Near-future quarterly financial projections

[MP3Mike]

Thanks., I missed that number somehow.

They like to hide little nuggets all over

 

[Stretch2727]

Regarding the increase in A/R, this is my hunch....only a hunch:
I believe the FCA payments due Tesla for joining the EV EU pool sits in A/R (not paid) for both Q1 & Q2.
If FCA had not pooled with Tesla, the FCA EU penalty for 2020 would have been due in 2021 (that's what I have read in the regulations). So it is possible that FCA successfully negotiated with Tesla that payments for participating in the pool in 2020 would be made in 2021.
For Tesla this is proper revenue for 2020 but it may all be booked in A/R and cash received in 2021. FCA likely provides Tesla with a Letter of Credit to ensure they don't default on the payment.
We may learn more when the 10Q is published.

I believe Zach made the comment that 40% of the AR was related to regulatory credits during the conference call. I think he was trying to dispel some of the questions and myths around the high AR.

 

[The Accountant]

Q2 Idle Capacity Costs (Margins will improve in Q3 by $125m to $250m)
I have commented on this topic several times in this thread but now that it was confirmed by Zach let me highlight it again because it is important for understanding how incredible the Q2 profit was in light of this headwind and the profit improvement coming in Q3

When equipment (or an entire factory) is idled (as was Fremont for 40 days in April), there is special accounting required.
The fixed costs during the idle period are expensed immediately and not capitalized (added) to inventory. Usually some of these fixed costs would be on the balance sheet in inventory (work in progress and finished goods vehicles) but in this case it is all expensed immediately.

Here is Zach's comment during the earnings call:
"... automotive gross margin, excluding regulatory credits, reduced sequentially from 20% to 18.7%. This sequential reduction is fully attributed to idle capacity charges and lower operational efficiency due to the various shutdown" (emphasis added).

In my model, I computed the impact at about $125m. This amount was the low end of my estimate but it could have been as high as $250m. It all depends on what portion of the Fremont cost structure is fixed. I had assumed 7% but it could be as high as 14%.

Anyhow - going forward with no shutdown at Fremont, we won't see this Idle Capacity charge and we should see margin/profits improve by $125m to $250m in Q3.

As a reference for this Idle Capacity accounting, see PwC's publication (toward the bottom of the page).
Are you ready for your stakeholders to ask about the coronavirus?

EDIT: btw - It would be great to hear some Analysts talk about this one-time downside but of course I am not holding my breathe. It would really put this amazing Qtr in better perspective.

 

[mongo]

Q2 Idle Capacity Costs (Margins will improve in Q3 by $125m to $250m)
I have commented on this topic several times in this thread but now that it was confirmed by Zach let me highlight it again because it is important for understanding how incredible the Q2 profit was in light of this headwind and the profit improvement coming in Q3

When equipment (or an entire factory) is idled (as was Fremont for 40 days in April), there is special accounting required.
The fixed costs during the idle period is expensed immediately and not capitalized (added) to inventory. Usually some of these fixed costs would be on the balance sheet in inventory (work in progress and finished goods vehicles) but in this case it is all expensed immediately.

Here is Zach's comment during the earnings call:
"On automotive gross margin, excluding regulatory credits, reduced sequentially from 20% to 18.7%. This sequential reduction is fully attributed to idle capacity charges and lower operational efficiency due to the various shutdown" (emphasis added).

In my model I computed the impact at about $125m. This amount was the low end of my estimate but it could have been as high as $250m. It all depends on what portion of the Fremont cost structure is fixed. I had assumed 7% but it could be as high aas 14%.

Anyhow - going forward with no shutdown at Fremont, we won't see this Idle Capacity charge and we should see margin/profits improve by $125m to $250m in Q3.

As a reference for this Idle Capacity accounting, see PwC's publication (toward the bottom of the page).
Are you ready for your stakeholders to ask about the coronavirus?

We may also see less CEO compensation expense ($101 million this time). So that's, what, $200-$300 million to the good side?

 

[The Accountant]

We may also see less CEO compensation expense ($101 million this time). So that's, what, $200-$300 million to the good side?

Excellent Point - this too!

 

[jeewee3000]

Q2 Idle Capacity Costs (Margins will improve in Q3 by $125m to $250m)
I have commented on this topic several times in this thread but now that it was confirmed by Zach let me highlight it again because it is important for understanding how incredible the Q2 profit was in light of this headwind and the profit improvement coming in Q3

When equipment (or an entire factory) is idled (as was Fremont for 40 days in April), there is special accounting required.
The fixed costs during the idle period are expensed immediately and not capitalized (added) to inventory. Usually some of these fixed costs would be on the balance sheet in inventory (work in progress and finished goods vehicles) but in this case it is all expensed immediately.

