Near-future quarterly financial projections

[generalenthu]

That's just for the "diluted EPS" calculation, which per GAAP requires all convertible securities to be accounted as if all were excercised.

Elon reaffirmed their guidance that Tesla is going to pay back all convertible debt from cash flow - i.e. no dilution is going to happen.

I.e. it's an accounting fiction that will gradually go away as the convertible notes are paid back in cash.

Why is it different from last q

 

[neroden]

IIRC Tesla never rolls ZEV credits over to the next year, so they'll probably sell all of them in Q4, right?

If anyone will buy them.

Tesla is generating ZEV credits so fast that the market for them is going to be flooded (arguably it already is). With more and more ZEV credits coming in to Tesla, faster than the demand for ZEV credits is increasing (since CARB requirements go up very slowly, most automakers are making compliance cars, and most automakers have a pile of ZEV credits already), the value of ZEV credits will only be dropping for several years.

So it makes sense for Tesla to dump ZEV credits as quickly as possible, before they become even less valuable. But the question is who they're going to sell them to. Toyota, I guess (who doesn't even have a compliance car). Ford, perhaps. Maybe Honda? But there isn't a big market. I'm not sure Tesla can even sell all their credits; some may become worthless.

 

[brian45011]

IIRC Tesla never rolls ZEV credits over to the next year, so they'll probably sell all of them in Q4, right?

No, not necessarily. Tesla is totally opaque about regulatory credit transactions. They included some info about the contract with Honda in the IPO exhibits; and, IIRC, a comment in an early 2013 filing about the duration of the GHG/CAFE credit sale contract, but other than those bits, Tesla is pretty much radio silent about regulatory credit transactions.

 

[brian45011]

Why is it different from last q

There can be no dilution when a loss is reported so fully diluted shares = shares outstanding when losses are reported.

When a profit is reported, fully diluted shares > shares outstanding.

Basic net income (loss) per share of common stock attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards, warrants and convertible senior notes using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net income (loss) per share of common stock attributable to common stockholders when their effect is dilutive. Since we expect to settle in cash the principal outstanding under the 0.25% Convertible Senior Notes due in 2019, the 1.25% Convertible Senior Notes due in 2021 and the 2.375% Convertible Senior Notes due in 2022, we use the treasury stock method when calculating their potential dilutive effect, if any. Furthermore, in connection with the offerings of our bond hedges, we entered into convertible note hedges (see Note 10, Convertible and Long-Term Debt Obligations). However, our convertible note hedges are not included when calculating potentially dilutive shares since their effect is always anti-dilutive.
​

The 2Q18 10Q reported potentially dilutive shares as:
Stock based awards 9.9 million
Convertibles 1.5 million
Warrants 0.3 million

 

[neroden]

There can be no dilution when a loss is reported so fully diluted shares = shares outstanding when losses are reported.

When a profit is reported, fully diluted shares > shares outstanding.

Basic net income (loss) per share of common stock attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards, warrants and convertible senior notes using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net income (loss) per share of common stock attributable to common stockholders when their effect is dilutive. Since we expect to settle in cash the principal outstanding under the 0.25% Convertible Senior Notes due in 2019, the 1.25% Convertible Senior Notes due in 2021 and the 2.375% Convertible Senior Notes due in 2022, we use the treasury stock method when calculating their potential dilutive effect, if any. Furthermore, in connection with the offerings of our bond hedges, we entered into convertible note hedges (see Note 10, Convertible and Long-Term Debt Obligations). However, our convertible note hedges are not included when calculating potentially dilutive shares since their effect is always anti-dilutive.
​

The 2Q18 10Q reported potentially dilutive shares as:
Stock based awards 9.9 million
Convertibles 1.5 million
Warrants 0.3 million

The convertibles won't be converted, and I doubt the stock will be high enough for the 2019 warrants to execute (though the later warrants might), so the main point is employee stock option (and similar) awards. These are a continous source of dilution.

