This is NOT the case and I am very grateful for all I've learned here so far.

I'm not comfortable staying in this issue without a better understanding of what the Credit regime means to TSLA in the future. Personally I think they are going to be much more dependent on this windfall than previously implied.

Many thanks for any insight on these estimates and your knowledge and perspective.

 

[VoltAir]

Roadster revenue: 250 x $140k = $7M Gross Profit (@20%): $1.5M

Model S revenue: $331M Gross Profit: ($25.5M)

So the actual average 2012 Model S GM was around (7.7%). Tesla have to progress from:
... LOSING about $10k on $125K of revenue per delivery in 2012 to...
... GENERATING $25k Gross Profit on about $100k per delivery (at most -- that means everyone is buying 85 and P85) by the end of 2013. Roughly a 30% cost reduction on a design that is by all indications stable and essentially frozen?

Good grief. Horrible arithmetic on Roadster. Should have been...
250 x $140k = $35M Gross Profit (@ 20%): $7M

Which would make Model S revenue $303M Gross Profit ($31.5M), or about (10.3%) GM.
Meaning loss of almost $12k per vehicle.

 

[clmason]

Good grief. Horrible arithmetic on Roadster. Should have been...
250 x $140k = $35M Gross Profit (@ 20%): $7M

Which would make Model S revenue $303M Gross Profit ($31.5M), or about (10.3%) GM.
Meaning loss of almost $12k per vehicle.

This data is quite bleak. Considering they are projecting a profit in 2013q1 and paying back the loan in 1/2 the time, I assume they have brought down their production costs considerably from last quarter to current quarter. I am optimistic.

 

[Norbert]

Both production cost, and supplier prices, during ramp up, don't allow any conclusions about costs during steady production. Especially for a company producing the first time in this manner.

To be concerned about one because of the other is just a waste of time and nerves. You'll need to completely re-wire your synapses and pattern-matching neo-cortex units.

 

[K Hall]

+1 Norbert.

There is no linear relationship between Q4 and Q1 GP. Very few of their cost components are constant during the production ramp up.

I trust their guidance as they had 1/2 of Q1 behind them and a good idea of their run rates and cost.

 

[VoltAir]

Norbert and K, there was a time when I might have agreed. But I have been around enough operational stumbles to see that this just makes me too queasy. I sold-to-close all my call positions on Tuesday, out at a modest upside, and I'm waiting until all the uncertainty clears.

I am confident in Musk's commitment to cut R&D 15% (to under $60M). I also believe they can throttle SG&A rise to 10%. This leaves expenses at around $110M. Tesla needs to generate around $90M of Gross Profit to reach the target in the 8-K (small profit on a non-GAAP basis). That would leave about ($20M) GAAP net income; $20M is probably about where stock-based compensation ends up.

If they get another Regulatory Credit bluebird of $40M, that leaves $50M. It's hard to believe there's another Development Services surprise since they had such a huge revenue recognition event in December. If they squeeze $5M from Development, $1M from a few Roadsters to Oz and HK, and $2M from a quarter's worth of RAV4EV assemblies, the target for Model S is $42M, or about 10% GM.

The average Q3 Model S margin for 350 cars/qtr (27/week) production rate was about -30%. This improved to about -10% for 2750 cars/qtr (211/week). Roughly speaking, on average the CoGS for a well-equipped Model S dropped by about 20% when the rate of production increased by 7-8x. Achieving GM in excess of 10% would imply an additional 20% CoGS improvement with just short of a doubling in rate to 4500 cars/qtr (350-400/week). This just doesn't add up.

I understand your theory when you say there is no relationship between ramp-up costs and current costs. But unless there has been significant redesign of major component or subsystem elements, the proposed level of cost reductions just aren't going to show up. About 8% of the total number of cars to be built in Q1 were already finished. That would account for about $40M of the $268M in inventory. Some of that was probably larger lot buys as well, but in the range of part quantity being purchased here, a 10% discount is at the outer edge of expectation for such a buy. Even then, much of the inventory won't reflect any savings at all. Finally, the labor reduction targets addressed in the conference are encouraging, but if you assume a base wage/fringe of $25/hr on a fully-burdened $65/hr rate, the improvements described by Elon Musk will only achieve about $30M savings through the end of Q1.

