Near-future quarterly financial projections

[ReflexFunds]

Q4'18's $667.5m vs. the $870m estimated for Q4'19 - that's a YoY 30.3% growth in quarterly R&D expenses.

I don't disagree with you on great RoI for R&D expenses - I just think a 30% increase in Q4'19 would go against the spirit of their guidance. Technically you could be right that it's full year opex they are guiding for, which would offer an artificially high baseline with the high FY'2018 total opex.

That’s the SG&A line, may be a bit high but seems consistent with the 10% opex yoy growth guidance. I think it will mainly be driven by building out infrastructure in Europe and China for Model 3, more call centre/communications staff in US (which may be in SG&A) and growth of Tesla China team.

 

[Fact Checking]

My Model 3 production numbers are:
4Q18 61.4k or 5.12k/week for 12 weeks of operation and 1 week downtime
1Q19 67.0k or 5.58k/week over 12 weeks
2Q19 75.0k or 6.25k/week over 12 weeks
3Q19 83.0k or 6.92k/week over 12 weeks
4Q19 86.0k or 7.17k/week over 12 weeks

I am assuming Tesla's 7k/week guidance is roughly on a 12 week/quarter of production basis. It could instead mean the quarter average, but then it gets harder to reconcile the 360-400k total deliveries guidance.
I am not including any GF3 production in 2019 yet, hopefully I will add this to Q4 in 3-6 months if Tesla appears to remain on track.

The 10k Model 3s in-transit to Europe/Asia is a one time structural shift, so you shouldn't expect it to reverse later in the year. Assuming quarter end delivery patterns remain smooth, there should now always be roughly 10k 3s in-transit to RoW at end of Q. I think European sales and deliveries have likely been heavily prioritised in Q1, partly due to the higher ASP, but also due to seasonality and some temporary tax credit demand pull forward to Q4 in the US. In Q2 MR should be released in Europe so may no longer be much higher margin than US, and US demand should be back to normal - so Tesla will dedicate more production capacity to US in Q2. This is my reason for an increased US mix in Q2 and a more limited QoQ increase in RoW deliveries.

Let me rephrase my "international in-transit Model 3 inventory" question:

• In Q4 Model 3 production was lagging deliveries by 1.7k units, and in-transit inventory was 1.0k units. "Fleet" inventory was 7.3k units, an increase of 5.3k units over Q3.
• For Q1 Tesla guided Model 3 production to outpace deliveries by 10k units, which they attribute to international delivery delays creating higher in-transit inventories.
• All other things equal this means that in-transit Model 3 inventory would increase from 1k to ~11k and would stay roughly at those levels through the rest of 2019.
  
• Your EU+Asia estimates for Q1,Q2,Q3,Q4 are: 34k, 37k, 41k, 43k.
• If in-transit inventory jumps from 1k to 11k in Q1, and it's a one-time capital cost to fill the delivery pipeline, then I believe it necessarily must be visible as a 10k jump in Q2 deliveries. (Modulo seasonal fluctuations.)
• Yet your Q1->Q2 increase in international deliveries is only 3k units, not 10k units.

I.e. I think you are either overestimating Q1 international deliveries by 7k, or underestimating rest of the year deliveries by 7k per quarter (or a mix of the two).

 

[ReflexFunds]

Let me rephrase my "international in-transit Model 3 inventory" question:

• In Q4 Model 3 production was lagging deliveries by 1.7k units, and in-transit inventory was 1.0k units. "Fleet" inventory was 7.3k units, an increase of 5.3k units over Q3.
• For Q1 Tesla guided Model 3 production to outpace deliveries by 10k units, which they attribute to international delivery delays creating higher in-transit inventories.
• All other things equal this means that in-transit Model 3 inventory would increase from 1k to ~11k and would stay roughly at those levels through the rest of 2019.
  
• Your EU+Asia estimates for Q1,Q2,Q3,Q4 are: 34k, 37k, 41k, 43k.
• If in-transit inventory jumps from 1k to 11k in Q1, and it's a one-time capital cost to fill the delivery pipeline, then I believe it necessarily must be visible as a 10k jump in Q2 deliveries. (Modulo seasonal fluctuations.)
• Yet your Q1->Q2 increase in international deliveries is only 3k units, not 10k units.

I.e. I think you are either overestimating Q1 international deliveries by 7k, or underestimating rest of the year deliveries by 7k per quarter (or a mix of the two).