If Tesla ever feels it has enough cash flow from operations, they could consider buying the stock for employee stock awards on the open market instead of using freshly issued shares, thus actually halting dilution.

 

[mongo]

The convertibles won't be converted, and I doubt the stock will be high enough for the 2019 warrants to execute (though the later warrants might), so the main point is employee stock option (and similar) awards. These are a continous source of dilution.

If Tesla ever feels it has enough cash flow from operations, they could consider buying the stock for employee stock awards on the open market instead of using freshly issued shares, thus actually halting dilution.

So basically, stock buyback at what would have been time of option sign up (with Tesla assuming stock will rise)? Seems more advantageous that waiting for them to exercise and then purchasing form the market.

 

[kakamora]

That's just for the "diluted EPS" calculation, which per GAAP requires all convertible securities to be accounted as if all were excercised.

Elon reaffirmed their guidance that Tesla is going to pay back all convertible debt from cash flow - i.e. no dilution is going to happen.

I.e. it's an accounting fiction that will gradually go away as the convertible notes are paid back in cash.

Does TSLA or the investor in the convertible have the option on whether to convert to shares or cash our.

My understanding was that the option was with the investor therefore they were willing to accept a lower yield. If the option is with the company

There can be no dilution when a loss is reported so fully diluted shares = shares outstanding when losses are reported.

When a profit is reported, fully diluted shares > shares outstanding.

Basic net income (loss) per share of common stock attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards, warrants and convertible senior notes using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net income (loss) per share of common stock attributable to common stockholders when their effect is dilutive. Since we expect to settle in cash the principal outstanding under the 0.25% Convertible Senior Notes due in 2019, the 1.25% Convertible Senior Notes due in 2021 and the 2.375% Convertible Senior Notes due in 2022, we use the treasury stock method when calculating their potential dilutive effect, if any. Furthermore, in connection with the offerings of our bond hedges, we entered into convertible note hedges (see Note 10, Convertible and Long-Term Debt Obligations). However, our convertible note hedges are not included when calculating potentially dilutive shares since their effect is always anti-dilutive.
​

The 2Q18 10Q reported potentially dilutive shares as:
Stock based awards 9.9 million
Convertibles 1.5 million
Warrants 0.3 million

Who has the option to convert or cash out. Is it with the company or the convertible investor. Cause the outcome would almost always be the opposite.

Sure I am missing something here

 

[neroden]

So basically, stock buyback at what would have been time of option sign up (with Tesla assuming stock will rise)? Seems more advantageous that waiting for them to exercise and then purchasing form the market.

Or doing the buyback even earlier. Some companies have a specific account/fund which buys up stock just to supply employee stock-based compensation specifically. Not super common but I've seen it done.

 

[Fact Checking]

Does TSLA or the investor in the convertible have the option on whether to convert to shares or cash our.

My understanding was that the option was with the investor therefore they were willing to accept a lower yield. If the option is with the company

Yeah, so the part you are missing from the 100+ pages long prospectus of the convertible notes is the detail that Tesla has the option to pay in cash even if the owner requests conversion to shares.

In that scenario Tesla pays the cash equivalent of the shares - and any excess cash required above the ~$360 conversion price will be generated by rather complex hedges that Tesla bought.

I.e. if TSLA is for example $460 when note holders request conversion, then Tesla pays $360 per share-equivalent note, and the remaining $100 is paid (to Tesla, who adds to the $360, making it $460) by the financial institution that wrote the hedge contract.

It's (much) more complex than that, but that's the gist of it - at least how I understand it.

And that's what Elon announced in Q2 and reaffirmed in the Q3 call: they are going to pay back the notes in cash, they won't dilute existing shareholders.

 

[neroden]

Does TSLA or the investor in the convertible have the option on whether to convert to shares or cash our.

My understanding was that the option was with the investor therefore they were willing to accept a lower yield. If the option is with the company



Who has the option to convert or cash out. Is it with the company or the convertible investor. Cause the outcome would almost always be the opposite.