Here is Zach's comment during the earnings call:
"... automotive gross margin, excluding regulatory credits, reduced sequentially from 20% to 18.7%. This sequential reduction is fully attributed to idle capacity charges and lower operational efficiency due to the various shutdown" (emphasis added).

In my model I computed the impact at about $125m. This amount was the low end of my estimate but it could have been as high as $250m. It all depends on what portion of the Fremont cost structure is fixed. I had assumed 7% but it could be as high as 14%.

Anyhow - going forward with no shutdown at Fremont, we won't see this Idle Capacity charge and we should see margin/profits improve by $125m to $250m in Q3.

As a reference for this Idle Capacity accounting, see PwC's publication (toward the bottom of the page).
Are you ready for your stakeholders to ask about the coronavirus?

EDIT: btw - It would be great to hear some Analysts talk about this one-time downside but of course I am not holding my breathe. It would really put this amazing Qtr in better perspective.

I cannot tell you how much I have learned from your explanations.

My knowledge of accounting is abysmal, therefore I cannot add value to this thread, for which I apologise. Nonetheless, I find this to be the most interesting thread in all of TMC.

Thank you @The Accountant , @FrankSG , @mongo and all others for your contributions over here.

 

[ByeByeJohnny]

I was off as well on the items you outlined above.
I too am stunned about the Tesla Energy revenues. $370m in Q2 vs $293m in Q1.......with the COVID lockdowns throughout April and May, this is an incredible result.
Tesla Energy may finally become the big story!

Could it be that one or two largish projects were recognized in Q2? I seem to remember that when the Australian project was done it had a huge impact on the Energy revenues that quarter, and I seem to remember that happening some other time as well.

Nevertheless, impressive they could do this this quarter. Tesla Energy potential was what made me decide to actually start investing in Tesla so very happy it seems to start growing again.

 

[The Accountant]

Could it be that one or two largish projects were recognized in Q2? I seem to remember that when the Australian project was done it had a huge impact on the Energy revenues that quarter, and I seem to remember that happening some other time as well.

Nevertheless, impressive they could do this this quarter. Tesla Energy potential was what made me decide to actually start investing in Tesla so very happy it seems to start growing again.

Large megapack projects could very well be what drove the growth. This is very difficult to forecast as there is very little information published. I have searched for news of installs hoping some local news station will cover the story but I find very little.
I think there is huge demand for megapacks acting as peaker plants but until now there were contraints on batteries. Perhaps this changes soon.

 

[CorneliusXX]

Large megapack projects could very well be what drove the growth. This is very difficult to forecast as there is very little information published. I have searched for news of installs hoping some local news station will cover the story but I find very little.
I think there is huge demand for megapacks acting as peaker plants but until now there were contraints on batteries. Perhaps this changes soon.

My guess is that individual projects are becoming less newsworthy. On the call last night they said something to the effect that Megapack are being bought by utilities and private projects - which to me sounded like there may just be multiple relatively small scale rather than a couple of large deals defining the quarter.

 

[Doggydogworld]

We may also see less CEO compensation expense ($101 million this time). So that's, what, $200-$300 million to the good side?

Hard to see how it will be less. Q3 should see at least two more tranches accelerated. Plus the 4.5b AAEBITDA tranche will be considered probable since 2 of the last 3 quarters were >4.5b annualized (need 4 straight if I read it correctly).

18.7% vs. 20% gross margin ex-Reg Credit is a 61m difference in Auto COGS (3862m vs. 3801m). So if idle capacity cost was the ONLY reason for the drop from 20% to 18.7% it was a 61m hit. I agree that sounds low. I've previously guessed fixed depreciation was ~175m per quarter (13-14m/week), and that was before adding Model Y equipment. So six weeks of shutdown in Q2 should have cost 100m+ including utilities, etc.

Then again, most cars made in the quarter are sold by EOQ, so I'm not sure if there's that much difference between dropping these fixed costs straight into COGS or capitalizing them into inventory. Does anyone happen to know if Tesla tracks and recognizes COGS by VIN or if they aggregate them and use a LIFO or FIFO type approach?

Could it be that one or two largish projects were recognized in Q2?

