Near-future quarterly financial projections

[EVNow]

Zach in Q3 conference call:

“In the immediate term, we're focused on increasing production of Model 3 and Model S and Model X as quickly as we can. ”

Don’t you think only 20k SX deliveries is conservative considering this statement? They also showed a current annual production capacity of 90k / year for SX at Fremont or 22.5k/quarter. Couldn’t this be a decent q4 upside surprise? Especially considering q4 deliveries tend to outpace production?

We can't assume "as quickly as we can" = in Q4. We don't know that. I'm assuming about 2k increase in production in Q4, similar to increase in Q3 from Q2. My numbers are such that they meet the 360k target, which they will try utmost to meet. There are definitely upsides possible. If they sell 3k more S/X, for eg. they make $50M more profit.

In anycase, its a given that Q4 deliveries will be higher with good profits. As I said, its a question of margin. But in Q1 its a question of deliveries. Tesla would do well to space out the deliveries between Q4 & Q1 wherever they can to absorb the impact of seasonality. Of course Netherlands (and US) has some tax cliffs, so they will try to deliver max this quarter.

 

[Thekiwi]

Thanks for the Q4 Estimate.
What are you assuming for total vehicle deliveries?

I was using 85k Model 3 & 20k S&X = 105k total Q4 deliveries.

(I think this is a good conservative estimate)

 

[Doggydogworld]

Also, production and deliveries in Q4 are a wildcard, and I think there's an increasing chance that Tesla will be able to surprise us positively in Q4 again:

• Q4 European deliveries are intriguingly high so far, per the graph posted by @KarenRei:
• View attachment 477890
  
• This suggests (but doesn't prove) a substantially higher early quarter production rate in Fremont compared to Q3. Just 35 days into Q4 Tesla started delivering at late-Q3 levels (!).
• This graph by @JustMe shows record Q4 units underway to Europe via ships:
• View attachment 477896
  
• The rate is significantly beyond any previous quarter: 30-40% higher than Q2, if the "ship loading hours" method is accurate.
• We still don't have an answer to the mystery production increase leak from Jerome, back in July: “While we can’t be too specific in this email, I know you will be delighted with the upcoming developments.”
• Q3 Model 3 production was 79k, up from 72k in Q2 - which I don't think matches the tone of Jerome's email.
• There's the leak to Cleantechnica about 7,000 excess Q3 battery packs sent to China:
• Tesla Gigafactory 3 Has ~7,000 Battery Packs In Stock For Chinese Model 3 Production, Will Use LG Chem Cells In 2020 | CleanTechnica
• U.S. order book appears to be almost 100% full in Q4 already, according to Tesla's own "weeks of delivery" estimates. (Which tend to lag true demand.)
• EU order book has closed for Q4 deliveries yesterday: most configs are for February 2020 delivery only.
• Inventory levels are very low in the U.S., to the extent Tesla allows us to see them.
• The 10-Q has shown a significant increase in non-finished goods inventory. Part of it could be battery packs for GF3 - but maybe they stockpiled parts for Fremont as well, for a full quarter demonstration of maximum sustained production rates?

Those 5-8 independent pieces of data/clues point towards a skillfully masked attempt by Tesla to hit the ball out of the ballpark in Q4: they might have sandbagged Q3 production and deliveries to maximize Q4 results.

If they do then even Q2 margins would be enough for record Q4 revenue and GAAP profits.

And here's a final mystery: in their Q4 report Tesla updated the 360k-400k 2019 deliveries guidance range to 360k only. Everyone, including me, interpreted this as an admission that they cannot hit 400k and can barely hit 360k in the best of cases.

But there's another possible explanation for why they removed the 400k upper guidance ...

Anyway, calling Q4 a record quarter at this point is premature I suspect, but the evidence so far is incredibly intriguing, and there's not a single counterfactual I've been able to find, other than Tesla's track record of punishing our optimism most of the time.

​

The Q3 inventory increase was raw materials, battery packs should be Work in Progress.

Q4 shipping is driven by:

1. Extreme Netherlands demand due to 12/31 BIK stepdown
2. Potential 12/15 China penalty tariff
3. Seasonally high Q4 demand
4. New markets (e.g. Korea)​

Leasing companies in the Netherlands are buying cars for Q4 plus Q1, Q2 and even Q3 of 2020 (Tesla delivered some of this in September). Due to this pull-forward plus Korea and the need to ship 2+ weeks earlier to China Tesla dedicated 100% of production to overseas so far this quarter vs. 70-80% early in prior quarters. That starved the US of Model 3s, causing the 4-6 week wait time. They also pushed other European countries back in line - some EuroSR+ buyers may have to wait until Q1.