The reason for only 3k delivery growth in international is because I expect a larger % of production to be dedicated to US in Q2 vs Q1. I think there will likely be less ships dispatched in Apr/May than in Jan/Feb, and this cancels part of the benefit of some March ships arriving in April. Could be wrong though.

 

[Fact Checking]

That’s the SG&A line, may be a bit high but seems consistent with the 10% opex yoy growth guidance. I think it will mainly be driven by building out infrastructure in Europe and China for Model 3, more call centre/communications staff in US (which may be in SG&A) and growth of Tesla China team.

Indeed - SG&A, not R&D. So you are attributing it mostly to automotive SG&A.

Still I think it's going against the spirit of their guidance:

• Automotive revenue would grow from Q4'18 of $6.07b to $6.48b in Q4'19, an increase of only 6.7%, and they'd have to grow SG&A by 30% to support that?
• Their guidance was: "Our operating expenses will grow by less than 10% in 2019, thus creating massive leverage given the top line growth in 2019."
• Comparing Q4'18 to Q4'19 would actually show a reduction in leverage even in the automotive segment, due to the 30% SG&A growth.

So yes, if we include all the high fixed opex 2018 quarters and lower efficiency Model 3 production then there's increased leverage in 2019, but it would be rather misleading to present such results in such a way.

I'm not saying that it couldn't happen.

 

[Fact Checking]

The reason for only 3k delivery growth in international is because I expect a larger % of production to be dedicated to US in Q2 vs Q1. I think there will likely be less ships dispatched in Apr/May than in Jan/Feb, and this cancels part of the benefit of some March ships arriving in April. Could be wrong though.

So if Tesla expects this to happen then there's very little reason to rush the March ships: they only kill Q1 results unnecessarily, they could as well have delayed those ships to early April and not eat the significant capital cost of the increase of 10k vehicles in transit, especially in a critical Q1 quarter that sees -$920m debt service ...

So I think that's a pessimistic reading and assumes a significant inefficiency and lack of good planning. These early Model 3 customers waited 2-3 years already, one extra month wouldn't result in any meaningful percentage of lost sales for those couple of thousand units.

So I think there's a higher chance that Tesla is motivated by something else, see this disclosure by Elon from the Q4 conference call:

David Tamberrino:

"So like orders above, I think I've seen like 20,000 order levels for Europe and single-digit thousands for China is better than that, Elon?"​

Elon Musk:

"Yes, absolutely. The - I mean, we're not even really trying, I should point out. I guess it's - we - our factory is like, right now, only making cars for China and Europe. That's all it's doing for - with respect to Model 3. And our whole focus is, okay, how do we get those cars made, get them on a ship as fast as possible, get the ship as fast as possible to Zeebrugge in Belgium then get them over to Drammen in Norway and get those cars to customers as fast as possible. We get them to China as fast as possible."​

This question was asked on January 30, when the European Model 3 tracker was at about ~15k orders, and Elon's answer suggests that total orders are well north of 20k for Europe, that they've got all upcoming supply covered.

I.e. I think they are guiding for ~10k Model 3's in transit because they are expecting to keep up that rate of international deliveries for the rest of FY2019.

If there's an increase in the U.S. order book in Q2 due to the tax credit changes or HW3/FSD they could probably increase production or increase prices (via bundling), instead of redirecting high margin international supply.

 

[Buckminster]

It looks like a major reason for low net income in Q1 is S/X profits. In the UK, S/X are not available for delivery until May. In France, April. If there was a demand problem, would Tesla get these on boats now to sell in March? I understand that they have dropped a shift but is there not a small chance that profits could increase rather than decrease dramatically? Is my desperation showing?...

 

[StarFoxisDown!]

I.e. I think they are guiding for ~10k Model 3's in transit because they are expecting to keep up that rate of international deliveries for the rest of FY2019.

I'm hoping they are approaching it this way. I want them to even out deliveries going forward so that there's an expectation of this many US deliveries per quarter, this many Europe deliveries, this many Asia deliveries and then base their logistics around that.

 

[Fact Checking]

It looks like a major reason for low net income in Q1 is S/X profits. In the UK, S/X are not available for delivery until May. In France, April. If there was a demand problem, would Tesla get these on boats now to sell in March? I understand that they have dropped a shift but is there not a small chance that profits could increase rather than decrease dramatically? Is my desperation showing?...

I'd rather read that as a sign of high demand for S+X.