Sure I am missing something here

Tesla's 2019 and 2021 convertible bonds both give Tesla the option to settle them in cash instead of stock. (I just rechecked.) Cash more or less equivalent to the value of the stock which they would have gotten, mind you, but cash.

Each time someone elects to convert them, Tesla has the option to settle in cash instead.

 

[TheTalkingMule]

The convertibles won't be converted, and I doubt the stock will be high enough for the 2019 warrants to execute (though the later warrants might), so the main point is employee stock option (and similar)

Surprised to hear you don't see these March 2019 bonds concerting. You don't have SP at $361 by March? That's post 4Q earnings and shorts haven't even covered yet.

 

[neroden]

Yeah, so the part you are missing from the 100+ pages long prospectus of the convertible notes is the detail that Tesla has the option to pay in cash even if the owner requests conversion to shares.

In that scenario Tesla pays the cash equivalent of the shares - and any excess cash required above the ~$360 conversion price will be generated by rather complex hedges that Tesla bought.

I.e. if TSLA is for example $460 when note holders request conversion, then Tesla pays $360 per share-equivalent note, and the remaining $100 is paid (to Tesla, who adds to the $360, making it $460) by the financial institution that wrote the hedge contract.

It's (much) more complex than that, but that's the gist of it - at least how I understand it.

And that's what Elon announced in Q2 and reaffirmed in the Q3 call: they are going to pay back the notes in cash, they won't dilute existing shareholders.

This is also how I understand it, though brian would have the details more accurate than either of us.

I will note that if the price goes above the *warrant* prices, Tesla ends up having to issue stock to satisfy the warrants. That's $512.66.

---
I believe the 2022 notes have the same provision (I should look it up).

In case you're wondering, the June 2018 notes didn't have quite the same provisions, so Tesla did have to issue some stock.

The 2021 warrants have a strike price of $560.64 and cannot be cash-settled, so could cause dilution.

The 2022 warrants have a strike price of $655, but have a cash-settlement option to allow anti-dilution.

The SolarCity notes also don't have the same provisions; if someone converts, they actually get stock.

However, the conversion price for the SolarCity 2.75% convertible notes due in November is... $560.60. So unless we have a massive bull run right now, they'll be paid off.

The conversion price for the SolarCity 2019s is $759.36, though Tesla has a partial hedge agasint the dilution if that happens. Could convert. Maybe.

The conversion price for the 2020 zero-coupon convertibles owned by Silver Lake Kraftwerk is $300. They have a really weird rule: if TSLA is over 600 for 45 consecutive days, Tesla can redeem the bonds at par (!!!!). So Silver Lake Kraftwerk has a strong incentive to convert before that happens.

 

[neroden]

Surprised to hear you don't see these March 2019 bonds concerting. You don't have SP at $361 by March? That's post 4Q earnings and shorts haven't even covered yet.

I must correct myself; sorry for the error. I do see the March bonds converting but I see Tesla settling them in cash.

With the hedges paying for most of any price rise above $360, I see Tesla settling these bonds in cash unless the stock price is over $512.66. If the stock is that high, the warrants will be executed, which will cause dilution.

 

[schonelucht]

There is nothing to dislike about the Q3 results. Exceptionally well done, Tesla.

 

[uselesslogin]

Guys, I called this yesterday, but on the wrong thread so nobody heard me

Copy and past below:

cricketman, Tuesday at 3:15 PM
Elon is in a good mood and they brought the earnings call forward

I think this means a very good profit of at least $200m. Remember $200m is the just a small matter of whether 2,500 Performance Model 3s got out the door on time or not

And Q4 profit will be at least $500m.

Which means market cap should be up to $100m before the end of the year"

I don't know why I am sharing this, but some recognition of my genius would be nice

Hopefully the $100m market cap before the end of the year prediction comes true as well. I have 1,000 shares and I am staying in until at least $3,000 share price, unless it goes up real quick in which case it will be tempting to cash in a small percentage

I certainly hope we don't get a $100m market cap. I'm hoping for closer to $100b. Anyway well done calling it.