With all the overseas moving parts in Q4 I'm more interested in US and Canada Model 3 deliveries. Unfortunately that number will be hard to determine.

 

[EVNow]

I was using 85k Model 3 & 20k S&X = 105k total Q4 deliveries.

(I think this is a good conservative estimate)

That would make Tesla miss the 360k target by a few hundred

 

[jeewee3000]

Those 5-8 independent pieces of data/clues point towards a skillfully masked attempt by Tesla to hit the ball out of the ballpark in Q4: they might have sandbagged Q3 production and deliveries to maximize Q4 results.

If they do then even Q2 margins would be enough for record Q4 revenue and GAAP profits.

And here's a final mystery: in their Q4 report Tesla updated the 360k-400k 2019 deliveries guidance range to 360k only. Everyone, including me, interpreted this as an admission that they cannot hit 400k and can barely hit 360k in the best of cases.

But there's another possible explanation for why they removed the 400k upper guidance ...

Anyway, calling Q4 a record quarter at this point is premature I suspect, but the evidence so far is incredibly intriguing, and there's not a single counterfactual I've been able to find, other than Tesla's track record of punishing our optimism most of the time.

​

If Tesla sandbagged Q3 production to surprise in Q4 to the upside, that would ensure breakout of ATH. However, that is a very optimistic view - even though there are 'clues' in that regard - which in the past has mostly turned out not to be true.

Interpreting those same clues in a more conservative way, mabye Tesla removed the 400k upper guidance from the Q3 update letter because they know the final result will be way closer tot 360k than 400k and they don't want to seem to perform only in the "lower end" of their guidance.

If they are sandbagging, I'm more inclined to believe they are currently sandbagging Q4 to just exceed 360k deliveries in 2019 and to move some deliveries to Q1 2020 to anticipate a quarter with less demand.

In the current uptrend that is my main worry: Q1 2020. So if the above turned out to be true we would see a very steady stock rally until Q2 2020 easily. If (OT) FSD feature complete is on time and of decent quality that would add even more oil to the fire.

But back to deliveries, I am not expecting crazy deliveries in Q4. A beat of 360k however is definitely in the cards.

 

[Fact Checking]

If Tesla sandbagged Q3 production to surprise in Q4 to the upside, that would ensure breakout of ATH. However, that is a very optimistic view - even though there are 'clues' in that regard - which in the past has mostly turned out not to be true.

Yeah, I very much agree about the historic track record: in the past, almost without exception, such optimistic expectations ended in investor tears. This is I believe one of the main reasons why the TSLA stock price didn't break out of its historic $250 ± $100 price range in the past 4.5 years (!).

But ... (and I suspect you expected a 'but' ), most of the clues I cited were actual observations of Q4 shipments.

There's also additional 'clues' from the production side:

• Leak about at least one major Model 3 supplier's doubling of orders, timed to have begun in October:

Tesla supplier hints at massive increase in Model 3 production - Electrek

“will increase monthly shipments for components of relays used in Tesla Model 3 vehicles from about 20,000 units currently to 40,000 units beginning August 2019”.

“CFTC has also landed orders for other components used in Model 3, with shipments to begin in October 2019, the sources said. As Tesla is hiking Model 3 output and its Gigafactory 3 in Shanghai, eastern China, will kick off production of the electric vehicle by year-end 2019, CFTC’s shipments to Tesla are expected to rise, the sources noted.”​

• Carsonight reported a GF1 year-end battery pack production rate target of 10k/week. Furthermore, @ReflexFunds pointed out that Tesla's internal aspirational target was 15k/week packs:

Carsonight: "I met a group of Tesla employees recently. They told me that Tesla has a private aspirational goal of 15k packs/week, but the employee's general consensus on that one was "uh huh, riiight". They think 10k/week is doable, though."
​

He also reported a matching increase in cell production on the Panasonic side.​

• Global Equities Research analyst Trip Chowdhry, FWIW, reported "brisk" international shipments from Fremont a week ago:

"First half of quarter production and shipment focus continues to remain International Shipments. It is fairly common to see Shipping Trucks, each with 8 TSLA Vehicles heading towards the Docks on HWY 101, all through the day. Factory activity very strong."​

Both the supplier volume doubling leak and the GF1 leak of 10k/week production is consistent with a potentially "crazy" increase of Model 3 production in Q4.

Maybe they'll use the extra capacity to increase inventory to help Q1 - but in Q4 they had the SolarCity debt payment and I think they'll want to show growing cash equivalents - having too much inventory growth would work against that.