Storage jumped a lot from Q1, despite the virus. Utilities are essential services, so I doubt there was any disruption there. They said Megapack was profitable, so I assume it provided the growth. Powerwalls and Powerpacks most likely had negative gross margin because solar historically has good gross margins (30%+). Note that new solar installs probably have lower gross margin/better op margin, but their revenue contribution is small.

 

[dc_h]

Great work again this quarter. The most content dense thread.

Moving on to Q3, Troy has already upgraded Q3 twice, to 145,000 now. He’s only about 42,000 from Shanghai. I think they’ll average closer to 4000 per week, which is about 52,000 and add inventory. Fremont should be close to 100,000, especially with the new 4.5 line for the model Y. I think there were estimates of 600 million in Q3, but that now seems conservative. They could increase R&D, charging stations, but I don’t know how much they can increase plant spending. Texas if moving, that will start adding costs this quarter. If Model Y starts in Q4 in China, it probably won’t be significant, but could add another 10,000 cars for q4. That would put Shanghai over 60,000 in q4 with 30% margins.

thanks again to the great expert guidance. Better then the street and gets better every quarter.

 

[FrankSG]

Q2 Idle Capacity Costs (Margins will improve in Q3 by $125m to $250m)
I have commented on this topic several times in this thread but now that it was confirmed by Zach let me highlight it again because it is important for understanding how incredible the Q2 profit was in light of this headwind and the profit improvement coming in Q3

When equipment (or an entire factory) is idled (as was Fremont for 40 days in April), there is special accounting required.
The fixed costs during the idle period are expensed immediately and not capitalized (added) to inventory. Usually some of these fixed costs would be on the balance sheet in inventory (work in progress and finished goods vehicles) but in this case it is all expensed immediately.

Here is Zach's comment during the earnings call:
"... automotive gross margin, excluding regulatory credits, reduced sequentially from 20% to 18.7%. This sequential reduction is fully attributed to idle capacity charges and lower operational efficiency due to the various shutdown" (emphasis added).

In my model, I computed the impact at about $125m. This amount was the low end of my estimate but it could have been as high as $250m. It all depends on what portion of the Fremont cost structure is fixed. I had assumed 7% but it could be as high as 14%.

Anyhow - going forward with no shutdown at Fremont, we won't see this Idle Capacity charge and we should see margin/profits improve by $125m to $250m in Q3.

As a reference for this Idle Capacity accounting, see PwC's publication (toward the bottom of the page).
Are you ready for your stakeholders to ask about the coronavirus?

EDIT: btw - It would be great to hear some Analysts talk about this one-time downside but of course I am not holding my breathe. It would really put this amazing Qtr in better perspective.

I completely missed this in Zach's comment. But this makes total sense. I had an extremely hard time making sense of ASPs after entering the results into my model today. Wasn't surprised to be off by some amount, but I had a hard time reconciling by how much I was off.

Makes total sense now. Thank you so much for this contribution!

 

[elasalle]

If Q3 does 120+ deliveries, are EV credits required for Gross Profits, or can Q3 be quarter where profits are possible even without the credits?

 

[Buckminster]

Sounds like $700m GAAP income is becoming the baseline for Q3?

 

[The Accountant]

If Q3 does 120+ deliveries, are EV credits required for Gross Profits, or can Q3 be quarter where profits are possible even without the credits?

This is "back of the envelope"
120k deliveries and no credits and salary cuts re-instated.......I get GAAP profit of $70m
140k deliveries and no credits and salary cuts re-instated.......I get GAAP profit of $250m

But we will get Reg Credits....maybe FSD revenue recognition....maybe Deferred Tax Credits and even higher Energy Revenues...
So the numbers I quoted above could be considered the absolute floor.
My guess is that we will see $500m or better. I will have an estimate for Q3 later in August.

 

[Cosmacelf]

Q2 Idle Capacity Costs (Margins will improve in Q3 by $125m to $250m)
I have commented on this topic several times in this thread but now that it was confirmed by Zach let me highlight it again because it is important for understanding how incredible the Q2 profit was in light of this headwind and the profit improvement coming in Q3

When equipment (or an entire factory) is idled (as was Fremont for 40 days in April), there is special accounting required.
The fixed costs during the idle period are expensed immediately and not capitalized (added) to inventory. Usually some of these fixed costs would be on the balance sheet in inventory (work in progress and finished goods vehicles) but in this case it is all expensed immediately.