In particular:

• China could have a lot of forward-demand from Q2, because it's still uncertain whether tariffs are going to go back to the punitive 40% in March.
• Likewise China could have triggered a lot of pent up demand in Q1: tariffs were 40% in Q3 and Q4 and went back to 15% in Q1 I believe. So Q1 might have seen a doubling of S/X orders from China.
• The entry Model S with a 100 kWh battery pack software-capped to ~90 kWh is a really good deal: you can get the hardware of a 100D for the price of a 85D. This too could have generated some demand.

The reduction in the Model S/X production rate is simply a consequence of the 8 GWh annual limit, which allows only 80k units total, down from the former 100k limit. Because Tesla increased effective ASPs by removing the 75D they might be selling 20% fewer units, but might make up for it in margin (cash generated).

 

[Buckminster]

Because Tesla increased effective ASPs by removing the 75D they might be selling 20% fewer units, but might make up for it in margin (cash generated).

So, in that case, isn't a $705m to $520m drop in profit unlikely?

 

[EVNow]

Deliveries, take-rates, ASPs and gross margins:
View attachment 374709
P&L:
View attachment 374710

Cash flow:
View attachment 374712

Do you mind sharing the spreadsheet ?

 

[generalenthu]

I was wondering about the following "accounts receivable" and "accounts payable" mystery:

Quarter

Dec 31, 2016

Mar 31, 2017

Jun 30, 2017

Sep 30, 2017

Dec 31, 2017

Mar 31, 2018

Jun 30, 2018

Sep 30, 2018

Dec 31, 2018

[TD2] Accounts payable [/TD2] [TD2] Inventory [/TD2] [TD2] Accounts receivable [/TD2] [TD2] $1,860,341 [/TD2] [TD2] $2,067,454 [/TD2] [TD2] $ 499,142 [/TD2] [TD2] $2,075,333 [/TD2] [TD2] $2,220,336 [/TD2] [TD2] $ 440,349 [/TD2] [TD2] $2,359,316 [/TD2] [TD2] $2,438,111 [/TD2] [TD2] $ 453,539 [/TD2] [TD2] $2,385,778 [/TD2] [TD2] $2,471,382 [/TD2] [TD2] $ 607,734 [/TD2] [TD2] $2,390,250 [/TD2] [TD2] $2,263,537 [/TD2] [TD2] $ 515,381 [/TD2] [TD2] $2,603,498 [/TD2] [TD2] $2,565,826 [/TD2] [TD2] $ 652,848 [/TD2] [TD2] $3,030,493 [/TD2] [TD2] $3,324,643 [/TD2] [TD2] $ 569,874 [/TD2] [TD2] $3,596,984 [/TD2] [TD2] $3,314,127 [/TD2] [TD2] $1,155,001 [/TD2] [TD2] $3,404,451 [/TD2] [TD2] $3,113,446 [/TD2] [TD2] $ 949,022 [/TD2]

Inventory levels were at around $2.4b through most of 2017, and accounts receivable was around $500m-$600m.

Inventory increased by about 40% by the end of 2018, due to the ramp-up of the Model 3 production pipeline. But accounts receivable increased even more, to $950m, which is a 85% YoY increase. This is rather counter-intuitive, because payment is taken at delivery and payment clearing delays are relatively short in the T+1 - T+2 range in the U.S., which was the majority of Model 3 deliveries.

Also note that the Q4 FCF does seem to be a bit "expectation managed" to me: $910m is just above Q3's $881m.

Based on that I'm wondering whether Tesla was saving up a bit of accounts receivable cash flow in Q4, to improve Q1 free cash flow? I think they have several discretionary tools to delay payments, in exchange for a bit higher interest income from the payment processing financial institutions, etc.

Note that there's a similar counter-intuitive trend in the accounts payable figures as well: there's a decrease of -$192.5m in accounts payable, despite Tesla making more cars and having a 3% sequential increase in car-sales revenue.

They did highlight it in the Q4 update letter:

"Operating cash flow remained strong although our days payable outstanding decreased significantly, partially limiting the positive impact of working capital."​

Tesla didn't volunteer any explanation for the decrease in payables outstanding, but I don't think there's many scenarios under which Tesla would have been forced to pay suppliers faster - my working hypothesis is that it was primarily voluntary, to transfer Q4 FCF to Q1.

To do so Tesla had some discretionary leeway to manage expectations: they could have paid suppliers in Q4 faster than required, to drain some of the Q4 FCF, which would then help Q1 FCF via payables expansion.

(This could also have built some goodwill with suppliers, who have probably seen early Q4 payments as a welcome bonus to counter-act some of the possibly contracting ICE order books, in a critical end of year quarter.)

TL;DR: while neither of these factors would have an impact on revenue or income due to accrual accounting, but they could have a significant positive effect on Q1'19 free cash flow and cash flow, in the "hundreds of millions of dollars" range.

