Near-future quarterly financial projections

[The Accountant]

Without contracts in place for future revenue or a sufficient amount of historic financial profits, I would say no VA released for 2019

Also, doesn't the Tesla view on "more likely to be profitable than not" have to be in-line with guidance? I can't see Tesla being less than bullish.

@dw4ngg - to not recognize a valuation allowance release (even a portion), management would have to state and believe that it is "more likely than not" that Tesla will have a taxable loss in 2020. I am having a hard time seeing Tesla make this statement. The Q1 order book (including China), Model Y pre-orders, ZEV credits, Full Self Drive revenue recognition, improving margins, strong SG&A controls - all provide evidence to support a profitable year.
But it would not surprise me to see the the release occur later in 2020. It's an accounting decision that will be scrutinized (lots of armchair quarterbacks) so maybe that causes them to delay it.

@Buckminster - this is actually what has been running through my mind. The information in the 10K filing is a "public communication".
If Elon states during the Q4 call that 2020 will be a profitable year....and then later in Feb the 10K is released stating it is more likely than not that Tesla will not recognize the Net Operating Loss carry-forward (i.e. no taxable income)....we would have two contradictory public statements. I guess it's possible but how do you reconcile that?

 

[dw4ngg]

@dw4ngg - to not recognize a valuation allowance release (even a portion), management would have to state and believe that it is "more likely than not" that Tesla will have a taxable loss in 2020. I am having a hard time seeing Tesla make this statement. The Q1 order book (including China), Model Y pre-orders, ZEV credits, Full Self Drive revenue recognition, improving margins, strong SG&A controls - all provide evidence to support a profitable year.
But it would not surprise me to see the the release occur later in 2020. It's an accounting decision that will be scrutinized (lots of armchair quarterbacks) so maybe that causes them to delay it.

@Buckminster - this is actually what has been running through my mind. The information in the 10K filing is a "public communication".
If Elon states during the Q4 call that 2020 will be a profitable year....and then later in Feb the 10K is released stating it is more likely than not that Tesla will not recognize the Net Operating Loss carry-forward (i.e. no taxable income)....we would have two contradictory public statements. I guess it's possible but how do you reconcile that?

Profitable yr for financial purposes may not necessarily mean taxable profits. Plus, any positive 2020 taxable income forecast would lead to only a small % of VA release. Remember for tax you follow MACRS for depreciation which is way larger than book DDA. Also you have items such as foreign derived intangible income deductions and perhaps stored up general business credits, namely the R&D credit

Edit: though the credits portion could already be part of the VA-ed portion of the def tax asset, thus use would lead to some financial income

 

[The Accountant]

Profitable yr for financial purposes may not necessarily mean taxable profits. Plus, any positive 2020 taxable income forecast would lead to only a small % of VA release. Remember for tax you follow MACRS for depreciation which is way larger than book DDA. Also you have items such as foreign derived intangible income deductions and perhaps stored up general business credits, namely the R&D credit

Edit: though the credits portion could already be part of the VA-ed portion of the def tax asset, thus use would lead to some financial income

I agree with your statements...however, many here are expecting a $4B pretax income for 2020 and my guess is that (with transfer pricing), we see much of that in the US - I'll estimate 3B for US. You would have to have some very large tax/book timing differences to get from $3B book income to $0 tax income. Let's see how this plays out. If not Q4 2019 - certainly by Q4 2020 if not sooner.

 

[Buckminster]

No. Deferred tax assets and valuation allowance are a GAAP thing. They don't affect taxable income.

In Q3, Net Income, non GAAP was 342m, GAAP was 150m. If they had taken 50% of the $1.8Bn then the figures would have been?:

Non GAAP 342m
GAAP 1.05Bn

 

[Doggydogworld]

If Elon states during the Q4 call that 2020 will be a profitable year....and then later in Feb the 10K is released stating it is more likely than not that Tesla will not recognize the Net Operating Loss carry-forward (i.e. no taxable income)....we would have two contradictory public statements. I guess it's possible but how do you reconcile that?

The same way they reconcile Elon saying they'd produce 420-600k S/X/3 in 2019 while official guidance was 360-400k deliveries.

Lol, you joined Saturday and this is your 2nd comment?

A lot of people lurk, sometimes for years, and only comment when they see a topic they happen to understand better than most. I personally appreciate an occasional knowledgeable post vs. those who clog the threads posting crap they don't understand.

In Q3, Net Income, non GAAP was 342m, GAAP was 150m. If they had taken 50% of the $1.8Bn then the figures would have been?:
Non GAAP 342m
GAAP 1.05Bn

These numbers have nothing to do with taxable income. Your "virtuous circle" comment implies they can use the taxable profit created by releasing the valuation allowance to justify releasing the valuation allowance. That's not how it works. The decision to release the valuation allowance is based on expected taxable income. That's completely different from GAAP (or non-GAAP) income. Releasing a valuation allowance can create a GAAP profit, but it doesn't create taxable income.

