2017Q1 results

[ValueAnalyst]

And then five years later, the artificial accounting-induced losses will reverse and start showing profits.

What was SolarCity's peak volume installation quarter? We should be able to predict when the "losses" from the leases will reverse based on this: it'll be around 5 years from then.

Except all the accounting standards will be changed before then, I think...

This will become immaterial as Model 3 and solar roof start volume production.

 

[ValueAnalyst]

Firstly thanks to everyone for adding Colour ( most overused word in the conference call) to this thread.

I have two things that somewhat weigh on my brain, and cause some dissonance relative to how I have placed my bet.
1) despite a lot of smart people's best efforts, the solar city accounting still seems opaque and guesswork. I really question at this point why? Their CFO also left in the midst of all this, despite being relatively new to Tesla. I do worry there might of been behind the scenes disagreements.
2) every quarter I expect tesla energy to start making massive gains. I expect in the long run the energy component might dwarf the car sales strictly do to massive volumes, and the dire need of a paradigm shift in Energy provision in order to at least try to avoid the sixth major extinction. It is going up nicely...63 per cent over last quarter, but how? Why? Guidance? Where is the colour?

CFO left on good terms to accept a position in public service.

Tesla won't show "massive gains" until second half of linear part of s-curve ramp up of model 3, so 2H18 at the earliest. This isn't the problem though; the problem is retail investors focusing too much on eps for what is basically a pre-revenue (M3) venture capital investment.

 

[neroden]

We just spent 18 months talking about how the SCTY finance and sales systems were unsustainable. It was pushing the entire industry forward, in line with the master plan, but showing zero net cash and potentially far less than zero in new markets. Now they're TSLA and it's pretty clear that offloading future revenue streams can be facilitated at will.

I'm not at all sure about that. The monetization transactions have been going too slowly. They added more leases than they added securitized debt in Q1, which is going in the wrong direction. I don't think they can offload those revenue streams at will yet.

 

[neroden]

To quote myself:

What was SolarCity's peak volume installation quarter?

I think we can loosely predict the future swings in NCIs and so forth based on this. Lease installs should drop every quarter going forward (since that's the stated intent) so the question is when the tax equity "flips" happen; when this happens the portion of the Hypothetical Liquidation at Book Value which belongs to SolarCity goes way up. (It's around the same time when the bizarre drops in HLBV based on tax assets end.) This time is typically 5 years out.

SolarCity leased installs were up, by quite a lot, every quarter until a certain point. When? As we approach the five year anniversary of that point, we should see more and more installs "flipping" to SolarCity and after the five-year anniversary of that point the tax equity investor nonsense should be minimal. We'll still have the cash equity investor stuff but that's much more straightforward and consistent.

OK, I'll do my own research
1Q 2015 -- 153 MW
2Q 2015 -- 189 MW
3Q 2015 -- 256 MW
4Q 2015 -- 272 MW
1Q 2016 -- 214 MW
2Q 2016 -- 201 MW
3Q 2016 -- 187 MW

Sooo. The leasing peak was almost certainly in 4Q 2015. We won't see the weird tax equity transactions from this straightening out until the end of 2020.

I hope the accounting change will obviate all of this sort of analysis. Might not.

 

[Ocelot]

CFO left on good terms to accept a position in public service.

Tesla won't show "massive gains" until second half of linear part of s-curve ramp up of model 3, so 2H18 at the earliest. This isn't the problem though; the problem is retail investors focusing too much on eps for what is basically a pre-revenue (M3) venture capital investment.

yes I read that as well VA. Just find it extremely vague. Maybe you know the exact position? He worked at Google for 13 years or so....

 

[ValueAnalyst]

yes I read that as well VA. Just find it extremely vague. Maybe you know the exact position? He worked at Google for 13 years or so....

I'd be more concerned if the replacement wasn't deepak.

 

[ValueAnalyst]

I'm not at all sure about that. The monetization transactions have been going too slowly. They added more leases than they added securitized debt in Q1, which is going in the wrong direction. I don't think they can offload those revenue streams at will yet.

Why do you assume they want to securitize the debt?

Tesla/SCTY managements may have a more favorable view of the asset quality and the strength of the borrower base (i.e. 700+ avg credit score) than potential investors in these leases. In that case, wouldn't they want to collect the cash flows themselves?

 

[ValueAnalyst]

OK, I'll tell you the things which jumped out at me.
(1) There are still purchase accounting adjustments for the SolarCity merger? In *Q1*? $100 million? Aren't they supposed to do all of those in the quarter they do the merger? Looks like this is going to be muddling up the books for quite a while... I think an expert in purchase accounting for mergers is needed to comprehend this.

I have experience in M&A and also some experience in purchase accounting as part of M&A transactions, both on sell-side and buy-side.

This is likely a one-time adjustment, possibly related to valuation of identifiable intangible assets and/or goodwill. Note that the investor letter specifically points out this was a non-cash adjustment, so it may be a depreciation assumption or discount rate adjustment on lease payments or a write-down of Silevo goodwill et cetera. 10Q will include more detail.

The important point is: it is non-cash and very likely one-time, so I would expect it to not be an issue in future quarters.

 

[dc_h]

Why do you assume they want to securitize the debt?

Tesla/SCTY managements may have a more favorable view of the asset quality and the strength of the borrower base (i.e. 700+ avg credit score) than potential investors in these leases. In that case, wouldn't they want to collect the cash flows themselves?

8-9% cash flow for a company with 70% yoy growth. Math=unload it

 

[neroden]

Why do you assume they want to securitize the debt?

Tesla/SCTY managements may have a more favorable view of the asset quality and the strength of the borrower base (i.e. 700+ avg credit score) than potential investors in these leases. In that case, wouldn't they want to collect the cash flows themselves?

Tesla is capital intensive. They want the cash now to build Gigafactories with, rather than getting it a decade down the road.

Other way to put it is: this cash flow stream is really not giving them a good ROI. *Maybe* 8%-9%. They can get much better ROI on the next Gigafactory.

 

[ValueAnalyst]

Tesla is capital intensive. They want the cash now to build Gigafactories with, rather than getting it a decade down the road.

Other way to put it is: this cash flow stream is really not giving them a good ROI. *Maybe* 8%-9%. They can get much better ROI on the next Gigafactory.

I agree. Marginal ROIC is extremely high.