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2017Q1 results

Discussion in 'TSLA Investor Discussions' started by schonelucht, Apr 3, 2017.

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  1. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    OK. The reservation for future maintenance remains unchanged.

    Horrifyingly, if I'm not mistaken (and I might be mistaken), the deferred revenue *isn't* currently on the books as deferred revenue, due to GAAP being crazypants. So in real economic terms this replaces deferred revenue with current revenue, maybe at a profit but possibly at a loss, but in terms of GAAP it looks like a great big profit because it replaces *unrecognized* revenue in the future with *recognized* revenue in the present.

    This is my belief and I could be wrong because every one of these deals seems to have slightly different accounting. This is a problem which the new "revenue recognition" and "lease recognition" standards were designed to address -- under current GAAP it is possible to structure two lease-related deals which are economically essentially identical to have revenue and costs recognized in different years for the two deals, which is open to abuse. It took me a lot of reading to reassure myself that SolarCity wasn't deliberately abusing this (I really think they weren't) but merely organizing deals however their financing partners wanted them. Anyway, the new accounting standards are supposed to actually measure the economic results of the deal in accrual terms and should do so better than the current standards.
     
  2. schonelucht

    schonelucht Active Member

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    Trying to understand Tesla Energy financing makes my head spin. The deals in 2016 are called 'cash equity financing' in the quarterly report. Here is what SolarCity wrote about the very first one (from May 2nd with John Hancock)

    (skipped same details but about subsequent cash equity financing rounds

    So it seems there is no profit recognition at all since the company consolidates the special constructs on its own balance sheet. I suspect the same to happen with the Q1 operation. Although it is pretty weird that the 2016 annual report mentions it being concluded Dec 16th

    which is in direct contradiction of Jason Wheelers answer on the conference call that there was no solar securitization in Q4?!? Looks like the Q1 we are looking for did already happen in Q4 anyway. @luvb2b what do you make of it?

    Small side note : the term loan that Tesla prepaid with the proceeds of the first securitization had an interest rate of 4% but the cash equity debt that replaced it has an interest rate of 5.7%. I don't see Tesla doing many such deals anymore with financing less tight.
     
  3. steve3

    steve3 Member

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    I had unknowingly conflated the terminologies, securitization and cash equity transaction. Thanks @brian45011 for clarifying this, and finding the Q1 transaction that Jason likely referenced.

     
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  4. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    Ah yeah, my description of the accounting relates to securitization or monetization. Cash equity financing is apparently... *re*financing... oy.
    Oh yes they will! Well... probably at a better spread, but they will continue to refinance some low-interest debt with higher-interest debt.

    Here's why. The difference in the interest rate is based on the difference between *short-term* loans (like the term loan) and *longer-term* loans (the cash equity debt is much longer-term). It's like the difference in yield between 5-year treasuries and 30-year treasuries.

    Tesla is paying more to eliminate the refinancing risk: to match the loan maturity with the duration of the lease. To get out of the maturity-transformation / banking business, which is the business which almost sank SolarCity.

    Also, if interest rates in the economy in general go up, this wins even more (because the refinancing would have been at the new higher interest rates, and the 5.7% is now locked in).
     
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  5. luvb2b

    luvb2b Member

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    i think these transactions don't affect the bottom line p&l meaningfully, which is why they usually say there was no gain or loss, or they simply exclude such disclosure.

     
  6. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    Since all the Special Purpose Entities are consolidated, these transactions change the amount of profit/loss allocated to minority interests, in a manner which is utterly cryptic (and hopefully insignificant).

    I've always found "minority interest" accounting in corporate reports to be highly problematic; it conceals more than it reveals. If the minority interests are insignificant, this is OK, but if they are large, it's just confusing.
     
  7. luvb2b

    luvb2b Member

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    my consultant report explains this rather well. basically the issue is tax credits can't all be used by solar city. so they instead get tax equity investor to own the deals (initially). these things are all structured in special vehicles. but since scty is effectively in control of these spe's they have to consolidate the accounting - even though gains / losses of the vehicles accrue directly to the investors of those spe's.

    "
    1. There are tax incentives and increased depreciation for solar.

    2. Solar developers like SCTY couldn't use all these.

    3. Therefore solar developers get tax equity investors to put up the cash to fund the deals and get the tax incentives and depreciation while splitting some future revenues with SCTY.

    4. This provides financing to SCTY to build rooftop solar, gives the in- vestors tax breaks, and lets both split the future revenues.

