Near-future quarterly financial projections

[EVNow]

Troy's numbers (and mine, which are similar) track Finished Goods Inventory very well from quarter to quarter. This contradicts the theory that Tesla has secretly sold 5k+ aged loaners as used cars without counting them as deliveries

In that case, the mystery continues. Why do they have constantly high inventory ?

10k old inventory is 50 cars per store/service center.

 

[Fact Checking]

Troy's numbers (and mine, which are similar) track Finished Goods Inventory very well from quarter to quarter. This contradicts the theory that Tesla has secretly sold 5k+ aged loaners as used cars without counting them as deliveries.

If Tesla keeps a loaner that long they are supposed to transfer it to PP&E and depreciate it. In fact, they did this not too long ago for ~70m (from memory) of cars. That'd be ~1000 S/X, which we should subtract from Troy's numbers when doing balance sheet inventory calculations. Tesla will eventually sell almost all of these cars. I really don't know if they'll count those sales as deliveries.

Accounts receivable seem to represent the final 3-4 business days worth of sales in the quarter.

Accounts payable include capex payables, which can really throw off calculations during periods of high and/or rapidly changing capex. That shouldn't be a big problem right now.

I did some finished goods based estimates too, in this comment:

Just curious, does your model differentiate between "days of inventory outstanding" between the Model 3 and the S/X?

In particular we have a pretty good notion of how Model 3 delivery latencies look like currently, if we look at the "VIN to Delivery time in the last 3 weeks" chart of Troy's tracker.

While the sample of people reporting is self-selecting and thus not representative statistically, it's unlikely to be particularly biased by expected delivery time - in fact longer delivery time gives people more time to register their VIN in the tracker so I'd expect the bias towards entries with longer delivery times.

According to the histogram there the average delivery time for Model 3's is somewhere between 10-14 days from VIN to delivery. To that we have to add a couple of days of manufacturing time - which should be no more than 7 days (possibly much less). I.e. 20 days looks like an upper bound for M3 days of inventory.

For the Model S/X 75% of the demand (rest of the world) is at least 1 month of shipping distance away from Fremont, plus European deliveries also have a (re-)assembly step. DIO should be a lot higher, especially considering that Tesla cannot stop the Fremont factory at all, so cars are being produced whether it's conveniently sold by the end of the quarter or not. I'd guesstimate 45 days on average.

Another factor is that the Model 3 is optimized for mass manufacturing: fewer components and faster assembly. This could shave off another couple of days from the typical "new order" -> "delivery" delay and reduce the DIO figure.

A very rough DIO estimate for the last 3 quarters plus Q3:

MSX at 2k/week rate:

• MSX DIO is 45 days
• MSX ASP is $105k
• Cost basis is 75% with a 25% gross margin
  
• At 2k/week production outstanding inventory is 45/7*2,000*75%*$0.105m = $1,012m

This is close to observed/reported MSX finished goods inventory levels.

M3 at 2k/week rate (end of Q1-ish):

• M3 DIO is 20 days
• M3 ASP is $59k
• Cost basis is 120% with a -20% gross margin at a 0.8k/week run-rate (end of Q1)
  
• At 1k/week outstanding inventory is 20/7*800*120%*$0.059m = $161m
• Cost basis is 100% with a 0% gross margin at a ~4k/week run-rate (end of Q2)

• At 2k/week outstanding inventory is 20/7*4,000*100%*$0.059m = $674m

• Cost basis is 85% with a 15% gross margin guided at a ~5k/week run-rate (end of Q3)

• At 5k/week outstanding inventory is 20/7*5,000*85%*$0.059m = $716m

Cross-check of these estimates:

• 2017/Q4 finished goods estimate: $1,012m, Q4 reported value: $1,013m (99% accurate)
  
• 2018/Q1 finished goods estimate: $1,173m, Q1 reported value: $1,125m (96% accurate)
  
• 2018/Q2 finished goods estimate: $1,686m, Q2 reported value: $1,721m (98% accurate)
  
• 2018/Q3 finished goods estimate: $1,728m

So by separating out the Model 3's different manufacturing and delivery characteristics we can match the actual inventory levels pretty well (which is not a surprise, there's more parameters to the linear equations than data points ), but interestingly the Q3 inventory estimate is only 2.5% higher than Q2 finished goods levels.

Even if we factor in a few other expected changes for Q3, such as a slightly higher MSX rate, I don't see a bigger inventory growth than 5%. One reason is that M3 gross margins improve, which reduces the CoG calculation of the inventory valuation, the other reason is that the 4k/week exit rate at the end of Q2 only increases by 25% to 5k/week at the end of Q3.

While you are calculating +40% based on DIO - which is an order of magnitude difference.

