Near-future quarterly financial projections

[Question]

Q1 we have two new factories opening at the same time. As far as I know, Tesla must account depreciation from these starting Q1 and both factories build very little amount of cars (only few thousand). There is full staff and depreciation costs but output is only 5% of full capacity. I'm not a pro in accounting & finance but this looks like net loss for at least in Q1. How much this loss could be? I don't understand how everyone has higher Q1 eps estimate than 2021 Q4 eps estimate.

Q4 there will be no costs from Berlin and Texas at all because they don't deliver anything.

 

[petit_bateau]

Energy generation and storage generated $806m of revenue 3Q21, just $3m gross profit.

View attachment 744679

I've been looking at this a little more closely myself.

The energy and the services cups are both half full and half empty.

The EnergyGen+Storage line and the Services+Other line have both been drags on profit on many quarters. With the Services & other line item it seems to be methodically moving into becoming a sustained profit centre. Whilst we know the intent is for it not to become a significant profit-maker in the near term, at least it would no longer be a drag and that in turn means it will hopefully get a bit more love. The Energy line item is rather more hit-and-miss, but again my sense is that it will reach the necessary scale during 2022 to become structurally profitable. My own forecasts are somewhat cautious in terms of the profitability aspect. However I think that in profitability terms they may surprise to the upside on these items, but the actual revenue volumes may be lower than I would like to see.

Anyway here is my latest view on these:

 

[CorneliusXX]

I've been looking at this a little more closely myself.

The energy and the services cups are both half full and half empty.

The EnergyGen+Storage line and the Services+Other line have both been drags on profit on many quarters. With the Services & other line item it seems to be methodically moving into becoming a sustained profit centre. Whilst we know the intent is for it not to become a significant profit-maker in the near term, at least it would no longer be a drag and that in turn means it will hopefully get a bit more love. The Energy line item is rather more hit-and-miss, but again my sense is that it will reach the necessary scale during 2022 to become structurally profitable. My own forecasts are somewhat cautious in terms of the profitability aspect. However I think that in profitability terms they may surprise to the upside on these items, but the actual revenue volumes may be lower than I would like to see.

Anyway here is my latest view on these:

View attachment 747834

My understanding of the services line is that it contains profits on sale of second hand vehicles that are traded in or come off lease. While prices of second hand vehicles remain high I'd expect service profitability to improve, however if new vehicle supply rebounds and we see second hand vehicle prices returns to longer term averages then we may see a reversal of this profitability. I'm not sure we can confirm that the core service (i.e. maintenance and repairs) has become structurally more profitable.

That said - there doesn't appear to be any abatement in the high second hand prices at this stage, so we might well see continued profits for several quarters to come.

 

[petit_bateau]

My understanding of the services line is that it contains profits on sale of second hand vehicles that are traded in or come off lease. While prices of second hand vehicles remain high I'd expect service profitability to improve, however if new vehicle supply rebounds and we see second hand vehicle prices returns to longer term averages then we may see a reversal of this profitability. I'm not sure we can confirm that the core service (i.e. maintenance and repairs) has become structurally more profitable.

That said - there doesn't appear to be any abatement in the high second hand prices at this stage, so we might well see continued profits for several quarters to come.

Thanks. I hadn't considered that aspect. The factors that I had considered to be the primary drivers of the improving profitability trend are :

1) more cars moving out of warranty and hence paying more for servicing;
2) better utilisation of the maintenance locations & mobiles;
3) the % of lifetime free charging vehicles declining as a % of the fleet;
4) the slow but steady improvement in utilisation of chargers (based on vehicles/connector as a proxy for energy/connector);

I wonder to what extent your suggestion is contributing ? In any case I guess Tesla can drive resale prices up by throwing in warranty, freecharging quotas, FSD, and various other software unlocks.

 

[mongo]

Q1 we have two new factories opening at the same time. As far as I know, Tesla must account depreciation from these starting Q1 and both factories build very little amount of cars (only few thousand). There is full staff and depreciation costs but output is only 5% of full capacity. I'm not a pro in accounting & finance but this looks like net loss for at least in Q1. How much this loss could be? I don't understand how everyone has higher Q1 eps estimate than 2021 Q4 eps estimate.