Edit: still not advice, plus @Doggydogword has explained about 20-30% of the early Q4 shipments rate increase.

 

[ReflexFunds]

The Q3 inventory increase was raw materials, battery packs should be Work in Progress.

I presumed the battery pack stockpile was in the raw materials line, I'm not sure what else would cause such a large increase and I don't see how Tesla would keep Work in Progress flat QoQ while building up a battery pack stockpile within this line item. Do you just not believe they stockpiled packs and powertrain components at all? I don't see any reason to disbelieve Cleantechnica's source, particularly when it would be extremely stupid for Tesla to not stockpile components ahead of production and ahead of the December tariff increase and given the pack/powertrain supply ramp helps explain the large jump in Q3 gross margin.

As Tesla China has to import the packs from GF1 and pay tariffs on them, I presumed Tesla China would treat these components like any other third party supplier component which are all accounted for in the Raw Materials line.

 

[Fact Checking]

The Q3 inventory increase was raw materials, battery packs should be Work in Progress.

Not necessarily: maybe "Work in Process" is only unfinished cars from the chassis onward: i.e. once the car has a VIN. Everything else is "raw materials" - including battery packs.

I looked at the 10-K, it's not well defined.

Q4 shipping is driven by:
1. Extreme Netherlands demand due to 12/31 BIK stepdown
2. Potential 12/15 China penalty tariff
3. Seasonally high Q4 demand
4. New markets (e.g. Korea)
Leasing companies in the Netherlands are buying cars for Q4 plus Q1, Q2 and even Q3 of 2020 (Tesla delivered some of this in September). Due to this pull-forward plus Korea and the need to ship 2+ weeks earlier to China Tesla dedicated 100% of production to overseas so far this quarter vs. 70-80% early in prior quarters. That starved the US of Model 3s, causing the 4-6 week wait time. They also pushed other European countries back in line - some EuroSR+ buyers may have to wait until Q1.

That's true, but the 'loading days' approximation of international Model 3 shipments is currently trending to be about +70% above the first 2 months of Q3. (There's still two weeks left from November.)

I.e. 70-80% to 100% shift of focus explains a 20%-30% gap, but not the other 40-50% of the increase in shipments, AFAICS. Maybe there's a serious reporting/tracking gap though.

But low U.S. deliveries in October might also explain why InsideEVs stopped reporting monthly: near zero deliveries in October and November would both have looked weird, and they'd basically expose the accuracy (or inaccuracy) of their estimates via the December estimates alone.

With all the overseas moving parts in Q4 I'm more interested in US and Canada Model 3 deliveries. Unfortunately that number will be hard to determine.

Indeed.

I'm wondering how much organic demand Tesla loses due to the delays in the U.S. - people considering a Tesla but balking at the ~1-2 months delivery delay because they need the car right now, or because they are impatient. A lot of car purchases are impulsive in car-mortgage dominated countries. In Europe, where full-in-cash car purchases have a higher percentage, people are more deliberate.

 

[RobStark]

Zach in Q3 conference call:

“In the immediate term, we're focused on increasing production of Model 3 and Model S and Model X as quickly as we can. ”

Don’t you think only 20k SX deliveries is conservative considering this statement? They also showed a current annual production capacity of 90k / year for SX at Fremont or 22.5k/quarter. Couldn’t this be a decent q4 upside surprise? Especially considering q4 deliveries tend to outpace production?

They can only make more than 80k/yr rate if they sell smaller than 100 kWh packs.

 

[jeewee3000]

Yeah, I very much agree about the historic track record: in the past, almost without exception, such optimistic expectations ended in investor tears. This is I believe one of the main reasons why the TSLA stock price didn't break out of its historic $150-$350 price range in the past 4.5 years (!).

But ... (and I suspect you expected a 'but' ), most of the clues I cited were actual observations of Q4 shipments.

There's also additional 'clues' from the production side:

• Leak about at least one major Model 3 supplier's doubling of orders, timed to have begun in October:

Tesla supplier hints at massive increase in Model 3 production - Electrek

“will increase monthly shipments for components of relays used in Tesla Model 3 vehicles from about 20,000 units currently to 40,000 units beginning August 2019”.

