Articles/megaposts by DaveT

[SteveG3]

2) If they delivered all the loaners and show cars that were sandbagged in previous quarters to avoid the depreciation hit due to lack of sensors, that's 2400 cars. That could make Q3 a blowout in terms of deliveries. Q4 delivery guidance would have to go down to re-stock but that would be an afterthought in most reports. Do you think this is a possibility, or do you think they're still going to keep their P85+'s until the D fully rolls out?

TSLA_Hopeful, a couple of weeks back I was wondering in a similar way about those loaner cars and their impact on Q3 and full year deliveries. Without any detailed research, I figured it could help some, but not make a substantial dent in full year 35K delivery target. The number I estimated without specific research was far lower than your 2,400 cars. 2,400 loaners, display cars, would make quite a difference, how did you get that number?

 

[chickensevil]

TSLA_Hopeful, a couple of weeks back I was wondering in a similar way about those loaner cars and their impact on Q3 and full year deliveries. Without any detailed research, I figured it could help some, but not make a substantial dent in full year 35K delivery target. The number I estimated without specific research was far lower than your 2,400 cars. 2,400 loaners, display cars, would make quite a difference, how did you get that number?

Some of the bears (arguing about various lack of demand things and such) have pulled together a number that is somewhere around there based on the disparity between production numbers over time vs the delivery numbers over time... there are a couple of Q's that you have to make an estimate for, but otherwise I think it was a pretty solid number.

You can also assume with some 200 stores each with 2 show cars and 2 test cars would be 800 cars. Assume that the Service Centers (of which there are about 200 as well) each with only 10 loaner cars would be another 2000. So right there, without even really trying, you can explain away their stockpile by the amount of stores and service centers. You are always going to be selling off old stock while adding in new stock so each current store would not really shift their delivery numbers much by themselves, however new stores/service centers (or an influx of needed stockpile of loaner cars at a service center because of a larger customer base) would cause further drain on the production numbers and therefore explain why you will always slightly produce more cars than you sell.

That said, because of the timing of when they choose to add cars back after selling you could rig the delivery numbers to work in your favor for one quarter, but then you have to make it up in the next quarter. It isn't something you can do every single quarter.

 

[SteveG3]

Some of the bears (arguing about various lack of demand things and such) have pulled together a number that is somewhere around there based on the disparity between production numbers over time vs the delivery numbers over time... there are a couple of Q's that you have to make an estimate for, but otherwise I think it was a pretty solid number.

You can also assume with some 200 stores each with 2 show cars and 2 test cars would be 800 cars. Assume that the Service Centers (of which there are about 200 as well) each with only 10 loaner cars would be another 2000. So right there, without even really trying, you can explain away their stockpile by the amount of stores and service centers. You are always going to be selling off old stock while adding in new stock so each current store would not really shift their delivery numbers much by themselves, however new stores/service centers (or an influx of needed stockpile of loaner cars at a service center because of a larger customer base) would cause further drain on the production numbers and therefore explain why you will always slightly produce more cars than you sell.

That said, because of the timing of when they choose to add cars back after selling you could rig the delivery numbers to work in your favor for one quarter, but then you have to make it up in the next quarter. It isn't something you can do every single quarter.

Thanks Chicken. I'd estimated roughly 100 each for service centers and stores (was thinking in terms of North America only, as the less robust demand in EU had me ignoring it, and the early stages of service and stores in China had me ignoring it). Tesla used to have a list on the website, but looking today I just see a map, and I can't eyeball well enough to know what number is right. Don't know if you were thinking North America or global in terms of 200 each for stores and service centers.

I also was guessing more like 5 loaners per service center. just a guess on my part... wondering if you or anyone else here has more than a guess to go on as to loaners at a the typical size service center.

fwiw, if there was something like 2,000+ loaners to finesse quarterly deliveries with, I think Tesla might well have taken advantage of it last quarter. While to me it's totally meaningless if Tesla delivers 7,800, 7,000, or 8,000 cars in Q3 (I don't have any concern that they are lying about demand or their ability to ramp up production), there are those on Wall Street who jump all over what they think can be spun as FUD. I think they would go up to a few months light in the loaner fleet to avoid the Wall Street silliness. Of course they have to replenish, but I think once they got up to ~1,000 run rate per week, they had the capacity to push it up some. A handful of weeks at 1,100 to 1,200 vehicles per week sometime in this quarter would get them caught up in their loaner fleet, even if it was not optimal from a production cost efficiency point of view.