Q4 there will be no costs from Berlin and Texas at all because they don't deliver anything.

@The Accountant is better at this stuff, but here's a quick PoVv
Tesla had over a billion in profit Q2 and Q3 (and likely Q4), I'm not seeing how the vehicle ramping could generate a loss that size.
Look at the profitable Q1 2020 deck to see the impact Shanghai ramp up had on financials. Cash flow took a hit, but that is distinct from profitability.
https://tesla-cdn.thron.com/static/HZTKGL_TSLA_Update_Letter_2020-1Q_VGVL6F.pdf

 

[The Accountant]

Q1 we have two new factories opening at the same time. As far as I know, Tesla must account depreciation from these starting Q1 and both factories build very little amount of cars (only few thousand). There is full staff and depreciation costs but output is only 5% of full capacity. I'm not a pro in accounting & finance but this looks like net loss for at least in Q1. How much this loss could be? I don't understand how everyone has higher Q1 eps estimate than 2021 Q4 eps estimate.

Q4 there will be no costs from Berlin and Texas at all because they don't deliver anything.

Mongo made the point already but I will add some more numbers to demonstrate.
In the chart below you can see that in Q4 2019, Fremont had margins of 20.9%. Once, Shanghai came on board in Q1 2020, margins only dropped to 20% and some of this was due to a margin drop at Fremont with the Model Y ramp and as production on Models 3,S &X dropped due to COVID. I estimated that Shanghai started with 17% margins.
You may ask how can a new site have positive margins? Several reasons:
- Depreciation only starts when the equipment is placed in service. Not all equipment are placed in service initially.
- Depreciation for tooling is done based on units produced. Less units means less depreciation
- Staffing is usually on board to match production. Likely only one shift of line workers are hired with the 2nd shift coming on board to train throughout the following months.
- Many fixed costs have variable elements to them despite being classified as "fixed". As an example, if the site will eventually need 40 security personnel, they may only have on board 20 at launch.
- Labor costs are much lower in Shanghai than at Fremont

Now for Q4 2021 vs Q1 2022, I am estimating a slight margin decrease from 29.4% to 29.1%. Keep in mind that Berlin/Austin will only account for 9% of the deliveries in Q1 2022. When Shanghai launched it accounted for 18% of deliveries in Q1 2020. We should see better margins in Fremont as price increases start to come through in Q1 2022.
Although I believe Shanghai had 17% margin at launch, I assume 10% margin for Berlin/Austin as labor costs will be higher than Shanghai and I understand that there will be higher tech equipment installed which could create some inefficiencies initially.

We may get more information from Zach on the Q4 earnings call and I will adjust my numbers accordingly.

* Auto margins excluding regulatory credits

 

[mongo]

Mongo made the point already but I will add some more numbers to demonstrate.
In the chart below you can see that in Q4 2019, Fremont had margins of 20.9%. Once, Shanghai came on board in Q1 2020, margins only dropped to 20% and some of this was due to a margin drop at Fremont with the Model Y ramp and as production on Models 3,S &X dropped due to COVID. I estimated that Shanghai started with 17% margins.
You may ask how can a new site have positive margins? Several reasons:
- Depreciation only starts when the equipment is placed in service. Not all equipment are placed in service initially.
- Depreciation for tooling is done based on units produced. Less units means less depreciation
- Staffing is usually on board to match production. Likely only one shift of line workers are hired with the 2nd shift coming on board to train throughout the following months.
- Many fixed costs have variable elements to them despite being classified as "fixed". As an example, if the site will eventually need 40 security personnel, they may only have on board 20 at launch.
- Labor costs are much lower in Shanghai than at Fremont

View attachment 747855

Now for Q4 2021 vs Q1 2022, I am estimating a slight margin decrease from 29.4% to 29.1%. Keep in mind that Berlin/Austin will only account for 9% of the deliveries in Q1 2022. When Shanghai launched it accounted for 18% of deliveries in Q1 2020. We should see better margins in Fremont as price increases start to come through in Q1 2022.
Although I believe Shanghai had 17% margin at launch, I assume 10% margin for Berlin/Austin as labor costs will be higher than Shanghai and I understand that there will be higher tech equipment installed which could create some inefficiencies initially.