 

[FrankSG]

@dw4ngg - to not recognize a valuation allowance release (even a portion), management would have to state and believe that it is "more likely than not" that Tesla will have a taxable loss in 2020. I am having a hard time seeing Tesla make this statement. The Q1 order book (including China), Model Y pre-orders, ZEV credits, Full Self Drive revenue recognition, improving margins, strong SG&A controls - all provide evidence to support a profitable year.
But it would not surprise me to see the the release occur later in 2020. It's an accounting decision that will be scrutinized (lots of armchair quarterbacks) so maybe that causes them to delay it.

@Buckminster - this is actually what has been running through my mind. The information in the 10K filing is a "public communication".
If Elon states during the Q4 call that 2020 will be a profitable year....and then later in Feb the 10K is released stating it is more likely than not that Tesla will not recognize the Net Operating Loss carry-forward (i.e. no taxable income)....we would have two contradictory public statements. I guess it's possible but how do you reconcile that?

Based on the podcast you shared a while back it does sound possible. The podcast seemed to say that for accounting purposes certain information is weighed more heavily than others. They said "objectively verifiable evidence" such as past results far and away weighs most heavily, whereas Elon or the company stating they believe 2020 is more likely than not to be profitable is not objectively verifiable evidence, and therefore weighs less heavily for accounting purposes.

I don't think this completely excludes the possibility of a release in VA, but it does make it possible that Elon/management will publicly forecast 2020 profits, while at the same time not release VA because the "objectively verifiable evidence" outweighs those public statements for a few more quarters.

 

[EVNow]

Here is a comparison of my model and the actual.

One thing that makes it difficult to forecast Tesla is the sudden reversal of trends. In Q3 it was the margin that suddenly got better and reversed the trend of margins getting lower.

This time we have
- Sudden increase in SGA by $100M. Partly because of $65M in stock comp. Most of the gaap profit difference can be attributed to this.
- Model S&X ASP increased $10k to 102k. This resulted in better margin of 19.9% vs 19.2% (auto non-lease ex-credits).
- Service margin continued to get better from -21% to -16%.
- Energy margin went back to 12% after a good 25% last quarter.

 

[Doggydogworld]

Here is a comparison of my model and the actual.

One thing that makes it difficult to forecast Tesla is the sudden reversal of trends. In Q3 it was the margin that suddenly got better and reversed the trend of margins getting lower.

This time we have
- Sudden increase in SGA by $100M. Partly because of $65M in stock comp. Most of the gaap profit difference can be attributed to this.
- Model S&X ASP increased $10k to 102k. This resulted in better margin of 19.9% vs 19.2% (auto non-lease ex-credits).
- Service margin continued to get better from -21% to -16%.
- Energy margin went back to 12% after a good 25% last quarter.


View attachment 506167

Thanks for posting this. We called out Energy margin as suspicious last Q, so I wasn't surprised to see it normalize. That 102k S/X ASP is nuts, though. Doesn't fit with 80-105k base price, few options and typical reserves/deferrals. I suspect there's something else going on, but a big FSD release is the only possibility that comes to mind and I doubt they did that.

Actual sold cars was 92,620 - 6,041 = 86,579 Model 3s and 19,475 - 2,807 = 16,668 S/X. That gives 50k Model 3 ASP and 100,855 S/X ASP, which is slightly better but still too high.

In other news, ship loading for Europe continues to be somewhat leisurely. I expected the UK to fill part of the big hole left by the Netherlands. We should get a better idea in the next two weeks. On the flip side, they sent three (!!) ships to Korea already. One made a pit stop in China, but that may not be related to Tesla. US deliveries are happening, but it's hard to quantify.

Guidance was odd - "Comfortably over 500k" with no upper bound despite full year production capacity of >700k.

 

[ReflexFunds]

I'll be able to update this more precisely with the 10k, but this is my guess so far in the moving parts of Tesla's P&L.

It does look like a significant QoQ ASP increase in Q4 for both Model 3 and Model S/X, but also some one off upgrade revenue and maybe also some release of some other one off low margin revenue (not in my model).
It does look like like for like production costs are up QoQ - this could be due to 1) One off low margin auto revenue release not included in my model, 2) One off boosts in Q3 not repeated, 3) One off headwinds in Q4, 4) Higher Panasonic cell pricing at GF1 after Tesla hit profitability. We may see more from the 10k and Panasonic results, but either way the progress from Q2 to Q4 overall was still very solid.

The lower Energy gross profit QoQ is likely a combination of Megapack and Solar Roof production ramp costs, and possibly an exceptional positive in Q3.


Key Revenue & Profit Assumptions:

P&L:

Cash Flow:

 

[EVNow]

Actual sold cars was 92,620 - 6,041 = 86,579 Model 3s and 19,475 - 2,807 = 16,668 S/X. That gives 50k Model 3 ASP and 100,855 S/X ASP, which is slightly better but still too high.