 

[hershey101]

Some of the bears (arguing about various lack of demand things and such) have pulled together a number that is somewhere around there based on the disparity between production numbers over time vs the delivery numbers over time... there are a couple of Q's that you have to make an estimate for, but otherwise I think it was a pretty solid number.

You can also assume with some 200 stores each with 2 show cars and 2 test cars would be 800 cars. Assume that the Service Centers (of which there are about 200 as well) each with only 10 loaner cars would be another 2000. So right there, without even really trying, you can explain away their stockpile by the amount of stores and service centers. You are always going to be selling off old stock while adding in new stock so each current store would not really shift their delivery numbers much by themselves, however new stores/service centers (or an influx of needed stockpile of loaner cars at a service center because of a larger customer base) would cause further drain on the production numbers and therefore explain why you will always slightly produce more cars than you sell.

That said, because of the timing of when they choose to add cars back after selling you could rig the delivery numbers to work in your favor for one quarter, but then you have to make it up in the next quarter. It isn't something you can do every single quarter.

Based on a sample point of 1 (and heavy extrapolation), I would say that these numbers are too high. In NY, the stores have at most 2 cars at any given point, but most often there is only 1. And the number of loaners at the service center is also closer to 5. I have barely seen any loaners around. Most of the cars I have seen in the service center are cars people have traded in, and these trade-ins get sold pretty quickly.

 

[TSLA_Hopeful]

Some of the bears (arguing about various lack of demand things and such) have pulled together a number that is somewhere around there based on the disparity between production numbers over time vs the delivery numbers over time... there are a couple of Q's that you have to make an estimate for, but otherwise I think it was a pretty solid number.

Definitely not a bear , but this ^. They produced 1,000 more cars than delivered in Q1, 1,200 in Q2. Assuming they had some extra stock left at the end of last year, I definitely think Tesla has some leeway depending on how they want to cut it.

How is everyone else feeling for Q3? I personally feel a little more bias to it disappointing "the street" as I listed before, but it rallying back quickly like in Q1, but want to get everyone's thoughts. I think Q4 will be a blast though.

 

[SteveG3]

Definitely not a bear , but this ^. They produced 1,000 more cars than delivered in Q1, 1,200 in Q2. Assuming they had some extra stock left at the end of last year, I definitely think Tesla has some leeway depending on how they want to cut it.

How is everyone else feeling for Q3? I personally feel a little more bias to it disappointing "the street" as I listed before, but it rallying back quickly like in Q1, but want to get everyone's thoughts. I think Q4 will be a blast though.

I suspect the majority of that is filling the pipelines of cars to EU and China, which really does not matter much as Tesla may have been able to finesse that as well if they needed to (ie last weeks of quarter divert to North Am deliveries letting EU Asia pipeline diminish for now).

As to Q3, little worry here, I'm 95% long term buy/hold 5% trade on big selloffs. To me people over worry re deliveries as 1) Elon said things were on track in late September, 2) long term the kind of miss we may means next to nothing, 3) deliveries are just one element of the call... sometimes Elon lets out some serious nuggets and stock jumps (see last call, crazy amount of nuggets for one call... and following weeks stock price reflected it) sometimes he worries out loud on speaker phone (IIRC he kind of worried out loud about all the batteries they're going to need Q3 '13 call). Those Elon nuggets or worries to me are far more likely to be meaningful than delta to
prior delivery guidance. There's really no way to know in advance what will come from Elon, though I'd say past nugget to worry ratio is 3:1 or better.

 

[adiggs]

I suspect the majority of that is filling the pipelines of cars to EU and China, which really does not matter much as Tesla may have been able to finesse that as well if they needed to (ie last weeks of quarter divert to North Am deliveries letting EU Asia pipeline diminish for now).

