Near-future quarterly financial projections

[The Accountant]

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?

You make a very valid point but I gave a short-cut explanation so that non-accountants may undertand better.
Everyone has a different level of accounting knowledge so please don't think I am talking down to you.
I am going to explain this in simple terms not only because Cost Accounting is complex but because other members reading this may not understand accounting principles.

Let use these numbers:
Fremont Q1: Fixed Costs of $300m and 86,000 cars produced = $3,500 fixed costs per car
Fremont Q2: Fixed Costs of $300m and 50,000 cars produced = $6,000 fixed costs per car

Because of the shutdown with only 50,000 cars produced, margins were hurt by $125m.
The fixed costs per car in Q2 is higher by $2,500 ($6,000 - $3,500 = $2,500)
Since cost per car is higher in Q2 vs Q1 - then 50,000 autos at a higher cost of $2,500 = $125m

Once Q3 gets back to 86.000 unit or higher, margins will improve by $125m (as mentioned earlier this could be as high as $250m)

Now...your confusion was valid. I won't do the math here but if Idle Capacity Accounting was not applied, about $88m of the $125m would have been expensed anyway to the P&L as cars were sold but about $37m would have been on the balance sheet with the 15,000 cars remaining in inventory. Tesla uses FIFO (First In - First Out) Method for inventory.

But my main point is that we will see margins improve by $125m to $250m in Q3 as production ramps back up and fixed costs per car decline back to $3,500.

Everyone confused by now? I am!

 

[Cosmacelf]

You make a very valid point but I gave a short-cut explanation so that non-accountants may undertand better.
Everyone has a different level of accounting knowledge so please don't think I am talking down to you.
I am going to explain this in simple terms not only because Cost Accounting is complex but because other members reading this may not understand accounting principles.

Let use these numbers:
Fremont Q1: Fixed Costs of $300m and 86,000 cars produced = $3,500 fixed costs per car
Fremont Q2: Fixed Costs of $300m and 50,000 cars produced = $6,000 fixed costs per car

Because of the shutdown with only 50,000 cars produced, margins were hurt by $125m.
The fixed costs per car in Q2 is higher by $2,500 ($6,000 - $3,500 = $2,500)
Since cost per car is higher in Q2 vs Q1 - then 50,000 autos at a higher cost of $2,500 = $125m

Once Q3 gets back to 86.000 unit or higher, margins will improve by $125m (as mentioned earlier this could be as high as $250m)

Now...your confusion was valid. I won't do the math here but if Idle Capacity Accounting was not applied, about $88m of the $125m would have been expensed anyway to the P&L as cars were sold but about $37m would have been on the balance sheet with the 15,000 cars remaining in inventory. Tesla uses FIFO (First In - First Out) Method for inventory.

But my main point is that we will see margins improve by $125m to $250m in Q3 as production ramps back up and fixed costs per car decline back to $3,500.

Everyone confused by now? I am!

@Doggydogworld's explanation that it is a quarterly "timing difference" worked for me ... because if I try to work through it at your level of detail my brain hurts.

 

[adiggs]

I was way off in a couple of places, but I kind of expected that tbh.

• Energy revenue was almost double what I forecasted. No clue how they pulled off triple solar roof installations and a massive energy storage increase QoQ in the middle of a global pandemic. I'm honestly stunned.
• Much higher credits than I expected.
• Much lower ASPs than I forecasted, even after accounting for my $60M mistake in calculating revenue from FSD sales. Will have to look into this more later, why it was off by this much.
• CEO compensation package. Looks like it might've increased OPEX by as much as $100M. We'll have to wait for the 10-Q to find out the exact number.

My EPS was somehow very close, but that was mostly due to luck

Making many smaller forecasts will frequently generate offsetting errors, yielding a higher level forecast that is more accurate than the individual smaller fc. It's a tendency - not a rule, but that's a well known pattern that leads to being 'lucky'.

And GAAP EPS is what we were all focusing on this quarterly report, if it were the only number we cared about. Excellent result

 

[TNEVol]

@Doggydogworld's explanation that it is a quarterly "timing difference" worked for me ... because if I try to work through it at your level of detail my brain hurts.