    5. Since SCTY is the main beneficiary (and arguably the one actually in control of these deals), they must consolidate this stuff as VIEs. "
     
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  8. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    This much I knew. The tricky question is *what is the revenue splitting arrangement*. It's different in each deal and it does *not* appear on the corporate books (I think it's actually considered a commercial secret?). This is why one year's "minority interest" numbers don't predict the next year's. If what the investor paid for is the tax credit, what we'd like to know economically speaking is, how much did they pay SolarCity for it? (Or, how much revenue did they hand off?) It's not clear.

    Similar thing happens when SolarCity monetizes the leases using "cash equity financing" (which they sometimes do after the "tax equity financing", *on the same solar panels*); effectively they're getting a loan, or alternatively selling off part of the lease income stream, to finance the leases, but the way the accounting is done, the details and quantities of the cashflow allocation is obscured, so you can't tell whether they're getting a good deal or a bad deal.

    What I want to see the difference between the effective interest rate charged to the homeowner (completely concealed and obscured by the current lease accounting) and the effective interest rate SolarCity pays to the other investor (also obscured).

    As I say, new GAAP accounting rules should actually clear this all up when they are implemented. I don't blame them for not implementing the rules immediately; they have to redo the accounting for *every single previous lease, PPA, or SPE deal*. This is going to be an *expensive* accounting process.

    I believe that on the whole the deals were set up to show early losses for SolarCity and a high allocation of revenues to other investors early, and shift to gains for SolarCity later, but that's just based on generic statements about solar tax equity and securitization deals in general, and doesn't really tell us the quantities of the numbers involved for the particular SolarCity deals.
     
  9. luvb2b

    luvb2b Member

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    the accounting method chosen for allocating minority interests is unusual. i posted to you in the general discussion thread some links that discuss it. the short story is that revenue and costs are not being allocated in the minority results. what they're doing is taking the liquidating value of the spe's, then splitting that amongst scty and the noncontrolling interest as they would be split. the quarterly change in that value (roughly) is the gain/loss to scty.

    if @schonelucht is right, i think the bottom line figure is going to be positive gaap and non-gaap. final verdict will depend on where my scty research leads.

    i wasn't quite as conservative as you so i'm actually starting to lean towards the side of meaningful positive gaap and non-gaap eps (say > 50c/sh).

     
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  10. EinSV

    EinSV Active Member

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    A few items I haven't seen mentioned that individually are small but collectively might move the needle a bit in a positive direction in Q1 compared to Q4:

    • $68K S60 for entire quarter v. partial quarter in Q4
    • X60 almost completely phased out in Q1 versus partial phase out for Q4
    • Significant price increases outside the US to correct for exchange rates for some Q1 deliveries
    • X75/X90 deliveries pushed to Q2 one week earlier than X100/XP100
     
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  11. MitchJi

    MitchJi Trying to learn kindness, patience & forgiveness

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    I believe that the reasons that we haven't seen any substantial profits from TE are:
    1. That they've been production constrained. On the Kauai video JB said that they are ramping production as fast as they possibly can.

    2. Tesla just startedcan exponential ramp ~Jan4, which means that the profits should start to manifest in either Q1, Q2, or Q3.
     
  12. schonelucht

    schonelucht Active Member

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    I should expressed myself more clearly, I thought is was implied : we haven't seen TE making any gross margin. Which you would expect them to do if they are really production constrained. Because that means no pricing pressure at all.
     
  13. luvb2b

    luvb2b Member

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    +1 i agree with all this - we should see some upwards movement on average price due to mix and the issues you have mentioned.

    separately i am coming to the conclusion it is a big mistake to overlook the impact of scty.

     
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  14. EinSV

    EinSV Active Member

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    Thank you for digging into that -- very helpful!

    Any thoughts on whether and how the new GAAP lease accounting rules would affect accounting for leased vehicles if Tesla decides to follow them now? Apologize if this has been answered elsewhere ....
     
  15. luvb2b

    luvb2b Member

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    i thought tesla had been following lease accounting rules for a while?
    my take was that there would be some revenue boost as resale value guarantees around leases start roll off in the united states.
    tesla also appears to be shifting to leasing less and the mix shift may also provide a slight revenue boost (as gaap accounting for leases results in a lot of deferred revenues).
    in this quarter, my estimate is that the net effects of what's going on around leasing will be incremental positives.
    @neroden is probably more in tune with this stuff than me and may have more to add.