 

[ZachF]

It's funny when you have the shorts telling you to buy GM and sell Tesla because of debt and cash flow...

Here are GM's financials:
Growth, Profitability, and Financial Ratios for General Motors Co (GM) from Morningstar.com
debt:
General Motors Co Total Long Term Debt (Quarterly) (GM)

GM has bloated it's debt by $80 billion since 2012, and burned $45 billion in cash since 2015! What does GM have to show for it? declining or flat revenue.... So what has it's used all that massive debt for? Dividends (~$3b/y), stock buybacks (~$4b/y), executive bonus compensation, and paying the interest/refinancing the debt it already has!!!

Going into debt at 6% for dividend payouts... This company is a disaster.

Most other companies aren't much better. Ford has $155+ billion in debt, more than it's revenue now, It has a pretty good FCF of $10b/year, but that all goes to debt payback (which is still not enough to keep it from growing faster than revenue) and the giant dividend to keep the Ford family happy.

Both VW and Daimler have had a total FCF since 2011 of about -$60 billion. lol.

Meanwhile, take a look at Tesla:
Growth, Profitability, and Financial Ratios for Tesla Inc (TSLA) from Morningstar.com
Tesla Inc Total Long Term Debt (Quarterly) (TSLA)

2018 and 2019 are estimates, if they use about $2b in FCF to payback debt:

year, revenue, debt, FCF:

2012: $413m $452m -$505m
2013: $2,013m $586m -$6m
2014: $3,198m $2,488m -$1,027m
2015: $4,046m $2,696m -$2,159m
2016: $7,000m $7,128m -$1,564m
2017: $11,759m $10,310m -$4,142m
2018: $21,800m $10,400m $400m
2019: $33,000m $8,400m $2,000m

In short (lol) Tesla will have gone from a point of having large negative cashflow and debt larger than revenue, to a company with large cashflow and low (25% of revenue) relative debt in just 2-3 years. A complete turnaround and total refutation of the short FUD.

 

[sunhelm]

thanks for all the kind words. i can't believe how far away they were from where i guessed, and even more how far off the street was.

the most impressive thing is the cash generation. it's not happening on the back of payables expansion, it seems to be genuine cash margins on products sold. recall i had estimated nearly 30% cash gross margins on the model 3 and 1b cash flow from ops. they did 1.4b cash flow from ops, nearly 35% cash gross margins on the model 3, and this is with receivables growing by 600m.

this is a very rough update from the letter, when i get time i'll run through the 10q and try to update again.

many of the buckets in the balance sheet and cash flow statement are crudely done (inaccurate). i did line items wrong as i don't have details to break them into my usual buckets until the 10q. and here again is the whitespace i can't eliminate.

When TSLA financials do the 180 but the models still can't keep up

Seriously, your contribution here makes TMC such a great resource and a debunker against FUD.

 

[SPadival]

Hopefully the $100m market cap before the end of the year prediction comes true as well. I have 1,000 shares and I am staying in until at least $3,000 share price, unless it goes up real quick in which case it will be tempting to cash in a small percentage

$100m market cap?? Sell your shares right now.

 

[Fact Checking]

In short (lol) Tesla will have gone from a point of having large negative cashflow and debt larger than revenue, to a company with large cashflow and low (25% of revenue) relative debt in just 2-3 years. A complete turnaround and total refutation of the short FUD.

Also note that a lot of Tesla's cash flow is invested into expansion: $500m in Q3, $700m in Q4.

Tesla internal cash generation from operations was $1.4b on $6.1b of revenue, which is an amazing ~23% of revenue.

As a comparison: Amazon cash generation is around ~10% of revenue...

The consequences of this on future expected cash flows, i.e. corporate valuation, are far reaching, IMO.

 

[heltok]

So if we are a bit optimistic and assume that Tesla will reach 10k Model 3/week by end of the year and keep that steady state for 2019, with some efficiencies and some extra P3D to Europe, China and the rest of the world for an average selling price of $60k. What kind of FCF and EPS would you guesstimate for 2019 Q1?