Near-future quarterly financial projections

[st_lopes]

Deferred Tax Valuation Allowance - My Thoughts
@generalenthu - in response to your question:

Background

• When a company incurs a pre-tax loss for the year, they can typically record a tax benefit (income) as these pre-tax losses will offset pre-tax income in the future (or carryback to prior profitable years).
• In order to recognize this tax benefit, the company must conclude that it is "more likely than not" that they will have pre-tax income in the future.
• Like most start-ups, Tesla was not able to conclude that they would be profitable in the future (not enough evidence to convince their auditors PwC).
• The tax benefit from 2004-2019 has accumulated to $1,846m (see Net Operating Losses in the table below from 2019 10K)
• Since Tesla cannot conclude that it is more likely than not that they will have taxable income in the future, this benefit has been fully reserved (see the $1,956m in the table below).

When will Tesla Recognize the Tax Benefit to Income?

• Once Tesla can conclude that it is more likely than not that future taxable income will be likely, they will recognize all or part of the $1,846m to income.
• I believe that most (if not all) of the Net Operating Losses relate to the US results. That is, Tesla has been profitable outside of the US and the losses are on the US tax returns. So it is not only important that they are profitable, but profitable in the US.
• Also GAAP Income is different than Tax Income. You can have US GAAP Income and a US Tax Loss in the same year driven by higher expenses on the US Tax Return (due to accelerated depreciation and higher stock compensation costs - stock options are expensed at FMV over strike price at exercise date for the Tax Return and for GAAP it is determined at grant date using the Black-Scholes model).
• So once, Tesla can conclude it is "more likely than not that they will have US taxable income", we will see a portion or all of the $1,846 come to the P&L.
• My guess is that we will see the benefit arrive in the P&L in Q4 2020 but if we don't, I am pretty confident we will see it in Q1 2021.

Note: This is a complex topic and I don't claim to be an expert on the topic of Deferred Tax Valuation Allowances but I do understand the accounting concept. By publishing my thoughts here, perhaps we can crowd-source our way to the right consensus. I appreciate any challenges or supporting comments.
View attachment 602054

I entirely agree with your estimate on timing and your assertions around needing to be US Tax profitable (as opposed to globally profitable). Pre-US Tax Reform they may have already released the VA, given the notion of global consolidation of taxable income for US resident entities. After all, Q3 was already sufficiently EBIT profitable to soak up a chunk of these losses.

However, with the move to a semi-territorial tax system (absent BEAT and GILTI) the acceleration of revenue (and profit) being recognized in other jurisdictions would impact timing of the release.

Profitability solely in the US has become a far more significant factor. That said, with majority of production still coming from Fremont and Texas coming online in the near future, the facts are definitely stacking towards release of the VA being imminent.

It would have been a nice surprise to see it in Q3, but releasing a VA is more likely to occur as part of year end book close procedures. So, I would agree that Q4 2020 is most likely.

 

[ByeByeJohnny]

I don't think I want to spend the time to find out if I'm smart enough to understand this DTA thing. But for a real life effect does this mean that the first $1,8 billions of US profit for Tesla gets cancelled out by these prior losses and there is no tax to pay?

I'm guessing it's probably more complicated than so.

 

[Doggydogworld]

• Also GAAP Income is different than Tax Income. You can have US GAAP Income and a US Tax Loss in the same year driven by higher expenses on the US Tax Return (due to accelerated depreciation and higher stock compensation costs - stock options are expensed at FMV over strike price at exercise date for the Tax Return and for GAAP it is determined at grant date using the Black-Scholes model).

Elon got ~27m options (split-adjusted) in his 2009 comp plan and another ~24m in his 2012 plan. The 2009s expired on 12/31/19 and the 2012s will expire in August 2022. People usually wait until the last minute to exercise NSOs (some play tax games with ISOs). If Elon exercised his 2009s last year that'd be almost $10b in taxable expense. And if he still has his 2012s that's another almost-10b coming before Aug22.

But for a real life effect does this mean that the first $1,8 billion of US profit Tesla gets cancelled out by these prior losses and there is no tax to pay?

As I understand it the DTA offsets the first 1.8b of US income taxes. So it's more like 5b of taxable income.

The GAAP accounting is the complicated part.

 

[st_lopes]

I don't think I want to spend the time to find out if I'm smart enough to understand this DMA thing. But for a real life effect does this mean that the first $1,8 billion of US profit Tesla gets cancelled out by these prior losses and there is no tax to pay?

I'm guessing it's probably more complicated than so.

That’s essentially what it means.

 

[st_lopes]

That’s essentially what it means.