As to Q3, little worry here, I'm 95% long term buy/hold 5% trade on big selloffs. To me people over worry re deliveries as 1) Elon said things were on track in late September, 2) long term the kind of miss we may means next to nothing, 3) deliveries are just one element of the call... sometimes Elon lets out some serious nuggets and stock jumps (see last call, crazy amount of nuggets for one call... and following weeks stock price reflected it) sometimes he worries out loud on speaker phone (IIRC he kind of worried out loud about all the batteries they're going to need Q3 '13 call). Those Elon nuggets or worries to me are far more likely to be meaningful than delta to
prior delivery guidance. There's really no way to know in advance what will come from Elon, though I'd say past nugget to worry ratio is 3:1 or better.

Steve's got an awfully good way of stating my view of things as well (that I care little about actual deliveries in Q3). If anything, I find myself hoping for something that the broader short term crowd / analysts / wall street views as a "miss", leading to a collapse in the stock price, thereby enabling a much more attractive buy point. But that's selfish of me, I know

 

[chickensevil]

Based on a sample point of 1 (and heavy extrapolation), I would say that these numbers are too high. In NY, the stores have at most 2 cars at any given point, but most often there is only 1. And the number of loaners at the service center is also closer to 5. I have barely seen any loaners around. Most of the cars I have seen in the service center are cars people have traded in, and these trade-ins get sold pretty quickly.

I guess that is likely skewing my numbers since the only two service centers I have ever had any dealings with are probably the two largest on the east coast (Rockville and Tampa). And the loaners are likely out with customers constantly, at least around here, so it is very hard to get a solid guess on how many they carry... I might just ask them when I am in tomorrow through casual conversation and see what kind of response I get. But given that the service center here is always booked solid and you need like a 2 month lead time, for any service, and there have been two times in which I had been told I got the last loaner they had on hand, I am going to go with either they are always given out or they are always selling them off (or a bit of both).

Yes, the 200 number was globally. It was a guess based on a rough count I did a while back. (couple months ago now)... and you can still count them for yourself (ignore any of the coming soon) through their list view on their map: Find Us | Tesla Motors (you can get to this manually in case you lose the link by clicking on a location on the map and selecting to view the list of locations).

About the stores, minus Tyson's Corner which doesn't do test drives I have seen both K street and Bethesda have two test drive cars, and I have seen all of them having at least two cars in the store. So I assumed that was pretty normal. In any case, there was a thread which someone had made a spreadsheet with the estimated "stockpile" of cars. And I think it was actually way higher than 2400... it was something silly like 5k... I don't think those numbers are quite right, but either way, they have a significant stock of cars that they can tap into now and then.

 

[SteveG3]

On this whole idea of dipping into the display, test drive and loaner cars, to hit Q3 numbers, something just occurred to me earlier this evening.

It seems there are now a considerable number of existing Model S owners considering trading their cars into Tesla, and though it may involve a bit of juggling (putting some newly produced cars into those fleets right now, to sell in December when trade-ins start rolling in), Tesla may be able to take advantage of this to restock display, test drive, and loaner cars, with some of these trade-ins, and get more of the cars currently being produced out to customers rather than restocking those fleets, which would help meet delivery guidance.

If you do not mind, Please post your trade in offer from Tesla so we can compare note - Page 14

 

[TSLA_Hopeful]

Hmm that's interesting. Definitely possible. The only argument I could think of against that would be that they always want the top-line models to be in service centers and showrooms. But I agree the CPO program would give TSLA lots of flexibility and be an excellent free-cash flow source as well.

 

[SteveG3]

Hmm that's interesting. Definitely possible. The only argument I could think of against that would be that they always want the top-line models to be in service centers and showrooms. But I agree the CPO program would give TSLA lots of flexibility and be an excellent free-cash flow source as well.