Which is weird, and I love weird results!

Any idea what is going on here?

The result suggests that a large chunk of the finished goods inventory can be explained with new units in the delivery pipeline of cars. There no space for a significant fleet of 13.7k used MS/MX vehicles in those numbers AFAICS.

Does anyone know if GAAP allows the reporting of a couple of years old loaner or service car at a significant discount as a new sale? Maybe @brian45011 knows this?

According to their financial reports Tesla is already adjusting the inventory carrying value of used vehicles to market prices and is gradually writing off any decreases in value. At the end of their life time it might also be viable for Tesla to simply scrap old loaners for service parts of newer loaners and other fleet cars. This lowers the parts costs and also protects the used car resale value.

 

[EVNow]

MSX at 2k/week rate:

• MSX DIO is 45 days
• MSX ASP is $105k
• Cost basis is 75% with a 25% gross margin
  
• At 2k/week production outstanding inventory is 45/7*2,000*75%*$0.105m = $1,012m

That DIO looks high for S, X considering the wave. While their avg DIO is high, they have always tried to bring it down using the wave.

 

[Doggydogworld]

I did some finished goods based estimates too, in this comment:

The result suggests that a large chunk of the finished goods inventory can be explained with new units in the delivery pipeline of cars. There no space for a significant fleet of 13.7k used MS/MX vehicles in those numbers AFAICS.

Does anyone know if GAAP allows the reporting of a couple of years old loaner or service car at a significant discount as a new sale? Maybe @brian45011 knows this?

According to their financial reports Tesla is already adjusting the inventory carrying value of used vehicles to market prices and is gradually writing off any decreases in value. At the end of their life time it might also be viable for Tesla to simply scrap old loaners for service parts of newer loaners and other fleet cars. This lowers the parts costs and also protects the used car resale value.

45/7*2,000*75%*$0.105m = $1,012m​

45/7*2000 = 12,857 S/X in inventory. Close enough to 13,700 for my purposes.

I never claimed the 13.7k were "used" or old or anything of the sort. In fact, I've argued the opposite. It's perfectly reasonable to assume the 13.7k are mostly new cars that rotate through the inventory account on their way to being sold. Tesla uses inventory to smooth out seasonal trends and to satisfy buyers who can't or don't want to wait 2-3 months for their car. My big question: Where are these cars?

A few big stores and SCs probably have 50+ S/X hanging around. But the combo store/SC outside San Antonio only has a dozen or so, including demos, loaners and in transit. I expect this is more typical of Tesla's 200+ locations. Let's generously say 50 large sites have 50 each and another 200 average 10-15 each. That's 5k cars, where are the other 8-9k?

Inventory sites never show more than a few 1000 S/X in the US and Europe, and that includes many demos and loaners which Tesla is always happy to sell. And with Tesla's "wave" delivery system, there really shouldn't be 45 days of inventory at EOQ.

BTW, GAAP doesn't really care if a car sale is new or used. The company has leeway to report in a way that best reflects their business. Also, Tesla rarely writes down cars in FGI. Some example cases, assuming 75k COGS and 100k MSRP:

1. Car sits on lot for two years, becomes obsolete due to refresh. Dump for 78k. NO WRITEDOWN. 3k gross profit.

2. Car used for demo rides, sold after six months with 10k "mileage adjustment". NO WRITEDOWN. 15k gross profit.

3. Car used as loaner for >12 months. NOT INVENTORY. Move to PP&E and depreciate like any other long term business asset. Eventually scrap or sell and book the difference between sale proceeds and carrying value in appropriate category (probably Services, Other … but Tesla doesn't say).

Tesla has been lax about #3, IMHO, but they did recently move ~1000 cars from FGI to PP&E. It was the first time I'd seen that. A year or so back an analyst asked if they carried demos and loaners in FGI or PP&E, but Deepak seems to have misunderstood the question. So it's pretty opaque. I wish an analyst would ask straight out where the 13.7k are, but it seems the first rule of inventory club is we don't talk about inventory club.

 

[Fact Checking]

45/7*2000 = 12,857 S/X in inventory. Close enough to 13,700 for my purposes.

That's at the full 2k/week S/X production rate, while in Q1 they had a 1.1k/week average production rate, so the DIO estimate of pipeline inventory is more like 45/7*1,100 = 7,071 units, many of them in transit.

I'm not convinced the simple estimate is reliable though.

 

[Doggydogworld]

That's at the full 2k/week S/X production rate, while in Q1 they had a 1.1k/week average production rate, so the DIO estimate of pipeline inventory is more like 45/7*1,100 = 7,071 units, many of them in transit.

I'm not convinced the simple estimate is reliable though.