We may get more information from Zach on the Q4 earnings call and I will adjust my numbers accordingly.

View attachment 747862
* Auto margins excluding regulatory credits

Ouch, that GM is painful because if Tesla holds onto 30% margin for 3 more quarters (Q4n Q1, Q2), Elon would be awarded the final 2012 CEO Plan tranche (at the latest time possible).
Of course, Elon being Elon, he's not going to hurt the company's growth to achieve this, nor game the system by buying an over optioned (platinum rims for x Million) car.

 

[The Accountant]

Ouch, that GM is painful because if Tesla holds onto 30% margin for 3 more quarters (Q4n Q1, Q2), Elon would be awarded the final 2012 CEO Plan tranche (at the latest time possible).
Of course, Elon being Elon, he's not going to hurt the company's growth to achieve this, nor game the system by buying an over optioned (platinum rims for x Million) car.

My margins excluded regulatory credits. I believe Tesla can reach 30% with the credits. Not sure how margins for the CEO award is defined.

 

[Doggydogworld]

1) more cars moving out of warranty and hence paying more for servicing;

Warranty repairs are charged against the reserve, they are not an expense on the income statement.

2) better utilisation of the maintenance locations & mobiles;

Mobiles should scale with need and always be pretty fully utilized. More locations to reduce travel times will help. Fixed sites should benefit from scale. The small store/SC near me didn't have much service (or sales) action initially and had to be a cost drag.

3) the % of lifetime free charging vehicles declining as a % of the fleet;

Again, this is charged to a reserve so doesn't hit P&L.

Look at the profitable Q1 2020 deck to see the impact Shanghai ramp up had on financials.

Shanghai Phase I is not applicable, IMHO. It was some kind of freebie deal. Tesla never answer questions about Shanghai capex and I never saw the building, equipment or even tooling hit PP&E in any meaningful way. If Berlin and Austin both go into service in Q1 I'd guess ~150m of excess depreciation and maybe ~50m of excess labor. Maybe a 150 bpp hit to Auto Gross Margin?

 

[StarFoxisDown!]

Mongo made the point already but I will add some more numbers to demonstrate.
In the chart below you can see that in Q4 2019, Fremont had margins of 20.9%. Once, Shanghai came on board in Q1 2020, margins only dropped to 20% and some of this was due to a margin drop at Fremont with the Model Y ramp and as production on Models 3,S &X dropped due to COVID. I estimated that Shanghai started with 17% margins.
You may ask how can a new site have positive margins? Several reasons:
- Depreciation only starts when the equipment is placed in service. Not all equipment are placed in service initially.
- Depreciation for tooling is done based on units produced. Less units means less depreciation
- Staffing is usually on board to match production. Likely only one shift of line workers are hired with the 2nd shift coming on board to train throughout the following months.
- Many fixed costs have variable elements to them despite being classified as "fixed". As an example, if the site will eventually need 40 security personnel, they may only have on board 20 at launch.
- Labor costs are much lower in Shanghai than at Fremont

View attachment 747855

Now for Q4 2021 vs Q1 2022, I am estimating a slight margin decrease from 29.4% to 29.1%. Keep in mind that Berlin/Austin will only account for 9% of the deliveries in Q1 2022. When Shanghai launched it accounted for 18% of deliveries in Q1 2020. We should see better margins in Fremont as price increases start to come through in Q1 2022.
Although I believe Shanghai had 17% margin at launch, I assume 10% margin for Berlin/Austin as labor costs will be higher than Shanghai and I understand that there will be higher tech equipment installed which could create some inefficiencies initially.

We may get more information from Zach on the Q4 earnings call and I will adjust my numbers accordingly.

