Near-future quarterly financial projections

[kengchang]

Since we're stuck with reporting GAAP EPS to the SEC, can we examine the effect of the TSLA SP on Elon's CEO Comp expense?

Am I correct that the amnt that Telsa claims in SBC expense varies with the SP at the time the expense is booked? Ie: Tesla must claim the cost of the shares at current market value?

If so, is there a benefit to Tesla to fully expensing Elon's SBC before the next runup ie: back to $900 or even $1,200 per share as some bullish analysts have set their 12-mth price tgt? TIA.

Paging @st_lopes for tax issues.

Cheers!

No, the amount is already predetermined and does not change with current stonk price.

 

[Artful Dodger]

No, the amount is already predetermined and does not change with current stonk price.

Thank-you. I do understand that Elon's exercise price is fixed via the 2018 CEO comp. plan, but that sets the price Elon pays to excercise his options, not the current value of the shares when vested.

My question is whether Tesla has to claim the market price for the shares at the time they are expensed (est'd b4 vesting?) It seems that GAAP rules would favor the latter, since that more closely reflects the dilution effect on shareholders (who would have to pay that price in the open market)

Upon reflection, this should be a relatively straight-forward calculation based on the past expenses claimed, divided by the number of milestones vested (if the data is disclosed).

Which obviously, I have not done.

Cheers!

 

[Doggydogworld]

Thank-you. I do understand that Elon's exercise price is fixed via the 2018 CEO comp. plan, but that sets the price Elon pays to excercise his options, not the current value of the shares when vested.

My question is whether Tesla has to claim the market price for the shares at the time they are expensed (est'd b4 vesting?) It seems that GAAP rules would favor the latter, since that more closely reflects the dilution effect on shareholders (who would have to pay that price in the open market)

Upon reflection, this should be a relatively straight-forward calculation based on the past expenses claimed, divided by the number of milestones vested (if the data is disclosed).

Which obviously, I have not done.

Cheers!

As @kengchang said, the GAAP expense amount is fixed at time of grant. The only question is the timing. @The Accountant has excellent tables showing the expense related to each tranche, the timing of past expenses and his expectation for timing of expenses in the current periods. If you go back and read his comments you'll gain a better understanding of how it works than most analysts have.

 

[st_lopes]

As @kengchang said, the GAAP expense amount is fixed at time of grant. The only question is the timing. @The Accountant has excellent tables showing the expense related to each tranche, the timing of past expenses and his expectation for timing of expenses in the current periods. If you go back and read his comments you'll gain a better understanding of how it works than most analysts have.

The tax deduction they get is based on current value of shares on vesting whereas the GAAP reporting is predetermined (and usually much lower). In other words, their tax assets may continue to increase, as even if they show GAAP profits, their tax filings may show losses due to the difference in stock based compensation reporting.

 

[Doggydogworld]

The tax deduction they get is based on current value of shares on vesting whereas the GAAP reporting is predetermined (and usually much lower). In other words, their tax assets may continue to increase, as even if they show GAAP profits, their tax filings may show losses due to the difference in stock based compensation reporting.

Yes, great point. I did back of envelope math on Elon's 2012 options, which I think he has to exercise next year. Tesla's tax deduction comes to 15+ billion!

 

[Bobfitz1]

Yes, great point. I did back of envelope math on Elon's 2012 options, which I think he has to exercise next year. Tesla's tax deduction comes to 15+ billion!

Would you mind walking us through the math on your envelope? 15+ billion is an incredible number. If Tesla makes a 2022 profit of 1 or 2 billion, do they carry the deduction forward to one or more subsequent years?

 

[Doggydogworld]

Would you mind walking us through the math on your envelope? 15+ billion is an incredible number. If Tesla makes a 2022 profit of 1 or 2 billion, do they carry the deduction forward to one or more subsequent years?

It's a short walk The 10-K says "In August 2012, our Board of Directors granted 26.4 million stock option awards to our CEO....". It later says 9 of the 10 tranches were earned, so 23.76m options. Strike price was around 6 bucks, so it's basically 650 per share of taxable income to Musk and tax deduction to Tesla. Multiplying out gives 15+ billion.