I marvel that 2 semesters of cost accounting on the way to law school actually helps even if I don't remember much.

 

[The Accountant]

It's way too early to start publishing Q3 2020 Estimates
.....Ahh what the heck, let's do it anyway.
No matter how you run the numbers, there is no way to come up with a bad quarter.
Below are scenarios for deliveries of 135k, 145k & 155k delivering GAAP income of $400m, $490m & $583m, respectively.
In each scenario, Tesla would have GAAP profit even without Regulatory Credits (assumed at $230m).
The estimates below do not include any upside for additional FSD features released and no assumption for the Deferred Tax Allowance benefit (which I expect to see in either Q3 or Q4).
I may need to adjust my CEO compensation expense as I learn more from the Q2 2020 10Q filing
Of course these are my early estimates and will change as I get updated data and feedback from other members.

 

[The Accountant]

Q3 2020 vs Q3 2019
- Record Deliveries - 145,000
- Record Sales - $8.3B
- Record Operatiing Income - $752m
- Record GAAP Income - $490M
- Impressive Operaing Leverage - Growth of 188%

 

[The Accountant]

I see that my Very Early Q3 Estimate above is up on Twitter already.....I'm fine with that.
In case anyone from Twitter is visiting this thread, below you can find my level of accuracy for Q1 and Q2 2020:

 

[Mo City]

I see that my Very Early Q3 Estimate above is up on Twitter already.....I'm fine with that.
In case anyone from Twitter is visiting this thread, below you can find my level of accuracy for Q1 and Q2 2020:

View attachment 569292

Were you given credit on Twitter by whoever reposted it?

2nd question: Do you have prelims for Q4 and 2021?

 

[The Accountant]

Were you given credit on Twitter by whoever reposted it?

2nd question: Do you have prelims for Q4 and 2021?

Yes - I was given credit for the Q3 estimate on Twitter. Posted by a Twitter account that I enjoy reading (a TSLAQ parady account).
I don't have Q4 or 2021 completed. I usually work one quarter at a time.
@FrankSG has very good estimates for future periods.

 

[graphilwar]

I see that my Very Early Q3 Estimate above is up on Twitter already.....I'm fine with that.
In case anyone from Twitter is visiting this thread, below you can find my level of accuracy for Q1 and Q2 2020:

View attachment 569292

The nice thing is that you’ve been conservative on the bottom line vs. actual. So when I look at your estimate, I have some measure of confidence that the estimate is in the ball park but not wildly too high.

 

[heltok]

I see that my Very Early Q3 Estimate above is up on Twitter already.....I'm fine with that.
In case anyone from Twitter is visiting this thread, below you can find my level of accuracy for Q1 and Q2 2020:

View attachment 569292

Just a small fix, variance is the error squared:
Variance - Wikipedia

 

[The Accountant]

Thanks
I was trying to shorten the title "Actual vs Estimate" to one word. I will use Act vs Est the next time I publish.

 

[CorneliusXX]

Thanks
I was trying to shorten the title "Actual vs Estimate" to one word. I will use Act vs Est the next time I publish.

I like to us "∆" in the headings to denote the difference when I have narrow columns.

 

[heltok]

Thanks
I was trying to shorten the title "Actual vs Estimate" to one word. I will use Act vs Est the next time I publish.

Deviation, difference, error, delta, ∆ also works. Sometimes I can be lazy and use diff even though some computer scientists might get mad at me for doing it! =)

Ok enough off topic, great work! I just worry that difference/deviation/delta of the production and deliveries will be rather large this quarter, it could be a good quarter to unwind the wave. 150k produced and 140k delivered seems plausible to me...

 

[JusRelax]

Deviation, difference, error, delta, ∆ also works. Sometimes I can be lazy and use diff even though some computer scientists might get mad at me for doing it! =)

Ok enough off topic, great work! I just worry that difference/deviation/delta of the production and deliveries will be rather large this quarter, it could be a good quarter to unwind the wave. 150k produced and 140k delivered seems plausible to me...