View attachment 747862
* Auto margins excluding regulatory credits

I think the combination of further S/X production ramp, more of the US price hikes actually working their way into the cars sold, and further expansion out of Shanghai will only cause margins to stagnate, not drop.

I still expect operational margin to expand though

 

[heltok]

Q1 we have two new factories opening at the same time. As far as I know, Tesla must account depreciation from these starting Q1 and both factories build very little amount of cars (only few thousand). There is full staff and depreciation costs but output is only 5% of full capacity. I'm not a pro in accounting & finance but this looks like net loss for at least in Q1. How much this loss could be? I don't understand how everyone has higher Q1 eps estimate than 2021 Q4 eps estimate.

Q4 there will be no costs from Berlin and Texas at all because they don't deliver anything.

FSD, deferred tax revenue, higher prices for same car, less semiconductor drama, more S/X in the mix. Plus what the other people wrote about depreciating being per car.

 

[chiller]

Although I believe Shanghai had 17% margin at launch, I assume 10% margin for Berlin/Austin as labor costs will be higher than Shanghai and I understand that there will be higher tech equipment installed which could create some inefficiencies initially.

Have you considered the effect of avoiding the 10% import tax for the EU countries? That might offset some (or all?) of those factors.

 

[UkNorthampton]

Have you considered the effect of avoiding the 10% import tax for the EU countries? That might offset some (or all?) of those factors.

On phone, so hard to refer, but from memory someone on TMC shipping channel worked out Hyundai glovis deal means around 1700 USD shipping cost per car.

Also if European prices come down, might compound as general taxes as percentage of the higher import tax prices or crossing over luxury tax/subsidy boundaries. Could be a few positives, depending on individual country tax/subsidy regimes. Tesla will send supply more heavily to where they can get most effect

Edit: @petit_bateau mentioned $600/car, with higher volumes from China - 700k. Mentions some possible interpretations as this seems VERY HIGH volume. Wiki - Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable

 

[The Accountant]

Have you considered the effect of avoiding the 10% import tax for the EU countries? That might offset some (or all?) of those factors.

I currently have a working model for Q1 through Q4 of 2022 and have not factored this favorable impact. Thanks for pointing it out. I will investigate further and apply changes to my model as appropriate.

 

[The Accountant]

I think the combination of further S/X production ramp, more of the US price hikes actually working their way into the cars sold, and further expansion out of Shanghai will only cause margins to stagnate, not drop.

I still expect operational margin to expand though

You may be right. I originally had a gross profit margin increase for Q1 2022 but recently changed it to a slight decrease as outlined in my post above. I am sure I will have more changes before we get to the end of Q1.

 

[ammulder]

I can’t put a number on it but the Model X ramp this quarter has been painfully slow. If you check out the waiting room forum, it’s chock full of people talking about how much they hate Tesla the company (for the long wait and changing delivery ETAs and lack of communication and a few VIN assignment errors) but still want the car. Up until the past week the factory flyovers would show like 1-2 Model X amid the sea of other cars. Also, zero plaid deliveries until finally one photo of a plaid with no license plate on it hit Twitter yesterday. I feel like the Model X program likely has a negative margin this quarter, though there should be enough Model S to offset (there seem to be S Plaids in stock all over the US and in Canada).

Like I said I can’t really assess the bottom line, but I wouldn’t count on S+X margins going plaid until at least Q1.

 

[StarFoxisDown!]

I can’t put a number on it but the Model X ramp this quarter has been painfully slow. If you check out the waiting room forum, it’s chock full of people talking about how much they hate Tesla the company (for the long wait and changing delivery ETAs and lack of communication and a few VIN assignment errors) but still want the car. Up until the past week the factory flyovers would show like 1-2 Model X amid the sea of other cars. Also, zero plaid deliveries until finally one photo of a plaid with no license plate on it hit Twitter yesterday. I feel like the Model X program likely has a negative margin this quarter, though there should be enough Model S to offset (there seem to be S Plaids in stock all over the US and in Canada).