     
  16. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    Naw, you can be suffering enough pricing pressure to eat into gross margin over the short term even if you're production constrained. Think about it for a minute. You advertised a price, you got some contracts, now you have to fill those contracts at that price... the next contract, maybe you can charge whatever you like, but only after you fulfill the old contract, and you're production constrained...

    Remember, Tesla raised the prices on Model S several times: but everyone who'd already ordered got the prices they'd already committed to. Wasn't great for the numbers the first month or two.
     
  17. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    Oh, it would straighten out the lease accounting a lot; basically make it clearer. The rules change really is an improvement. However, they're not adopting the new rules this quarter, I'm almost sure of it (after looking up *how much work* it is to switch to the new rules, I simply don't think they've had time).
     
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  18. schonelucht

    schonelucht Active Member

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    Except that Tesla has been seen dropping their price twice already on TE product.
     
  19. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    schonelucht, I was pointing out that your statement claiming that when production constrained you should *expect* substantial gross margins was theoretically unsound as a general principle. It was bad logic. Whether Tesla is raising or dropping its prices is neither here nor there with respect to that.

    Would you care to attempt to rephrase what you're actually trying to say? I think you've got a valuable thought here somewhere but you haven't yet managed to get it out clearly.
     
  20. luvb2b

    luvb2b Member

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    #40 luvb2b, Apr 11, 2017
    Last edited: Apr 11, 2017
    ok friends, it's time to start leaking pieces of my q1 earnings model. i'm open for input.

    here are my base case figures for revenues only.

    auto sales 1,923,550
    auto leases 233,675
    1 time autopilot 50,000
    reg credit sales 100,000
    total auto 2,307,225

    energy storage 66,199
    solarcity 225,000
    grohmann 34,000
    services/other 200,357
    total revenue 2,832,781

    that's 147% increase vs. q1 2016.

    let's start the discussion here. here are my assumptions, i'll do all the easy ones first.
    energy storage grows 40% quarter over quarter (47,285 q4 2016)
    grohmann maintains 136m annual revenue run rate from 2015
    services revenue increases similar to past few quarters as 1. 4/50 warrantees expire, 2. charges start to hit for supercharging, 3. more teslas have accidents and need parts etc. for the last few quarters i had services revenue excluding storage at 177,152 in q4 and 120,359 in q3.
    solarcity revenue stays roughly the same as q4 2016, with a 2% positive tilt for increased mix of solar loans.

    reg credit sales and autopilot sales: i have to put in 150m or so here in order to get the numbers to match guidance on the last call. the last call they guided to gaap and non-gaap auto margins to reach q3 levels. you can't get there without introducing meaningful credit sales as those are the key differential between gap and non-gaap numbers. feel free to argue this point, but the simple fact is the guidance implies a 5% difference between gaap and non-gaap gross magins for automotive, and that's just not possible without zev sales and/or autopilot revenue recognition.

    auto leases: i have modeled a slight dip due to a mix shift towards fewer leased vehicles. with the termination of resale value guarantees in the usa it decreases attractiveness of leasing for some. also the likely reduction of the $7,500 tax credit will drive more buyers this year who try to get in ahead of that dropdown. leasing doesn't win a tax credit for the lessee. lease revenues roughly match q3 2016, which was actually lower than q4 2016.

    auto sales: assuming 27%/73% mix of lease vs loan/purchase, and assuming an average price per vehicle of 105.4k - take 0.73x25000x105.4. 105.4k is the same as the avg. price i estimate for q3 2016. it's higher than the 103.3k avg i estimate for q4 2016. basically can take q4 add 1% for forex adjustment and add 1% for mix shift towards more x. you get pretty much back to that 105.4k avg price of q3.

    comments, suggestions, or complaints?

    my optimistic case comes in another $200m higher at 3.04b total revenue. my worst case is 2.49b in total revenue. in my worst case i assume basically screwups of every variety. with all that screwing up you can just barely get under the analyst consensus i last saw of 2.6b. conversely my opimistic case includes excellence in every category, so that should be considered extreme.

    basically i can say with extremely high confidence (virtual certainty) the following:
    it will be record revenues, and revenues will grow organically over at least 90% vs q1 2016, and well over 100% when adding in acquisitions.

    my biggest concern is that sales that took place beween tesla and solar city will no longer be counted, so some revenue will be lost in that shuffle. those losses would come from the energy storage and solarcity lines most probably. judging from tesla's 10k proforma information for tsla+scty, the revenue loss could be as much as 100m per quarter.
     
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