I could go on. At this point it's my guess vs. your guess and it probably is just boring to the readers here, and it makes me look really argumentative which I don't mean to be. I am not a reservation holder yet, and this is your board. What I'm saying is that before I read the 10-K, I could theorize another good upside surprise in Development and a huge windfall in Credits alongside a nice positive Model S GP. But now I realize that expecting every single one of those things to happen is like saying "now that I'm down by three in the bottom of the Ninth, I know that I really need a Grand Slam so it will probably happen." I don't see it. In fact I see a $20-30M miss. [BTW: I don't think this has anythiing at all to do with today's drop.]

This is not by any means the end of the world. But profitability, or better yet the expectation of it, brings a burden of performance that, when missed, hurts worse than if we were still slogging along in early losses. Their confidence during the cc doesn't sway me. When they tightened guidance last May, they were only two months away from starting production and missed by a mile. (Back then the big miss didn't matter, but it does now.)

It will be lumpy for awhile. I'll get back in later. Signing off until after Q1 is unveiled and TSLA price shakes out. Many thanks for the air time.

 

[neroden]

N
I understand your theory when you say there is no relationship between ramp-up costs and current costs. But unless there has been significant redesign of major component or subsystem elements, the proposed level of cost reductions just aren't going to show up.

I'm not sure what you're saying here. Are you just thinking short-term results or long-term?

The factory didn't reach its "sustained production rate" until late February, maybe March. However, the workers were already being paid by the hour at the same rates as they would be paid at full productivity... plus we know Tesla was using a lot of overtime. Now, I'm not sure what percentage of the cost of production is labor. But let's say the labor costs drop by 37% due to elimination of weekend overtime work -- since we know they were operating 7 days a week, presumably with concommitant time-and-a-half -- while the rate of car production doubles -- the labor cost per car could drop *very* substantially.

I don't see a lot of improvements in *materials* costs (although we just discovered that Tesla is dropping the Alcantara headliner). But labor costs had a long way to come down thanks to productivity improvements. Of course you won't see most of the benefits of that in Q1, only in Q2. Of course, some of the money will have been pouring into the opening of stores, service centers, and superchargers, which should be a drag on profits and cash flow.

Of course, I hope Tesla's results are worse than "the street" expects for Q1, it would give me a chance to buy some more stock. And there's a good chance the numbers will look bad for Q1. I don't think it bodes badly for the company as a whole though; I still believe they can reach the target margin for Model S during the course of 2013. (And they aren't in a cash flow crunch, so they don't need the stock price to be high for capital-raising purposes.) Remember, Elon Musk did the same thing with the Roadster: the first few cars sold for less than the marginal production cost, but as they worked out all the production kinks, simplified the design, and raised the price, they ended up getting a nice profit margin on the later cars. I believe he'll be able to do the same with the Model S, because he already did it once.

As a result, my worries are entirely on the customer service end of things, because customer service for a small-run car is NOT the same as customer service for a 20000/year car, and Tesla has NOT proven that it can handle the latter yet.

 

[bhzmark]

Here I have something for you:
"We have also publicly announced our intent to develop a third generation electric vehicle to be produced at the Tesla Factory. We intend to
offer this vehicle at a lower price point and expect to produce it at higher volumes than our Model S. We expect that this vehicle will be
produced a few years after the introduction of the Model X crossover."

A FEW years! What if TSLA can't sustain its sales of the Model S and Model X to get enough revenue to fund the R&D costs of Gen III which won't be out for a few years. I take 2014+few years = 2017-2018 for the Gen III. Thats a long time from now,

Interesting to read the old speculation and occasional accurate prediction.