That is indeed a basic goal of the loaner program Hopeful. That said, if this strategy was pursued, it would be a 2-4 month sacrifice of that goal (the loaner fleet turns over very fast) to avert a barrage of FUD silliness over 2014 delivery guidance, and if you look through the thread summary, an extremely high percent of the would be trade-ins are P85 and P85+, so not too big a sacrifice re top-line models. Moreover, I think there have been some 60s among the loaners, so I don't really know that such a move bringing in a bunch of P85s and P85+s would be any kind of step down from having top-line vehicles in the fleet. They'd certainly have to inspect and do some upkeep of some of the trade-ins.

 

[DaveT]

(from this morning via email)

DaveT: Regarding the new US Bank leasing program, does Tesla recognize the full revenue of the cars upon delivery or is the revenue deferred like the previous leasing program?

Tesla IR: Still TBD, but likely just like our RVG program where the revenue is deferred for GAAP, but since we get all the cash up front, we add it back to calc non-GAAP revenue.

 

[Robert.Boston]

(from this morning via email)

DaveT: Regarding the new US Bank leasing program, does Tesla recognize the full revenue of the cars upon delivery or is the revenue deferred like the previous leasing program?

Tesla IR: Still TBD, but likely just like our RVG program where the revenue is deferred for GAAP, but since we get all the cash up front, we add it back to calc non-GAAP revenue.

Hmm, that seems odd. I can see why they defer revenue recognition until after the 3-month walk-away period, but after that? This reply suggests that US Bank is not taking title to the cars.

 

[eepic]

Hmm, that seems odd. I can see why they defer revenue recognition until after the 3-month walk-away period, but after that? This reply suggests that US Bank is not taking title to the cars.

I wonder if Tesla is providing a resale guarantee to US Bank, which enables the latter to provide very competitive leasing rates. To Tesla Motors as a whole its the same as prior leases except Tesla Auto (or whatever their lending arm is called) doesn't get involved and is substituted with US Bank.

 

[SBenson]

DaveT, Anyway we can validate this? I mean, find what the current run rate is?

Ben Kallo from Baird today "We believe production was ~900 vehicles per week when we toured the factory in August, and believe production is now ahead of schedule with gains from TSLA’s new finishing line."

From http://www.streetinsider.com/Analys...Cautious+on+the+Upcoming+Quarter/9947881.html

 

[DaveT]

I wonder if Tesla is providing a resale guarantee to US Bank, which enables the latter to provide very competitive leasing rates. To Tesla Motors as a whole its the same as prior leases except Tesla Auto (or whatever their lending arm is called) doesn't get involved and is substituted with US Bank.

That's my guess as well.

- - - Updated - - -

DaveT, Anyway we can validate this? I mean, find what the current run rate is?

Ben Kallo from Baird today "We believe production was ~900 vehicles per week when we toured the factory in August, and believe production is now ahead of schedule with gains from TSLA’s new finishing line."

From http://www.streetinsider.com/Analys...Cautious+on+the+Upcoming+Quarter/9947881.html

I think we just have to wait until earnings to find out what the production run rate was exiting Q3.

 

[pGo]

Hi Dave, what is your take on the er and specially the manufacturing issues. Do you still think they are temporary and should be resolved soon? I am seriously puzzled by the strength of Tesla after the report.

 

[DaveT]

Hi Dave, what is your take on the er and specially the manufacturing issues. Do you still think they are temporary and should be resolved soon? I am seriously puzzled by the strength of Tesla after the report.

I've got a deep dive on Q3 coming out tomorrow in my weekly newsletter. I'll post it here as well tomorrow morning.

Regarding Tesla's strength after the report, I think it's mixed. On one hand, every quarter that demand keeps increasing and Tesla doesn't screw up majorly, that puts Tesla closer and closer to their Gen3 goals. As a result, there is increasing share price pressure as each quarter passes and we get closer to the realization of Gen3. Also, not too long ago the market completely ignored the D announcement and Autopilot. Both of these significantly increase demand for Tesla, which increases revenue and growth trajectory, and eventually earnings. Elon seems to think that the D versions and Autopilot increases Model S demand by 50% alone. It's hard to argue with him. I also liked how they added Autopilot without charging more for it. In essence it was a price drop of sorts since people are getting more for their car for the same price.