This assumes NSOs, which I'm pretty sure is correct but not explicitly stated on p95 of the 10-K. Also assumes Elon hasn't exercised any yet, which should be true as it generally makes more sense to wait until expiration. And yes, the taxable loss this deduction creates would carry forward to future years, adding to the carry-forwards they've already accumulated. Tesla takes a full valuation allowance against their deferred tax assets on their GAAP balance sheet as they don't expect taxable income any time soon.

 

[The Accountant]

CEO Performance Award
I am expecting the CEO Award to come in at about $63m for Q3 (the lowest since I have been tracking it).
The reason for the lower amount is that I do not expect any new tranches to become "Probable" in Q3.
I am projecting that Tranche 10 becomes Probable in Q4.
This has no impact on non-GAAP EPS but it should add about $0.10 to GAAP EPS

 

[st_lopes]

CEO Performance Award
I am expecting the CEO Award to come in at about $63m for Q3 (the lowest since I have been tracking it).
The reason for the lower amount is that I do not expect any new tranches to become "Probable" in Q3.
I am projecting that Tranche 10 becomes Probable in Q4.
This has no impact on non-GAAP EPS but it should add about $0.10 to GAAP EPS

View attachment 696031

Does that mean you believe that Q3 EBITDA will NOT be $500M higher than Q2? If it is, then we likely hit the annualized $12M target in Q3. While Tesla doesn't disclose their EBITDA calculation, their Operating Income was up $600M between Q1 and Q2 (hence why Tranche 9 became probable). So, I do wonder if the probability of Tranche 10 getting recognized in Q3 may actually be higher than expected. That said, even if it does happen, the pull forward of $106M would still bring us below Q2 stock comp amount.

 

[The Accountant]

Does that mean you believe that Q3 EBITDA will NOT be $500M higher than Q2? If it is, then we likely hit the annualized $12M target in Q3. While Tesla doesn't disclose their EBITDA calculation, their Operating Income was up $600M between Q1 and Q2 (hence why Tranche 9 became probable). So, I do wonder if the probability of Tranche 10 getting recognized in Q3 may actually be higher than expected. That said, even if it does happen, the pull forward of $106M would still bring us below Q2 stock comp amount.

I see what your saying. I have Adj EBITDA at Q3 of 2.964B - so that's about a 12B runrate.
I will have to revisit the timing of Tranche 10.
Thanks

 

[XHabjab]

Since the Bitcoin Charge is entirely an artifact of GAAP accounting methods, shouldn't non-GAAP EPS neccessarily exclude any bitcoin charge?

Bitcoin was over $34.1K at the end of Q2 (an increase over avg purch cost). How is Tesla's cash and digital assets accounted for via non-GAAP rules?

Does Tesla value the asset as per the exchange rate at the end of the quarter?

Cheers!

@st_lopes can probably answer this better, so I will copy him here.
There are no hard and fast rules for Non-GAAP. I believe companies determine it themselves and disclose the definition. I don't think Tesla will remove it from Non-GAAP. Maybe they should as many analysts will.

Tesla will not revalue Bitcoin for the fair value. They will report it at cost (less any impairments). They will disclose the Fair Value in a footnote.

I wanted to ask this earlier but I figured it would be better to let the dust settle from the Q2 report...

The US government officially does not recognize bitcoin (or related crypto currencies) as currency, but they do see them collectively as assets which can increase and decrease in value. If you "buy" something with bitcoin, you need to jump through some tax hoops and calculate cost basis and appreciated value of the disposed asset and pay tax on it etc. etc... So they officially treat it as an asset but not a currency. [And this is the US government, not every government.]

So Tesla is clearly doing a "buy and hold" strategy with Bitcoin here. Why are there impairment charges for this? If they bought real estate, GM shares, art or an olive grove, the value would not be considered until the asset is disposed of. If they held Euros or Canadian dollars, this makes sense. But if they are getting impairment charges on Bitcoin, doesn't this imply that the IRS considers Bitcoin to be a currency?

If this is explained somewhere else, please provide a link and I'll read up on it there.

 

[MP3Mike]

I wanted to ask this earlier but I figured it would be better to let the dust settle from the Q2 report...

The US government officially does not recognize bitcoin (or related crypto currencies) as currency, but they do see them collectively as assets which can increase and decrease in value. If you "buy" something with bitcoin, you need to jump through some tax hoops and calculate cost basis and appreciated value of the disposed asset and pay tax on it etc. etc... So they officially treat it as an asset but not a currency. [And this is the US government, not every government.]