My total guess for the 13.7-14k produced but not delivered as of 3/31/19:

4k - demos, "new" loaners and showroom cars
2k - in transit
2k - US unsold new inventory
2k - Euro unsold new inventory
2.5k - China unsold new inventory
1k - old loaners transferred to PP&E
0.2-0.5k - scrapped, "lost at sea", insurance salvage, etc.​

 

[EVNow]

A year or so back an analyst asked if they carried demos and loaners in FGI or PP&E, but Deepak seems to have misunderstood the question.

This is what their 10-Q says. Since Tesla has said their loaners are high end cars to get people to upgrade, I think they are covered under "new vehicles available for immediate sale at our retail and service center locations". BTW, CPO are in FG too - so, it really doesn't matter whether they sell loaners as used or new. I think they are all in FG.

Finished goods inventory included vehicles in transit to fulfill customer orders, new vehicles available for immediate sale at our retail and service center locations, used vehicles and energy storage products.​

I went back and checked a few quarters in '16 and '17. FG is fairly close to calculated inventory (using 25% margin and 105k ASP). I guess they have continued to carry large inventory of S, X to have for immidiate sale / loaner. It would be interesting to see if they will try to replace s/x loaners with 3 now that they probably want to liquidate pre-Raven inventory.

 

[neroden]

• Does a sale of a returned leased or traded in Tesla count as a new delivery? I don't think so. : No.
• Are the writedowns of value, which are significant sums, reflected in the P&D report? I don't think so, they only include new production and deliveries of newly produced cars. : No.
• Are new leased units accounted as deliveries? : Yes.

Basically, the difference between production and delivery needs to be accounted as
- Loaners/floor models
- Scrapped

Only other thing I can think of is - if loaners with large mileage are sold as used (because Tesla already took tax credit for them ?). Normally they would still sell as new, so buyers can get tax credits.

Oh, I can add one more. Tesla is converting certain cars to internal use -- i.e. "buying" them for themselves. For instance, the various Model S and X cars converted to Mobile Service. I don't think those are counted as deliveries. They're mostly doing this with used cars, but they may be doing this with older loaners / floor models as well. In which case they'd count as production but not deliveries.

 

[neroden]

If Tesla keeps a loaner that long they are supposed to transfer it to PP&E and depreciate it. In fact, they did this not too long ago for ~70m (from memory) of cars. That'd be ~1000 S/X, which we should subtract from Troy's numbers when doing balance sheet inventory calculations. Tesla will eventually sell almost all of these cars.

Actually, a bunch will be converted to internal use and never sold to outsiders.

I really don't know if they'll count those sales as deliveries.

I'd guess not.

 

[SPadival]

Shorty interpretation is that this is bad

Véhicules électriques: 57% des demandes de subventions viennent du Québec | MÉLANIE MARQUIS | Actualités

APPLICATIONS BY PROVINCE * BETWEEN 1 stAND 28 May 2019

Quebec 1998

British Columbia 1295

Ontario 176

Alberta 10

Nova Scotia 10

Manitoba 8

New Brunswick 4

Saskatchewan 3

Prince Edward Island 2

 

[schonelucht]

I picked Q1'18 as a starting point, because while they obviously had some S+X inventory at the end of 2017 as well, they also had a blow-out quarter with 28,320 deliveries (!) on 22,140 of production - so I assume inventory levels were really low end of 2017 - I'd be surprised if they were over 2k globally at that point.

At the end of 2017, the cumulative difference between reported production and sales for 3/S/X was 10203 cars with 3380 in transit. That leaves 6823 cars in potential inventory.

 

[schonelucht]

The result suggests that a large chunk of the finished goods inventory can be explained with new units in the delivery pipeline of cars. There no space for a significant fleet of 13.7k used MS/MX vehicles in those numbers AFAICS.

Why not? At the end of 2017Q3, finished goods was $1.4B with with 15508 cars cumulative delta from production to sales. Assume 500 cars over 5 years ended up scrapped for whatever reason (accidents before delivery, used in r&d, ...), that's nearly $93k per car or quite close to what you'd expect based on margins, ASP etc at the time. By the end of the following quarter, the delta dropped by 5000 cars and the finished goods inventory by $400M. Again pretty much in line with selling older inventory and replaced by (more valuable) newer cars in transit to customers.

 

[Fact Checking]

Why not? At the end of 2017Q3, finished goods was $1.4B with with 15508 cars cumulative delta from production to sales. Assume 500 cars over 5 years ended up scrapped for whatever reason (accidents before delivery, used in r&d, ...), that's nearly $93k per car or quite close to what you'd expect based on margins, ASP etc at the time. By the end of the following quarter, the delta dropped by 5000 cars and the finished goods inventory by $400M. Again pretty much in line with selling older inventory and replaced by (more valuable) newer cars in transit to customers.