So, in the bigger context Tesla is seeing demand increasing (Model S, D versions, Autopilot, etc) and it's continuing to execute on Supercharger rollout and Gigafactory construction, as well as new stores and service centers and markets. As long as Tesla keeps tracking along, it's good news.

Now for Q3, we had a hiccup of sorts regarding production (producing only 7200 vs the 9000 guided). Tesla attributed this to the longer-than-expected factory shutdown. I look at this as an execution mistake, especially since they guided for 9000 cars produced on July 31 (a month into Q3). So, somehow during factory retooling, things didn't progress as expected and they took longer to retool and longer to ramp production.

To me, this isn't a tiny execution error... it's missing production guidance by only 2000 cars, which is significant. But on the other hand, it appears to be a one-time execution error (due to factory retooling) and hopefully they'll still be able to meet revised 2014 guidance of 33k cars. But, nevertheless it doesn't look good.

But I think this execution error needs to be balanced out by the bigger picture... Autopilot was released much earlier than anybody anticipated, which shows excellent execution. And the P85D is crazy insane, which again shows amazing execution. So in the bigger picture, while Tesla is experiencing some production hiccups, they are executing on other levels and perhaps these other levels are more important since they're more intimately involved in demand generation.

The other hiccup was pushing back Model X into Q3. Now, personally I think this is mostly a business decision. Pushing back Model X allows Tesla to avoid the complexity of introducing a new model too soon, especially since they have new versions of the Model S going out with the D. Also, it allows Tesla to place the Model X almost smack in the middle of the timeline between the Model S and Model 3, thus evening out revenue growth so that it's more steady going into 2015-2017. The steady revenue growth will be helpful to raise more money in the future.

So overall, it was a mixed Q3 earnings but not all bad. They did share that Gigafactory will begin to come online in 2016, and also Elon mentioned super strong Model S demand at 50% higher than 2014. These things show/emphasize that Tesla is still on track.

Regarding the stock price. Even though it jumped 10 points today, it's still 50 points off the all-time-high and not too far off the recent lows of 217. It seems like it's difficult to push the stock below 200 since Tesla is still executing and demand is growing. Yet, it's difficult to go above 300 because Tesla is not blowing us away with blowout quarterly earnings.

 

[DaveT]

Deep Dive into TSLA's Q3 Earnings

Here's my expanded thoughts on TSLA's Q3:

Tesla faces production challenges after factory retooling.

Tesla guided for 7800 deliveries and 9000 cars produced in Q3. They ended up delivering 7785 (15 short of their 7800 goal) and producing 7200 cars (1800 short of their 9000 goal). The reason for the production shortfall was that the major retooling shut down the factory longer than expected (they were expecting 2 weeks but it was shutdown for almost a month), and it appears that there have been challenges in ramping up production as well.

As a result, Tesla lowered their 2014 guidance to 33,000 deliveries (down from 35,000 guidance). Even Tesla admitted in the shareholder letter "Being unable to increase production fast enough, not lack of demand, is a fair criticism of Tesla."

If one were to look at just these numbers, you'd expect investors to be disappointed by Tesla's Q3 earnings but there were some bright spots in the earnings that show Tesla is continuing to execute and even more importantly that demand for the Model S is continuing to grow.

Model S demand continues to grow

The shareholder letter says "We also substantially broadened the appeal of the Model S by introducing Dual Motor all-wheel drive and Autopilot. Based on net orders since that introduction, excluding the extraordinary initial demand peak, we are confident of a 50% increase in both net orders and deliveries for Model S alone in 2015.

"A 50% increase from 2014 would mean 50,000 Model S vehicles delivered in 2015. In the conference call Elon mentioned a few times that he think demand could be as high as 70,000 orders for the Model S next year, but he says "conservatively" at least 50,000. This is great news for Tesla and TSLA investors, as it shows that Tesla is seeing robust and growing demand for the Model S.

Elon also mentioned in the conference call that "We're growing our production by like 50% a year, year-over-year as far into the future as we can reasonably project."