Wanted to edit to clarify, but got to it too late... @Doggydogworld has it right, ~1.9B of cash tax is saved, so assuming a 25% combined federal/state rate, that would be the first ~7.6B of profit would be tax free.

Edit: Loss pools may vary by state, so entirely possible that the effective tax rate is closer to 28% with California in the mix.

 

[st_lopes]

CEO Performance Award and Implications to Q3 2020

View attachment 587383

Tranches 2 & 3
In Q3 2020, Elon will have achieved tranches 2 & 3 of the CEO Award. This is highlighted in green on the schedule. As you can see, it will impact the Q3 P&L by $111m and $130m for tranches 2 & 3, respectively.

Tranche 4
For tranche 4 to be achieved, the market cap needs to reach $250b (the operational milestone of $3b EBITDA has already been achieved). If TSLA’s share price averages $406 from now until Sept 30, it will bring the 6-month average to $250b…earning Elon Tranche 4. This would mean that the $122m (in yellow) would be accelerated into Q3. I now suspect that the $5b cap raise was done to tap the brakes on the share price to avoid another large “Elon” charge to Q3. The CEO Award charge in Q3 is estimated at $260m. If tranche 4 is earned, then the total CEO Award charge would increase to $382m.

Tranche 6
Tranche 6 is currently deemed “not probable”. If Tesla changes its assessment to “probable”, I estimate a catch-up charge in Q3 of about $75m. However, to deem it probable, we would have to conclude that the average market cap of $350b is probable (this is likely) and one additional Operational Milestone is now probable (a 6th milestone). My guess is the $6b EBITDA would be the milestone deemed probable if you had to pick one. Here is an interesting consequence to this: if $6b EBITDA is probable, then it is “more likely than not” that Tesla will have taxable income thereby releasing some of the Deferred Tax Valuation Allowance. Thus, if tranche 6 is deemed probable, we will see a $75m charge but offsetting this would be a tax benefit from reversal of a portion of the Tax Allowance.

Many thanks to @Doggydogworld & @Zhelko Dimic who have provided me with some accounting insight for the CEO Performance Award.

From Q3 10-Q

 

[kengchang]

In October 2020, the market capitalization milestone of $250.0 billion was achieved, and the operational milestone of annualized Adjusted EBITDA of $4.5 billion will be achieved as of the date of issuance of this Quarterly Report on Form 10-Q. Accordingly, the fourth tranche of the 2018 CEO Performance Award will vest upon certification by the Board of Directors that such milestones have been achieved. Therefore, we expect that the remaining unamortized expense of $122 million associated with the fourth market capitalization milestone period, which was previously expected to be recognized ratably in future quarters through the third quarter of 2023 as determined on the grant date, will be accelerated into the fourth quarter of 2020.

As of September 30, 2020, we had $354 million of total unrecognized stock-based compensation expense for the operational milestones that were considered either probable of achievement or achieved but not yet certified, which will be recognized over a weighted-average period of 2.4 years. As of September 30, 2020, we had unrecognized stock-based compensation expense of $888 million for the operational milestones that were considered not probable of achievement. For the three and nine months ended September 30, 2020, we recorded stock-based compensation expense of $338 million and $571 million, respectively, related to the 2018 CEO Performance Award, and $56 million and $167 million, respectively, for the same periods in 2019.

@The Accountant @Doggydogworld

$282 million recognized in Q3 for CEO Award

So will recognize $122 million in Q4 to catch up.
Targeting $354 million over 2.4 years (Does this include the $122 million in Q4?)
$888 million left in total? (Including the $354 million?)

Income Taxes There are transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. As of September 30, 2020 and December 31, 2019, the aggregate balances of our gross unrecognized tax benefits were $264 million and $273 million, respectively, of which $239 million and $247 million, respectively, would not give rise to changes in our effective tax rate since these tax benefits would increase a deferred tax asset that is currently fully offset by a valuation allowance.

We realized no income tax benefit from stock option exercises in each of the periods presented due to cumulative losses and valuation allowances. As of September 30, 2020, we had $2.91 billion of total unrecognized stock-based compensation expense related to non-performance awards, which will be recognized over a weighted-average period of 2.7 years.

Does this mean valuation allowance will be recognized over 2.7 years?

 

[Boomer19]

what is the estimated LT % impact of elon’s compensation package
...trying to figure out if, like zev credits, why such a disproportionate amount of focus and time put on those...
rather than R&D (and it’s ROI), footprint expansion, etc, and collective effects on margins
or are they more relevant than previously thought

 

[The Accountant]

$282 million recognized in Q3 for CEO Award

So will recognize $122 million in Q4 to catch up.
Targeting $354 million over 2.4 years (Does this include the $122 million in Q4?)
$888 million left in total? (Including the $354 million?)