Yeah, I concur, and this estimate looks reasonable to me:

My total guess for the 13.7-14k produced but not delivered as of 3/31/19:

4k - demos, "new" loaners and showroom cars
2k - in transit
2k - US unsold new inventory
2k - Euro unsold new inventory
2.5k - China unsold new inventory
1k - old loaners transferred to PP&E
0.2-0.5k - scrapped, "lost at sea", insurance salvage, etc.​

I suspect they probably have delivered a fair chunk of those in Q2 already, with discounts, immediate availability vs. months to wait for Raven, and the Lifetime Free Supercharging perk.

This "inventory refresh" process could actually help revenue and add a bit of GAAP income as well, but MSX gross margins might go down due to the discounts. (Will any writedowns reduce GM?)

The cash flow aspect should be good AFAICS, especially if they prioritize Raven deliveries to customers and allow the loaner/demo pool to shrink.

 

[Doggydogworld]

Actually, a bunch will be converted to internal use and never sold to outsiders.

They reclassified 72.8m of loaners from inventory to PP&E in Q3 2018. That's my:

1k - old loaners transferred to PP&E
​

But I missed them transferring another 48.4m worth (~650) in Q4 of last year. So the total should be 1.6k. No mention of any such reclassifications in Q1.

I suspect they probably have delivered a fair chunk of those in Q2 already, with discounts, immediate availability vs. months to wait for Raven, and the Lifetime Free Supercharging perk.

I agree. They expected to clear many of them out in Q1, but fell way short. Of almost 14k produced but not delivered on 3/31 I figure about 12k were available for sale. They built more pre-Ravens in early Q2, maybe 4k? I figure they'll sell ~10k pre-Ravens in Q2. The other 6k will be available for immediate sale in Q3, many serving as demos and new loaners while they wait.

 

[neroden]

I expect to see more transfers to PP&E in the second quarter. The reason: service centers and mobile service are both expanding, significantly, but that process was not advanced enough in Q1 to add a bunch more service cars. It has advanced enough in Q2 that I expect more vehicles.

There's been a definite effort to flush pre-Raven S & X. I expect they will mostly be emptied out by the end of Q2. There might be a little left for Q3 but I doubt 6K.

 

[Doggydogworld]

I expect to see more transfers to PP&E in the second quarter. The reason: service centers and mobile service are both expanding, significantly, but that process was not advanced enough in Q1 to add a bunch more service cars. It has advanced enough in Q2 that I expect more vehicles.

There's been a definite effort to flush pre-Raven S & X. I expect they will mostly be emptied out by the end of Q2. There might be a little left for Q3 but I doubt 6K.

Will we know or have good estimates for how many Ravens they produce and/or deliver in Q2? That'd be interesting.

 

[EVNow]

I expect to see more transfers to PP&E in the second quarter. The reason: service centers and mobile service are both expanding, significantly, but that process was not advanced enough in Q1 to add a bunch more service cars. It has advanced enough in Q2 that I expect more vehicles.

Also by moving new cars to PP&E, I guess they can claim $3.75k tax credit ?

 

[neroden]

Also by moving new cars to PP&E, I guess they can claim $3.75k tax credit ?

Sure, but it only works if they have a full-year positive taxable income for the US. In the past this was extremely unlikely given "net operating loss carryforwards", which allow them to show very little taxable income until they've used up all the losses from the past.

However, the Trump tax bill limited the use of NOL carryforwards a little tiny bit (they're only allowed up to 80% of otherwise-taxable income) so if Tesla has a net taxable profit before the NOL carryforward, they would have some tax bill to use the tax credit against (the tax on 20% of their pre-NOL taxable income). This applied to 2018 as well. So I guess maybe they are getting to use the tax credit?

 

[EVNow]

Sure, but it only works if they have a full-year positive taxable income for the US. In the past this was extremely unlikely given "net operating loss carryforwards", which allow them to show very little taxable income until they've used up all the losses from the past.

However, the Trump tax bill limited the use of NOL carryforwards a little tiny bit (they're only allowed up to 80% of otherwise-taxable income) so if Tesla has a net taxable profit before the NOL carryforward, they would have some tax bill to use the tax credit against (the tax on 20% of their pre-NOL taxable income). This applied to 2018 as well. So I guess maybe they are getting to use the tax credit?

They have some provisions for income tax - so I guess they pay some tax (unless it is outside US).

 

[neroden]

They have some provisions for income tax - so I guess they pay some tax (unless it is outside US).

It's mostly outside the US