So Tesla is clearly doing a "buy and hold" strategy with Bitcoin here. Why are there impairment charges for this? If they bought real estate, GM shares, art or an olive grove, the value would not be considered until the asset is disposed of. If they held Euros or Canadian dollars, this makes sense. But if they are getting impairment charges on Bitcoin, doesn't this imply that the IRS considers Bitcoin to be a currency?

If this is explained somewhere else, please provide a link and I'll read up on it there.

It is all covered in the Tesla 10-Q reports, like this one: https://www.sec.gov/Archives/edgar/data/1318605/000095017021000524/tsla-20210630.htm

In the first quarter of 2021, we invested an aggregate $1.50 billion in bitcoin and accepted bitcoin as a form of payment for sales of certain of our products in specified regions, subject to applicable laws, and suspended this practice in May 2021. We believe in the long-term potential of digital assets both as an investment and also as a liquid alternative to cash. As with any investment and consistent with how we manage fiat-based cash and cash-equivalent accounts, we may increase or decrease our holdings of digital assets at any time based on the needs of the business and our view of market and environmental conditions. Digital assets are considered indefinite-lived intangible assets under applicable accounting rules. Accordingly, any decrease in their fair values below our carrying values for such assets at any time subsequent to their acquisition will require us to recognize impairment charges, whereas we may make no upward revisions for any market price increases until a sale. For any digital assets held now or in the future, these charges may negatively impact our profitability in the periods in which such impairments occur even if the overall market values of these assets increase. For example, in the six month period ended June 30, 2021, we recorded approximately $50 million of impairment losses resulting from changes to the carrying value of our bitcoin and gains of $128 million on certain sales of bitcoin by us.

(I emphasized the important sentence in there.)

and

During the six months ended June 30, 2021, we purchased an aggregate of $1.50 billion in bitcoin. In addition, during the three months ended March 31, 2021, we accepted bitcoin as a payment for sales of certain of our products in specified regions, subject to applicable laws, and suspended this practice in May 2021. We may in the future restart the practice of transacting in cryptocurrencies ("digital assets") for our products and services. We account for such non-cash consideration at the time we enter into transactions with our customers in accordance with the non-cash consideration guidance included in the Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, based on the then current quoted market prices of the digital assets.

We currently account for all digital assets held as a result of these transactions as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. We have ownership of and control over our digital assets and we may use third-party custodial services to secure it. The digital assets are initially recorded at cost and are subsequently remeasured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition.

We determine the fair value of our digital assets on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that we have determined is the principal market for such assets (Level 1 inputs). We perform an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that our digital assets are impaired. In determining if an impairment has occurred, we consider the lowest market price of one unit of digital asset quoted on the active exchange since acquiring the digital asset. If the then current carrying value of a digital asset exceeds the fair value so determined, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the price determined.

Impairment losses are recognized within Restructuring and other in the consolidated statements of operations in the period in which the impairment is identified. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale(s), at which point they are presented net of any impairment losses for the same digital assets held within Restructuring and other. In determining the gain to be recognized upon sale, we calculate the difference between the sales price and carrying value of the digital assets sold immediately prior to sale.

 

[The Accountant]

I wanted to ask this earlier but I figured it would be better to let the dust settle from the Q2 report...

The US government officially does not recognize bitcoin (or related crypto currencies) as currency, but they do see them collectively as assets which can increase and decrease in value. If you "buy" something with bitcoin, you need to jump through some tax hoops and calculate cost basis and appreciated value of the disposed asset and pay tax on it etc. etc... So they officially treat it as an asset but not a currency. [And this is the US government, not every government.]

So Tesla is clearly doing a "buy and hold" strategy with Bitcoin here. Why are there impairment charges for this? If they bought real estate, GM shares, art or an olive grove, the value would not be considered until the asset is disposed of. If they held Euros or Canadian dollars, this makes sense. But if they are getting impairment charges on Bitcoin, doesn't this imply that the IRS considers Bitcoin to be a currency?

If this is explained somewhere else, please provide a link and I'll read up on it there.

I'm copying @st_lopes in case he wants to add anything.

The accounting for financial statements for US listed companies is dictated by the Financial Accounting Standards Board ("FASB") and not the IRS.
The FASB issues Financial Accounting Standards which help clarify the Generally Accepted Accounting Principles ("GAAP") that Tesla must follow in presenting its Quarterly Financials.