I think the growing Model S demand makes sense for several reasons:
1. The Model S is getting better as Tesla is implementing continuous improvements to the car.
2. More and more people are finding out about Tesla and the Model S (via satisfied owner, stores, media, etc) and this serves to grow demand as well.
3. Adding dual-motors increases Tesla's addressable markets in areas where all-wheel-drive cars are popular.
4. Adding the Autopilot hardware suite for no additional cost to new Model S vehicles essentially makes the car a better value as customers are getting more for the same price.
5. Tesla is continuing to roll out new Superchargers and service centers and this helps to increase demand for their cars as well.

In the bigger picture, growing demand is probably the lifeline of an ambitious company like Tesla. In fact, fast-growing demand can cover a lot of mistakes in a young company.

Model X delayed to Q3 2015
The shareholder letter shares "we now expect Model X deliveries to start in Q3 of 2015, a few months later than previously expected."

Some people (especially some Model X reservation holders) are disappointed by this piece of news as they were eagerly waiting for the Model X release sooner.

Personally I think this is mostly a business decision. Pushing back Model X allows Tesla to avoid the complexity of introducing a new model too soon, especially since they have new versions of the Model S going out with dual-motors. Also, it allows Tesla to place the Model X almost smack in the middle of the timeline between the Model S and Model 3, thus evening out revenue growth so that it's more steady going into 2015-2017. The steady revenue growth will be helpful to raise more money in the future.

Put simply, Tesla is delaying the Model X not necessarily because it can't release it sooner but rather because it's better for Tesla (and ultimately Tesla's customers) to release the Model X later.

I have no doubt though when the Model X is released that it will be a big hit. Already the dual-motor powertrain for the Model X is already being rolled out in the Model S D versions. And with more time, Tesla will be able to make sure the falcon doors and second row seats (apparently they'll likely be rotating) are as near-perfect as possible.

Model 3 motor already in the P85D
In the conference call Elon Musk shared that the front motor for the P85D is a precursor for the Model 3 motor.

The front motor of the P85D is 221hp (vs 470hp in the rear). The 221hp motor is basically version 1.0 of the Model 3 motor and it gives Tesla an opportunity to make improvements over time before the release of Model 3 in 2017.

As we go into 2015, we'll see Tesla show more of it's focus and preparation for the Model 3. As Elon shared at the June 2014 TSLA shareholder meeting the Model 3 is the "Holy Grail". More and more over time we'll see Tesla rally around and focus on the Model 3.

Gigafactory to open in 2016
One of the surprises of Q3 ER was Tesla sharing that the Gigafactory would start producing batteries in 2016 (just 2 years away). Apparently Tesla building out the Gigafactory in phases and will gradually increase production.

The shareholder letter shares "Future capacity investments extend to the Gigafactory where we have already started to pour concrete for the foundation. A modular build strategy is enabling us to scale construction, capital requirements and capacity commensurate with growing demand. Together with Panasonic we are making good progress toward first cell production in 2016, slightly earlier than originally scheduled. Starting operations earlier will reduce ramp-up risks for Model 3 and provide some potential expansion capacity for Model S and Model X."

The Gigafactory coming online in 2016 is good news for the Model 3, as it shows that Tesla is taking serious steps to prepare for the mass market ambitions of the Model 3.

Overall, Tesla experienced some production hiccups in Q3 but continued to execute toward their greater Model 3/mass-market vision. They're seeing robust and growing demand for the Model S, which has only become even more appealing after the release of the dual-motor version and Autopilot sensor suite.

Tesla's 2014 guidance is now 33,000 deliveries (vs 35,000 production) and their Q4 guidance is $0.30-0.35 eps non-GAAP.

Following the Q3 report most analysts have kept their previous price targets and ratings on TSLA.

 

[AlMc]

Excellent, and balanced synopsis and insights (as usual!) Dave. I agree that while the model X delay may bother some but I do believe it is a 'good' business decision. Test model S demand, especially with the addition of AWD/DA, and benefit from the higher margins I suspect it will yield, than bringing out the model X. The X will be a big hit and the demand and eventual margins it will command will ultimately support TM until it can launch the ultimate goal..the model3.