As far as I understand it (I am not an accountant by any means), this would have a deterimental effect on free cash flow, but not on net income. It should have a slightly positive effect on net income for this quarter if they unwind the wave.

 

[The Accountant]

As far as I understand it (I am not an accountant by any means), this would have a deterimental effect on free cash flow, but not on net income. It should have a slightly positive effect on net income for this quarter if they unwind the wave.

Unwinding the wave has a negative impact on the P&L in the quarter when the unwinding occurs.
For example, to unwind the wave in Q3, Tesla would have to put some September production on ships which would not become a sale until October (Q4). With the wave intact, all September production is delivered in the US resulting in Sept Sales (Q3).
Unwinding the wave is the right thing to do from a cost perspetive (delivery costs bunched up at quarter end is not efficient).
Once Giga Berlin is up and running, the delivery wave will be for the most part over with no impact to the P&L.

 

[heltok]

Also I think it makes sense to always have some inventory of some Performance S/X/3 in every country for people who would rather pay more than wait longer. Right now in Sweden there are zero S/X in inventory:
New & Used Electric Cars | Tesla

 

[mrdoubleb]

Unwinding the wave has a negative impact on the P&L in the quarter when the unwinding occurs.
For example, to unwind the wave in Q3, Tesla would have to put some September production on ships which would not become a sale until October (Q4). With the wave intact, the all September production is delivered in the US resulting in Sept Sales (Q3).
Unwinding the wave is the right thing to do from a cost perspetive (delivery costs bunched up at quarter end is not efiicient).
Once Giga Berlin is up and running, the delivery wave will be for the most part over with no impact to the P&L.

Right. Didn't want to interrupt this exchange but I feel like this was a valid conversation 2 years ago, maybe even a year ago. Tesla just couldn't "afford" this. Now with Shanghai up and running and Berlin a year out, the risk/sacrifices outweigh the benefits of accelerating this by a few quarters.

 

[Thekiwi]

Anyone care to speculate what sort of gain Tesla might be getting in Q3 thanks to the falling USD?

 

[JusRelax]

Anyone care to speculate what sort of gain Tesla might be getting in Q3 thanks to the falling USD?

@JBRR had a lengthy post (attached below) regarding this topic in the main thread. He estimated that it would result in ~$80m.

The USD is weakening substantially. I'm not gonna pretend to be a currency expert but the current US monetary and fiscal policies probably have a thing or two to do with it.

Tesla is exposed to currency fluctuations per their 10K and recent 10Q.

10Q from 2020 Q1:

Interest rate risk is negligible:

Worst case adverse move of 10% results in ~300m$ loss. I'm unsure whether this is computed as a simple 10% gain/weakening of the USD or as individual worst case moves of individual currencies that happen to be good/bad for income. Ie. 10% gain in a currency vs usd where tesla has a net debt and a 10% drop in a currency vs usd where tesla has a net inflow.
Maybe @The Accountant can chime in?

The flipside of that should obv be that a favorable 10% move results in ~300m$ of income. So worth a glance.

it seems to me that on average tesla should gain positive income from dollar weakness unless the timing with EUR and CNY debt facilities has been bad. But we would expect bigger debts to be currency hedged, no?
While revenue streams are less likely to be hedged.

Dollar index DXY Q1 started 96.442 and ended 99,048. 2.7% strengthening.

In Q1 strengthening translated into a 54m$ loss.

Dollar index, DXY started Q2 at 99.048 and ended at 97.391. 2.2% weakening.

Will have to wait for 10Q to confirm whether this weakening translates into an income gain. VERY simple prediction is that it should have translated into a ~45m$ gain.

I started trying to back out individual currency fluctuations in the quarter but ... you know... too much work.

So how is Q3 panning out?

Started at DXY 97.196 and currently sitting at 93.928. a 3.4% weakening.
So, with my r/wallstreetbets level of due diligence I'm predicting this translates into a ~80m$ gain if this level holds through the quarter.

Above is as close as we can come to a garbage in, garbage out analysis. But it's at least a framework that's useful for thinking about how USD movements affects Teslas Q3.