The motivation would be to counteract the cash position effect of the -$920m March convertibles repayment and of the ~10k vehicles in transit logistics artifact due to European and Chinese deliveries.

I am still struggling to understand the level of receivables. The 955 million in receivables should mostly be from car sales and should exclude leases, which are included in operating leases if they're on balance sheet. This corresponds to about 2 weeks of deliveries which is way more than the time it takes for checks to clear. May be @jbcarioca can help.

 

[jbcarioca]

I am still struggling to understand the level of receivables. The 955 million in receivables should mostly be from car sales...

I have not examined that in detail, although I have planned to do so. My guess is that the increase is probably mostly due to TE utility-level installations. Presently I don’t have enough data to confirm that but nearly all the malarkey-scale TE sales have significant receivables post-completion. Depending on contract terms some receivables are progress payments during construction that would otherwise be WIP.

There are probably enough public data to evaluate this thesis, but that would require contract-by-contract review for the largest ones, at least. Those would most likely be found in public utility regulatory disclosures rather than TSLA. That is why I haven’t tried to probe this question further.

Hopefully someone else may have better ideas about this.

 

[Singer3000]

I have not examined that in detail, although I have planned to do so. My guess is that the increase is probably mostly due to TE utility-level installations. Presently I don’t have enough data to confirm that but nearly all the malarkey-scale TE sales have significant receivables post-completion. Depending on contract terms some receivables are progress payments during construction that would otherwise be WIP.

There are probably enough public data to evaluate this thesis, but that would require contract-by-contract review for the largest ones, at least. Those would most likely be found in public utility regulatory disclosures rather than TSLA. That is why I haven’t tried to probe this question further.

Hopefully someone else may have better ideas about this.

Not convinced this is the whole answer.

$950m Accts Receivables versus only $770m Energy/Storage revenue in the last 6 months. Which includes revenue from solar and powerwall and normal sized powerpack sales. Is a trade receivable not revenue that is recognised in the Income Statement but where the cash hasn’t yet been received?

Do we know for sure that fleet buyers aren’t being offered credit terms? The 10-K should tell us more, at least on the concentration of credit risk.

 

[Fact Checking]

Do we know for sure that fleet buyers aren’t being offered credit terms? The 10-K should tell us more, at least on the concentration of credit risk.

Part of it could be cash flow management for Q1: it would be quite a feat if Tesla could increase net cash levels despite the $920m repayment and the outstanding European inventory.

Would be quite a show of cash generation force ...

Here's the seasonal patterns, based on the 2017 and 2018 track record:

• In Q1'17 and Q1'18 accounts payable to increased - which is a cash generator. I'd expect this in Q1'19 as well.
  
• Accounts receivable decreased in Q1'17, which generated cash - but increased in Q1'18 by +$130m which might have been driven by the effects of the Model 3 ramp-up. Unclear what will happen in Q1'19, my expectation would be for a decrease in accounts receivable, but there's going to be many European payments to clear and March is going to end on a Sunday, which will have a cash cost of about ~$100m.

Also note that @ReflexFunds's projections for Q1'19 are a net decrease in cash balance by -$862m, primarily caused by the $920m bond repayment and the ~10k high-value Model 3's in transit inventory effect.

A lot of good things would have to happen for Tesla to counter those two effects, and I think the baseline is to expect a Q1 outcome that @ReflexFunds is estimating.

 

[EinSV]

Point of clarification. Some of the posts seem to suggest AR has increased but in Q4 2018 receivables were much lower as a percentage of revenue than they were in Q4 2017 (or 2016).

Revenue was up 124% Y/Y in Q4 but receivables were only up 84%. All things being equal, wouldn’t we expect AR to scale roughly linearly with revenue?

In any case, AR/sales decreased significantly Y/Y, which could reflect better back-end cash conversion, or a different business mix (more automotive sales, which could have lower AR than TE and service/other), or both.

 

[Singer3000]

Part of it could be cash flow management for Q1: it would be quite a feat if Tesla could increase net cash levels despite the $920m repayment and the outstanding European inventory.

Would be quite a show of cash generation force ...

Here's the seasonal patterns, based on the 2017 and 2018 track record:

• In Q1'17 and Q1'18 accounts payable to increased - which is a cash generator. I'd expect this in Q1'19 as well.
  