“CFTC has also landed orders for other components used in Model 3, with shipments to begin in October 2019, the sources said. As Tesla is hiking Model 3 output and its Gigafactory 3 in Shanghai, eastern China, will kick off production of the electric vehicle by year-end 2019, CFTC’s shipments to Tesla are expected to rise, the sources noted.”​

• Carsonight reported a GF1 year-end battery pack production rate target of 10k/week. Furthermore, @ReflexFunds pointed out that Tesla's internal aspirational target was 15k/week packs:

Carsonight: "I met a group of Tesla employees recently. They told me that Tesla has a private aspirational goal of 15k packs/week, but the employee's general consensus on that one was "uh huh, riiight". They think 10k/week is doable, though."
​

He also reported a matching increase in cell production on the Panasonic side.​

• Global Equities Research analyst Trip Chowdhry, FWIW, reported "brisk" international shipments from Fremont a week ago:

"First half of quarter production and shipment focus continues to remain International Shipments. It is fairly common to see Shipping Trucks, each with 8 TSLA Vehicles heading towards the Docks on HWY 101, all through the day. Factory activity very strong."​

Both the supplier volume doubling leak and the GF1 leak of 10k/week production is consistent with a potentially "crazy" increase of Model 3 production in Q4.

Maybe they'll use the extra capacity to increase inventory to help Q1 - but in Q4 they had the SolarCity debt payment and I think they'll want to show growing cash equivalents - having too much inventory growth would work against that.

 

[ReflexFunds]

They can only make more than 80k/yr rate if they sell smaller than 100 kWh packs.

If they were producing 100k per year at 50:50 75kWh vs 100kWh packs, their current capacity with just 100kWh packs is 87.5k per year. Presumably they have enough cell capacity to make 90k packs per year otherwise they lied about this capacity in a public filings.

 

[Fact Checking]

View attachment 478238

Be careful: @Doggydogworld is correct in pointing out that at least part of the Q4 increase in international shipments comes from a change in focus of Fremont production: previously 20-30% of Fremont Model 3 production in the first 2 months of the quarter were utilized for the U.S. and for Canada, to maintain inventory levels of at least high ASP trims.

In October and November this rate has apparently dropped to 0%, Tesla is starving the U.S. and Canada, to prioritize NL and other markets with incentives driven "use it or lose it" pull-forward demand.

I think there's still another 40-50% in apparent increase in international shipments in October and November - which might (or might not) map to higher production rate in Fremont. But this is single source only (ship tracking data based), which is manual, volunteer driven and subject to both methodological errors and reporting gaps.

Finally, the "GF3 sales permit" appears to have slipped to mid-December - which makes any Q4 GF3 deliveries dicey...

 

[Fact Checking]

If they were producing 100k per year at 50:50 75kWh vs 100kWh packs, their current capacity with just 100kWh packs is 87.5k per year. Presumably they have enough cell capacity to make 90k packs per year otherwise they lied about this capacity in a public filings.

Wasn't the 75:100 kWh split more like 70%/30%? That would put the average pack size at 82.5k, pretty close to their 80k/year guidance.

Their 80k/year guidance might also be limited by the current "two shifts" labor setup. Adding a third shift might allow them to increase the rate from 80k to 90k, but at the cost of a third, more expensive (night) shift. Probably not worth it.

 

[RobStark]

If they were producing 100k per year at 50:50 75kWh vs 100kWh packs, their current capacity with just 100kWh packs is 87.5k per year. Presumably they have enough cell capacity to make 90k packs per year otherwise they lied about this capacity in a public filings.

They said their manufacturing capacity was 90k. That is what the Gen II manufacturing line at Fremont can produce.

Currently, their one and only qualified supplier can provide 8 GWh of 18650 cells.

If need be I suppose they can qualify another supplier or maybe Panasonic can source from somewhere other than Japan. But probably not China as of now.

I also recall them saying they had improved efficiency on the line and were only currently using 1 shift on Gen II line.

 

[ReflexFunds]

Wasn't the 75:100 kWh split more like 70%/30%? That would put the average pack size at 82.5k, pretty close to their 80k/year guidance.

Their 80k/year guidance might also be limited by the current "two shifts" labor setup. Adding a third shift might allow them to increase the rate from 80k to 90k, but at the cost of a third, more expensive (night) shift. Probably not worth it.

From 4Q18 ASP/margins it looked like Tesla had got mix close to 50:50.
I'm not sure i remember seeing 80k/year guidance recently?
The disclosure in the 3Q19 report is that Model S&X production capacity is currently at 90k per year. This would have to account for physical supply and equipment speed restraints, but wouldn't have to reflect capacity limitations from the current reduced number of shifts.

S&X deliveries were 17.5k in 3Q19 and Zach said this didn't reflective true levels of demand. 20k isn't really much different from 17.5k, so I think production and deliveries of 22.5k in 4Q19 is possible. I'm sticking with 20k as a more conservative base case for now though.

 

[ReflexFunds]

They said their manufacturing capacity was 90k. That is what the Gen II manufacturing line at Fremont can produce.