Unfortunately, the FASB has done a poor job in addressing the accounting for Digital Assets like Bitcoin. In fact, they have done very little in this area and as such, companies that invest in Digital Assets have to treat this asset not as a currency or marketable security or fixed asset but rather as an Intangible Asset. Intangible assets are typically assets such as Goodwill, Patents, Trademarks, Customer Lists, etc. Intangible assets must be tested for Impairment periodically and can only be written down in value and not up (unless the asset is sold).

In my opinion (and the opinion of many others), this is not the right accounting for Bitcoin but until more companies start to invest in Digital Assets, I don't see the FASB making changes to the accounting soon.

I believe the IRS treats Bitcoin like it would a marketable security. That is, you don't have a gain or loss until the asset is sold. Impairments are not recognized as a loss for tax purposes.

Hope this helps.

 

[dc_h]

The latest news from China is that Model Y production is now up to 1000 per day, likely a local maximum and not 1000 per day, every day. It also sounds like Model 3 production may decline as more shifts move to Y production. The impact is more car production and higher margin cars being produced. Production for September could be ~40,000, with about 70% Model Y. This shift from 60-70% Model 3 to Model Y could add about 10,000 to ASP and 5% or more to MIC vehicles in general. With input costs rising, but prices and product mix changing to more Y in both Fremont and Shanghai, it seems like there is room for 2-5% margin improvement in Q3. With that boost, I think they would probably look for opportunities to realize expenses and maximize the opportunity to keep the rising profit tide rising in future quarters or use this quarter to leave more inventory in stock and smooth out deliveries a bit.
Anyhow, curious if the product shift has been noted in everyone's models for Q3 and Q4 yet?

 

[The Accountant]

The latest news from China is that Model Y production is now up to 1000 per day, likely a local maximum and not 1000 per day, every day. It also sounds like Model 3 production may decline as more shifts move to Y production. The impact is more car production and higher margin cars being produced. Production for September could be ~40,000, with about 70% Model Y. This shift from 60-70% Model 3 to Model Y could add about 10,000 to ASP and 5% or more to MIC vehicles in general. With input costs rising, but prices and product mix changing to more Y in both Fremont and Shanghai, it seems like there is room for 2-5% margin improvement in Q3. With that boost, I think they would probably look for opportunities to realize expenses and maximize the opportunity to keep the rising profit tide rising in future quarters or use this quarter to leave more inventory in stock and smooth out deliveries a bit.
Anyhow, curious if the product shift has been noted in everyone's models for Q3 and Q4 yet?

I have the shift to Model Y in Q3 and Q4 but I will likely fine tune these numbers as I see more details on deliveries production and chip availability.

 

[The Accountant]

Based on feedback, I have changed my projections for the CEO Award expense.
I have moved the Probability of Tranche 10 from Q4 2021 to Q3 2021,
and moved the Probability of Tranche 11 from Q1 2022 to Q4 2021.
I am now expecting to see a $173m charge in Q3 for the CEO Award.

 

[st_lopes]

Based on feedback, I have changed my projections for the CEO Award expense.
I have moved the Probability of Tranche 10 from Q4 2021 to Q3 2021,
and moved the Probability of Tranche 11 from Q1 2022 to Q4 2021.
I am now expecting to see a $173m charge in Q3 for the CEO Award.

View attachment 702905

I can’t wait to see what the conditions will be for the next CEO stock compensation package

 

[The Accountant]

I can’t wait to see what the conditions will be for the next CEO stock compensation package

Especially the market cap targets.

 

[navguy12]

Especially the market cap targets.

…because the first market cap targets sounded so “impossible“ to attain IMO, I can’t wait to see what will look “impossible“ this time around…

 

[Question]

I saw a post about salaries in Giga Berlin. Those salaries seemed extremely high for manufacturing jobs, and they didn't even include stock based compensation. I assume the situation is similar in Fremont. We don't know exactly which factory and region is making profits but I started to think that does all/majority of Tesla's profits come from MIC cars - especially MIC exports? Profitability skyrocketed at the same time as Giga Shanghai ramped + it would make sense logically. Right now they are exporting those cheaply made Shanghai cars to Europe and selling them at the same price as Fremont cars.

Risk: what happens when Berlin starts to ramp up and Shanghai exports starts to decrease? Are we going to see crash in profit margins or does shipping costs + import tax make up the difference in employee salaries?