Like I said I can’t really assess the bottom line, but I wouldn’t count on S+X margins going plaid until at least Q1.

It doesn’t really work like that when it comes to the X line. They use the same manufacturing line as the S so there’s no hit to margins if X production is slow. You have to think of the X and S as the same product. So overall increase in production will mean continued margin expansion which will help Q4, not hurt it

 

[ammulder]

It doesn’t really work like that when it comes to the X line. They use the same manufacturing line as the S so there’s no hit to margins if X production is slow. You have to think of the X and S as the same product. So overall increase in production will mean continued margin expansion which will help Q4, not hurt it

Hmm. I guess I don’t know whether X production was slow because they ran the line half the time S and half the time X and the X half was terribly inefficient, or if they ran the line 95% S and only 5% X for the quarter as a whole. I had been assuming closer to the former (more of the s-curve type ramp for the X) but maybe that’s not correct.

But I get the feeling they really did struggle to build the X. For instance, they called a lot of early reservation holders and offered guaranteed 2021 delivery if they switched to 6 seats, paying the difference (up to $6500). Many of those people are not getting 2021 deliveries, and some are quite unhappy at having paid for the upgrade now. To me that sounds like a ramp that didn’t go as quickly as hoped, not that production was A-OK but some other dude just decided not to give X any time on the line.

And if it’s the case that they were trying hard to build the X but it wasn’t going well, I would guess that means that S got less time on the line, and costs for the few Xs delivered were higher, and overall the S+X margins would be lower than if they had built all S all quarter or if X had been smooth sailing too.

 

[JohnnyEnglish]

Hmm. I guess I don’t know whether X production was slow because they ran the line half the time S and half the time X and the X half was terribly inefficient, or if they ran the line 95% S and only 5% X for the quarter as a whole. I had been assuming closer to the former (more of the s-curve type ramp for the X) but maybe that’s not correct.

But I get the feeling they really did struggle to build the X. For instance, they called a lot of early reservation holders and offered guaranteed 2021 delivery if they switched to 6 seats, paying the difference (up to $6500). Many of those people are not getting 2021 deliveries, and some are quite unhappy at having paid for the upgrade now. To me that sounds like a ramp that didn’t go as quickly as hoped, not that production was A-OK but some other dude just decided not to give X any time on the line.

And if it’s the case that they were trying hard to build the X but it wasn’t going well, I would guess that means that S got less time on the line, and costs for the few Xs delivered were higher, and overall the S+X margins would be lower than if they had built all S all quarter or if X had been smooth sailing too.

It is indeed sad that, whatever the underlying reason(s), the S/X production ramp is still not accomplished a year after the old lines were stopped. These products are important for the new technology they are introducing and the halo effect they provide.

However in terms of their impact on quarterly results 2021 has proven that S/X are a secondary factor. The primary impact on financial performance was the Shanghai production ramp. Similarly I expect the S/X ramp to remain a secondary factor in 2022 relative to the ramp of Y production in Berlin and Austin and the ongoing Shanghai ramp.

 

[StarFoxisDown!]

It is indeed sad that, whatever the underlying reason(s), the S/X production ramp is still not accomplished a year after the old lines were stopped. These products are important for the new technology they are introducing and the halo effect they provide.

However in terms of their impact on quarterly results 2021 has proven that S/X are a secondary factor. The primary impact on financial performance was the Shanghai production ramp. Similarly I expect the S/X ramp to remain a secondary factor in 2022 relative to the ramp of Y production in Berlin and Austin and the ongoing Shanghai ramp.

The S/X refresh gave us a unique insight in Q1/Q2 into the strength of Tesla's main business which is the 3/Y and exactly how profitable they are and can be in the future......BUT......S/X back at full production of 25k/quarter with these new price levels will have an outsized impact on earnings for the next 4-6 quarters until Berlin/Austin are ramped. Then the impact of S/X margins/profits will be lost in the sheer volume of the Berlin/Austin. Until then though, S/X will have a pretty noticeable impact on earnings (even though production will be treated as secondary by Tesla).