Currently, their one and only qualified supplier can provide 8 GWh of 18650 cells.

If need be I suppose they can qualify another supplier or maybe Panasonic can source from somewhere other than Japan. But probably not China as of now.

I also recall them saying they had improved efficiency on the line and were only currently using 1 shift on Gen II line.

I think Suminoe Japan was initially at 8/8.5GWh, but i think they were producing at a 9GWh rate in 4Q18.
Simon Moores at Benchmark Minerals stated Suminoe capacity at 11GWh last year and Benchmark are one of the most reliable sources in the battery industry. I don't think that 11GWh would account for scrap rate and downtime though.

Simon Moores @sdmoores
May 25, 2018
"Tesla is getting its 18650 Model S and X Batteries from Suminoe, Japan (Panasonic). This plant is at maxed out at 11GWh. Entirely reliant on Gigafactory ramp up for their new supply of cells this year (2170 Model 3)."

Also, we know 90k isn't the Fremont production limit for S&X given they they produced 100k previously.

 

[Fact Checking]

I'm not sure i remember seeing 80k/year guidance recently?

Sorry, correction: 90k S/X production capacity at Fremont - mentioned in the Q3 update letter.

 

[dc_h]

Finally, the "GF3 sales permit" appears to have slipped to mid-December - which makes any Q4 GF3 deliveries dicey...

Do you have a source? I'm not doubting, just curious how serious the delay is. They don't seem to be selling today, so December seems pretty reasonable.

 

[Doggydogworld]

Do you just not believe they stockpiled packs and powertrain components at all?

No, I don't believe they had 7000 stockpiled battery packs and drive units on 9/30. Doesn't make sense to produce them so far in advance. Does the penalty tariff even affect auto parts? That would be weird, the US ships a reasonable number of cars to China but I imagine very few parts.

I presumed Tesla China would treat these components like any other third party supplier component which are all accounted for in the Raw Materials line.

Even if counted as Raw Material by Tesla China they'd be WIP on the consolidated balance sheet.

Not necessarily: maybe "Work in Process" is only unfinished cars from the chassis onward: i.e. once the car has a VIN. Everything else is "raw materials" - including battery packs.

Battery packs are WIP by any normal definition. Stuff that's unchanged since you received it is material, once you use labor to make it into something it becomes WIP. I don't see why they'd re-define a standard term.

That's true, but the 'loading days' approximation of international Model 3 shipments is currently trending to be about +70% above the first 2 months of Q3. (There's still two weeks left from November.)

Two things happened in Q4:

1. They flipped the overseas switch earlier (actually late Q3)
2. Model 3 production is almost 100% overseas​

Starting earlier is responsible for almost half the QTD gain you see, building 100% overseas cars vs. ~70% is the rest (e.g. 6k/week vs. 4.2k is a 43% increase). These numbers work without any production rate increase, though I do expect production to be up 5-8k vs. Q3. 100% domestic production should start earlier this time since they can't do the late China ships and I don't expect another Hoegh Oslo stunt.

I also wonder how much wait time affects US demand. They probably have enough inventory and trickle production that salespeople can get a car to someone who really needs it ASAP, but I can see some folks looking at the web site and moving on without ever talking to a salesperson.

 

[TNEVol]

Be careful: @Doggydogworld is correct in pointing out that at least part of the Q4 increase in international shipments comes from a change in focus of Fremont production: previously 20-30% of Fremont Model 3 production in the first 2 months of the quarter were utilized for the U.S. and for Canada, to maintain inventory levels of at least high ASP trims.

In October and November this rate has apparently dropped to 0%, Tesla is starving the U.S. and Canada, to prioritize NL and other markets with incentives driven "use it or lose it" pull-forward demand.

I think there's still another 40-50% in apparent increase in international shipments in October and November - which might (or might not) map to higher production rate in Fremont. But this is single source only (ship tracking data based), which is manual, volunteer driven and subject to both methodological errors and reporting gaps.

Finally, the "GF3 sales permit" appears to have slipped to mid-December - which makes any Q4 GF3 deliveries dicey...

I can only provide anecdotal support. Living on i40 and using it daily for several quarters my wife and I have counted car carriers going East. The rough correlation between observations and the wave have been observable each quarter. For example when Tesla is shipping we don't see any car carriers. But when end of quarter approaches we see up to 3 in a 30 minute drive which tapers.off to an occasional truck in the last 2 weeks of the quarter. I expect this taper is for West coast deliveries. Instead of a few trucks at the beginning of this quarter we have seen none. And we have seen none so far in the rest of the quarter. I expect a huge wave at the end of November and for two weeks in December or I think US deliveries will be reduced