If we take 3 ASP as 51k, we get 96k S&X ASP. Probably a better estimate.

Q1 profitability - assuming 95k deliveries - depends on SGA. That depends on whether they will have to reserve some money for Musk reward. For eg. if the SP stays above 555, they will have to reserve quite a bit - which interestingly could reduce EBIT and make the reward condition not met !!

 

[ammulder]

Guidance was odd - "Comfortably over 500k" with no upper bound despite full year production capacity of >700k.

Let's image 530k deliveries. It's the difference between "Crushed their guidance" and "Came in at the low end of their guidance".

 

[EVNow]

I posted this in the s&p thread. But makes sense to discuss here. Comments ?

My view now is the chances of S&P after Q1 are slim. In fact I forecast a loss for Q1.
- Increase in SGA by $100M. This will continue to increase as Zach said, even though the $100M included a provision for CEO reward
- Further rewards to Musk might make even higher provisions necessary as the Market cap is above 100B
- Feature Complete delayed, unlikely to be this quarter. So no FSD revenue release

 

[DaveT]

I posted this in the s&p thread. But makes sense to discuss here. Comments ?

My view now is the chances of S&P after Q1 are slim. In fact I forecast a loss for Q1.
- Increase in SGA by $100M. This will continue to increase as Zach said, even though the $100M included a provision for CEO reward
- Further rewards to Musk might make even higher provisions necessary as the Market cap is above 100B
- Feature Complete delayed, unlikely to be this quarter. So no FSD revenue release

Yeah, on the conference call Zach (CFO) seemed to give a rather stark warning about Q1 and to expect some headways.

I'm expecting a loss.

And that would push S&P500 inclusion out to Q2 or Q3.

 

[EVNow]

Yeah, on the conference call Zach (CFO) seemed to give a rather stark warning about Q1 and to expect some headways.

I'm expecting a loss.

And that would push S&P500 inclusion out to Q2 or Q3.

After Q2 is still possible unless Q1 is again a really bad quarter. The $400M loss from Q2 ‘19 would fall off. I expect a simple profit in Q2 might be enough.

 

[DaveT]

After Q2 is still possible unless Q1 is again a really bad quarter. The $400M loss from Q2 ‘19 would fall off. I expect a simple profit in Q2 might be enough.

Do you think Model Y production starting will hurt Model 3 production at Fremont at all during Q1?

 

[kengchang]

Wouldn't FCA payment pad the bottom line?

 

[EVNow]

Do you think Model Y production starting will hurt Model 3 production at Fremont at all during Q1?

Not sure - but i’m expecting a drop in 3 deliveries in Q1 compared to Q4. I think they will not go all out to maximize 3 production, which would reduce 3 output. Of course they can make up the slack with MIC 3. We don’t know how Corona virus will affect GF3 production, though.

Wouldn't FCA payment pad the bottom line?

I’m assuming higher credits for Q1 of $200M. We don’t know whether the credits are on top of what Tesla has been making - some $130M or instead of it.

BTW, I looked up CEO rewards. It is 1.69M shares at $350. At 650 a share, that is $500M ! If the SP stays this high, Musk will get it after 6 months. So, Q1 and Q2 would need provisions of nearly $250M each (less $70M they did in Q4). The operational goal of $20B revenue in 4 quarters is of course already being achieved. Just needs $5B per quarter and Tesla is making $7B.

Say good bye to joining S&P soon, if that is the case ! And no deferred tax asset recognition.

 

[DaveT]

BTW, I looked up CEO rewards. It is 1.69M shares at $350. At 650 a share, that is $500M ! If the SP stays this high, Musk will get it after 6 months. So, Q1 and Q2 would need provisions of nearly $250M each (less $70M they did in Q4).

Say good bye to joining S&P soon, if that is the case !

Wow, sobering.

 

[kengchang]

My other question is why/how is China AWD/P already at Q3 delivery when we are barely entering February?

Another thing is how many Performance Model Y can Tesla make/deliver in Q1? This should be a revenue/margin booster.

 

[heltok]

BTW, I looked up CEO rewards. It is 1.69M shares at $350. At 650 a share, that is $500M ! If the SP stays this high, Musk will get it after 6 months. So, Q1 and Q2 would need provisions of nearly $250M each (less $70M they did in Q4). The operational goal of $20B revenue in 4 quarters is of course already being achieved. Just needs $5B per quarter and Tesla is making $7B.

Say good bye to joining S&P soon, if that is the case ! And no deferred tax asset recognition.

Will be very interesting to see what happens when S&P if addition is delayed for example until Q3. Index funds have grown larger than ever before and Tesla might have a very high market cap by then. It’s not often that we have a $100B+ company being included to S&P.