The CEO Award total for Q3 was $337m (see the box below outlined in red). In addition to the catch-up amount of $282m, there was the regular quarterly charges expensed (the catchup was incremental).

If no other tranches are deemed probable, the the CEO award for Q4 would be about $138m (see table below).
However, I anticipate that Tranche 7 may become probable and another catch up adjustment would be needed.
I will show this in another post.

 

[The Accountant]

@kengchang

I think it is likely that Tranche 7 gets deemed as Probable in Q4 which would require a catch up entry.
Adjusted EBITDA was $1.8b in Q3 and I expect it to be about $2.2b in Q4. I see an annual Adjusted EBITDA of $8b as probable (a milestone that is considered not probable at the moment).
If this happens, we would see an additional $73m charge in Q4 (see red box below) bringing the CEO award for Q4 to a total of $211m.

 

[Thekiwi]

FYI:

 

[Stretch2727]

So any estimates for Q4?

At some point we get the deferred tax valuation which I don't think I have heard mentioned from the analysts. Maybe a complete surprise to the street.

 

[bkp_duke]

So any estimates for Q4?

At some point we get the deferred tax valuation which I don't think I have heard mentioned from the analysts. Maybe a complete surprise to the street.

Just my thoughts, but I would expect the "decision making process" revolves around claiming them in Q4, which will probably be a blow-out quarter regardless, vs. holding onto them to use in Q1, which is typically Tesla's weakest quarter. 3rd option, I believe, is that Tesla could split them and use them at more than just one time, but I'm not an accountant.

 

[hobbes]

Just found this twitter thread with detailed Tesla financial predictions, kind of fits here: https://twitter.com/ICannot_Enough/status/1322888006794137600

Didn´t look a the details as I am not into accounting myself, but maybe it is interesting for the experts here. Twitter feed says he has done predictions there before, so maybe you know him already.

 

[Stretch2727]

Just found this twitter thread with detailed Tesla financial predictions, kind of fits here: https://twitter.com/ICannot_Enough/status/1322888006794137600

Didn´t look a the details as I am not into accounting myself, but maybe it is interesting for the experts here. Twitter feed says he has done predictions there before, so maybe you know him already.

Looks like he has the deferred tax valuation in Q4. The interest, tax, depreciation, line is a negative charge for q4 which is positive income.

$6-8 GAAP income for 2021 puts TSLA at a 50-65x forward PE ratio which is a totally reasonable valuation.

 

[The Accountant]

So any estimates for Q4?

At some point we get the deferred tax valuation which I don't think I have heard mentioned from the analysts. Maybe a complete surprise to the street.

Here is my very preliminary estimate for Q4. These will change as I get more information throughout the Qtr but I am providing them now to show how explosive these results will be.
Please note:

• I have below 170k and 181.5k delivery scenarios (the 181.5k gets us to 500k for the year)
• I have not included any Deferred Tax Valaution Allowance release. I will likely add this to my final forecast and should amount to about a $1.4B to $1.6B benefit
• There is also the possibility for Revenue Recognition of deferred FSD revenues perhaps as high as $700m to $800m if the current FSD beta gets released to all FSD owners this quarter.
• Note that even without the Tax Benefit and FSD Deferred Revenue recognition (mentioned above), Tesla should show Revenues of $10.4B to 10.9B this quarter with GAAP profits of $700m-$800m and non-GAAP profits of $1.2B.

 

[mrdoubleb]

Here is my very preliminary estimate for Q4. These will change as I get more information throughout the Qtr but I am providing them now to show how explosive these results will be.
Please note:

• I have below 170k and 181.5k delivery scenarios (the 181.5k gets us to 500k for the year)
• I have not included any Deferred Tax Valaution Allowance release. I will likely add this to my final forecast and should amount to about a $1.4B to $1.6B benefit
• There is also the possibility for Revenue Recognition of deferred FSD revenues perhaps as high as $700m to $800m if the current FSD beta gets released to all FSD owners this quarter.
• Note that even without the Tax Benefit and FSD Deferred Revenue recognition (mentioned above), Tesla should show Revenues of $10.4B to 10.9B this quarter with GAAP profits of $700m-$800m and non-GAAP profits of $1.2B.

View attachment 604662

Thanks for adding in a low case scenario. With a number of EU countries announcing various levels of lockdown, I am starting to get a little concerned deliveries over here may come in below expectation this quarter. Of course, if the lockdowns do indeed end by December, Tesla can make-up some of that, but at some point they will reach their delivery capacity per day. (Of course, if some of that slips to Q1, that will only cerate a stronger Q1, so...).