• Accounts receivable decreased in Q1'17, which generated cash - but increased in Q1'18 by +$130m which might have been driven by the effects of the Model 3 ramp-up. Unclear what will happen in Q1'19, my expectation would be for a decrease in accounts receivable, but there's going to be many European payments to clear and March is going to end on a Sunday, which will have a cash cost of about ~$100m.

Also note that @ReflexFunds's projections for Q1'19 are a net decrease in cash balance by -$862m, primarily caused by the $920m bond repayment and the ~10k high-value Model 3's in transit inventory effect.

A lot of good things would have to happen for Tesla to counter those two effects, and I think the baseline is to expect a Q1 outcome that @ReflexFunds is estimating.

It’s this kind of thing that makes Tesla’s reporting quality still quite frustrating for me. We shouldn’t be having to guess. In my view, a billion dollar item from $30bn of total assets deserves a more thorough explanation than it’s received in prior disclosures, especially so when it’s a credit risk bearing asset. Even just one more sentence might do it. It leaves an opening for the TSLAQ crowd to cast doubt on, when there’s almost certainly nothing of too much interest to see.

 

[jbcarioca]

Not convinced this is the whole answer.

$950m Accts Receivables versus only $770m Energy/Storage revenue in the last 6 months. Which includes revenue from solar and powerwall and normal sized powerpack sales. Is a trade receivable not revenue that is recognised in the Income Statement but where the cash hasn’t yet been received?

Do we know for sure that fleet buyers aren’t being offered credit terms? The 10-K should tell us more, at least on the concentration of credit risk.

I am not convinced either. The largest questions are all related to how there could be such a large item not otherwise explained in the documents we can easily see. I wish I had staff to devote to this issue.

 

[Cartegena]

I am still struggling to understand the level of receivables....

Perhaps, partially non-ZEV regulatory credit buyers? $40 million sold in second half of 2017 compared to $237 million in second half of 2018.

 

[DaveT]

The reduction in the Model S/X production rate is simply a consequence of the 8 GWh annual limit, which allows only 80k units total, down from the former 100k limit.

Where are you finding this 8 GWh annual limit?

 

[Fact Checking]

Where are you finding this 8 GWh annual limit?

The annual limit of ~8 GWh 18,650 cell production in Japan comes from several independent sources:

• @hiroshiy mentioned it in this post. Hiroshi-san, are you able to share the source of your figure?

• Tesla made the following disclosure in the Q1'18 10-Q:
  • "We expect Model S and Model X deliveries to be approximately 100,000 in total
    in 2018, constrained by the total available supply of cells with the 18650 form factor used in those vehicles."

• The 8 GWh figure is a relatively straightforward estimate that comes from the owner-reported battery selection mix: about ~60% were 75D, ~40% 100D packs. If we apply this to the reported 99,475 Model S/X's delivered in 2018, we get: 99,475*0.60*75+99,475*0.40*100 = 8,455,375 kWh, or 8.4 GWh. Given that the survey is self-selecting and not statistically representative sample, I think it's probably a safe assumption that lower trim cars are under-reported vs. higher-trim cars - i.e. 75D sales were more than 60% and [P]100D sales were less than 40%. This would put the 2018 18,650 supply somewhere below 8.4 GWh. (I believe @ReflexFunds estimated a similar mix?)

• Finally, we also know that the supply limit is a capex constrained hard limit: this is how much the Japanese factories of Panasonic are able to manufacture per year. This was explained in the Q4'17 conference call by JB:
  • "Romit Jitendra Shah - Nomura Instinet
    
    Yes. Thank you. It sounds like from the letter that you could do more than 100,000 S and X in 2018, but you're constrained by the 18650s. And I'm just curious what would it take to see the 2170 cells in these vehicles?
    
    Elon Reeve Musk - Tesla, Inc.
    
    Yeah.
    
    Jeffrey B. Straubel - Tesla, Inc.
    
    Well, this is JB. It's something we've of course contemplated, but it's quite a large change to the architecture of the module and the battery pack overall. And while the 18650 supply is somewhat of a cap at about 100,000 units per year, even just a few months ago we didn't feel that expanding and making some long-term bets on expanding that supply with Panasonic in Japan was really the right risk. It's something we could consider, but right now we're pretty happy with that balance and it matches our other production capabilities and our other investments."
  • I.e. in 2017 Tesla contemplated whether to expand the 18,650 supply, and decided against it.

So I believe all of this is a pretty robust basis to believe that the 18,650 cell supply from Panasonic was somewhere in the 8.0-8.5 GWh range in 2018, and that after about ~10 years of factory optimizations and a mature industrial process it probably doesn't have much space for low capex supply expansion.