Here is Zach's comment during the earnings call:
"... automotive gross margin, excluding regulatory credits, reduced sequentially from 20% to 18.7%. This sequential reduction is fully attributed to idle capacity charges and lower operational efficiency due to the various shutdown" (emphasis added).

In my model, I computed the impact at about $125m. This amount was the low end of my estimate but it could have been as high as $250m. It all depends on what portion of the Fremont cost structure is fixed. I had assumed 7% but it could be as high as 14%.

Anyhow - going forward with no shutdown at Fremont, we won't see this Idle Capacity charge and we should see margin/profits improve by $125m to $250m in Q3.

As a reference for this Idle Capacity accounting, see PwC's publication (toward the bottom of the page).
Are you ready for your stakeholders to ask about the coronavirus?

EDIT: btw - It would be great to hear some Analysts talk about this one-time downside but of course I am not holding my breathe. It would really put this amazing Qtr in better perspective.

I’m trying to wrap my head around this. Let’s simplify it for me to better understand.

If I have a $3B factory, 30 year life, and let’s just say we use straight line depreciation, then I would depreciate it by $100m every year and that would go against yearly P/L. If I now idle that factory for a year, don’t I simply do the same $100M depreciation charge? Why would anything change? I mean, in normal times, doesn’t that depreciation expense have to flow to the P/L somehow even if it goes through inventory? Help!

Or are you just talking about charges to the computed automotive gross margin?

 

[Doggydogworld]

I’m trying to wrap my head around this. Let’s simplify it for me to better understand.

If I have a $3B factory, 30 year life, and let’s just say we use straight line depreciation, then I would depreciate it by $100m every year and that would go against yearly P/L. If I now idle that factory for a year, don’t I simply do the same $100M depreciation charge? Why would anything change? I mean, in normal times, doesn’t that depreciation expense have to flow to the P/L somehow even if it goes through inventory? Help!

Or are you just talking about charges to the computed automotive gross margin?

It's just a timing difference. If it goes into inventory some of this quarter's fixed costs will be part of COGS in future quarters.

Does anyone think Zach was being conservative when he said 2020 Reg Credits would be twice 2019? That's 1188m for the year, leaving about 200m for each remaining quarter. Speaking of Reg Credits, Zach said ~600m were in Accounts Receivable. Q2 was 428m, supporting @The Accountant 's view that FCA won't actually pay most of this until after yearend. It's still very weird that Tesla recognized about 4.5k per car (6k ex-China) in 1H but only plans to recognize 1.25k per car (1.7k ex-China) in 2H.

 

[Troy]

Hi, everybody. My current Tesla delivery estimate for Q3 2020 is 145K, up from 142K a few days ago. Details here. I sometimes post my estimates on TMC too but I post all of them on Twitter.

I monitor all the developments regularly. For example, for Model Y, I look at my order tracker spreadsheet here. Orders so far in July are looking good.

Here is my accuracy in the last 4 quarters. The first table shows my final estimates on the last day. The second one shows my early estimates 10-11 days into the quarter. As you can see from the second table, the rumor that my early estimates are always low is not correct. More details related to accuracy and estimates throughout the quarter can be found here.

 

[MP3Mike]

Speaking of Reg Credits, Zach said ~600m were in Accounts Receivable

He said that isn't just ZEV credits, it includes other things like incentives that are paid directly to Tesla. (For example the $2k/car rebate in New York or the $4k/car Colorado credit, if Tesla handles that one.)

 

[Cosmacelf]

It's just a timing difference. If it goes into inventory some of this quarter's fixed costs will be part of COGS in future quarters.

Does anyone think Zach was being conservative when he said 2020 Reg Credits would be twice 2019? That's 1188m for the year, leaving about 200m for each remaining quarter. Speaking of Reg Credits, Zach said ~600m were in Accounts Receivable. Q2 was 428m, supporting @The Accountant 's view that FCA won't actually pay most of this until after yearend. It's still very weird that Tesla recognized about 4.5k per car (6k ex-China) in 1H but only plans to recognize 1.25k per car (1.7k ex-China) in 2H.

Weird, but if allowable, then it allows Tesla to smooth out earnings since, as you (and The Accountant) pointed out, they had this unusual idle fixed capacity charge in 2Q which will get unwound in 2H.

Accounting "tricks"? Maybe, but then they wouldn't have to resort to it if idiots could understand Tesla's business. But they can't, so they dress up each quarter as appropriate and as allowable. On a yearly basis, it makes no difference.

Thanks for the timing explanation.