 

[Boomer19]

Here is my very preliminary estimate for Q4. These will change as I get more information throughout the Qtr but I am providing them now to show how explosive these results will be.
Please note:

• I have below 170k and 181.5k delivery scenarios (the 181.5k gets us to 500k for the year)
• I have not included any Deferred Tax Valaution Allowance release. I will likely add this to my final forecast and should amount to about a $1.4B to $1.6B benefit
• There is also the possibility for Revenue Recognition of deferred FSD revenues perhaps as high as $700m to $800m if the current FSD beta gets released to all FSD owners this quarter.
• Note that even without the Tax Benefit and FSD Deferred Revenue recognition (mentioned above), Tesla should show Revenues of $10.4B to 10.9B this quarter with GAAP profits of $700m-$800m and non-GAAP profits of $1.2B.

View attachment 604662

devils advocate
why are the cost of revenues in your model less than in q3 '20? (EDIT: oops, they arent i was looking at wrong data...sorry!!)

....but the rest would be great to hear advice about....

also, how do we gross proft over 1.2b when they guided to increase in capex?
i'd expect the gross profit figure to be less than 1b


if i am super conservative, id still expect the bottom line numbers to be decent
say if they only did 160k cars (as @mrdoubleb voiced concern)...its still

~10% increase over q3,
assume same 10% increase in revs across board
~8b auto (7.3 q3 + .73)
9.5b total rev (8.7q3 + .87)

cost of revs
7.4b (6.71q3 + ..671)
2.1b gross profit

opex
1.5b (1.254b q3 * 1.2 - 20% increase in opex to be safe)

.6b net inc...

also, probably horribly dumb question..
cash flow statement has capex figure..
but statement of operations has opex figure...
so is capex hidden within the cost of revs on the stmt of ops? or a separate item not to be intermingled with stmt of ops?
meaning does my back napkin math above contain capex?

if not, even increase in capex of .5b still leaves us net .1b positive
in a quarter where we miss 500k by ~20k vehicles, experience only 10% sales increase, 20% cost increase, and large increase capex, following a quarter (q3) that was already 84% increase over q2 capex

we're getting to a point where you really have to start assuming the worst just to show elons 100-200mm profit here and there while stressing aggressive reinvestment in growth

bottom line, q4 should be very good, even if they dont hit 500k deliveries

 

[Thekiwi]

devils advocate
why are the cost of revenues in your model less than in q3 '20? (EDIT: oops, they arent i was looking at wrong data...sorry!!)

....but the rest would be great to hear advice about....

also, how do we gross proft over 1.2b when they guided to increase in capex?
i'd expect the gross profit figure to be less than 1b


if i am super conservative, id still expect the bottom line numbers to be decent
say if they only did 160k cars (as @mrdoubleb voiced concern)...its still

~10% increase over q3,
assume same 10% increase in revs across board
~8b auto (7.3 q3 + .73)
9.5b total rev (8.7q3 + .87)

cost of revs
7.4b (6.71q3 + ..671)
2.1b gross profit

opex
1.5b (1.254b q3 * 1.2 - 20% increase in opex to be safe)

.6b net inc...

also, probably horribly dumb question..
cash flow statement has capex figure..
but statement of operations has opex figure...
so is capex hidden within the cost of revs on the stmt of ops? or a separate item not to be intermingled with stmt of ops?
meaning does my back napkin math above contain capex?

if not, even increase in capex of .5b still leaves us net .1b positive
in a quarter where we miss 500k by ~20k vehicles, experience only 10% sales increase, 20% cost increase, and large increase capex, following a quarter (q3) that was already 84% increase over q2 capex

we're getting to a point where you really have to start assuming the worst just to show elons 100-200mm profit here and there while stressing aggressive reinvestment in growth

bottom line, q4 should be very good, even if they dont hit 500k deliveries

Others will no doubt reply with much more knowledge than I - but from a simplistic level: Most CapEx spending is turning cash into assets so doesn't result in a "loss" that shows up on the income statement.

For example: if you spend $1 Billion on a new factory, you end up with $1 Billion less cash, and add a factory worth $1 Billion to your assets.

 

[Beltsbear]

Others will no doubt reply with much more knowledge than I - but from a simplistic level: Most CapEx spending is turning cash into assets so doesn't result in a "loss" that shows up on the income statement.

For example: if you spend $1 Billion on a new factory, you end up with $1 Billion less cash, and add a factory worth $1 Billion to your assets.

Even better when Tesla does it, as they do it very efficiently.