Near-future quarterly financial projections

[EinSV]

This is incorrect on several accounts. First of all I suppose the 2019 is a typo and should be 2018 because neither Tesla (to my knowledge) nor me have estimated specific model 3 margins for that particular quarter. They (and I) did for 2018Q4. That said, my 2018 Q4 estimate was 16%. 14% is my Q3 estimate. Secondly, Tesla is not guiding high 20's by then. It is saying "slightly below 20%". Here is the full relevant exchange from the last quarterly conf call





I may possibly have somewhat lower delivery estimates than Tesla anticipates which makes the fixed cost contribution weigh heavier. That'd explain why I have (now) 17% while Elon is saying slightly above, slightly below 20%. Also (speculative) Elon is talking about gross margin around the end of year (ie December), while my estimate is for the full quarter. Other than that, I think my model is very well in line with guidance from management.

Edit : regarding the Munro&German research, there is always the element of Tesla M3 manufacturing not yet in a steady state (half foot in hell as Elon says). Winding that down is costly and takes time. We saw that with the X where margins gradually got better and I think Deepak in the quote above is saying the same thing (take out labor). Another element is that Tesla is simply not (yet?) an accomplished manufacturer that manages production costs down to a level of best in class which their research may assume. Finally, making your suppliers wait when you predicted a much quicker rampup is going to cost you. You may have to inhouse stuff, you may need to pay penalties, your cash cycle goes from generating money to costing you money, you may not qualify for volume discounts as quickly as you hoped for etc... It all adds up and explains the difference between raw cost estimates from tear down specialist and final margin as guided by management.

Ok the primary source of confusion is I simply misread your chart (2019 v 2018).

As far as the high 20s reference, on the Q1 call Elon estimated 25% margins in mid 2019 with a goal of high 20s by late 2019 — excerpt below:

Yes, exactly. That's why it was important to clarify what these things mean. Yes, Q4 is when we expect to be on or about 20%. Then by the middle of next year, 25% gross margin should be where we are. And then we'll also try to get to the high 20s by the end of next year. Edited Transcript of TSLA earnings conference call or presentation 2-May-18 9:30pm GMT
​

I am assuming margins will be ~25% by EOY 2019 but it sounds like both Tesla and the tear down engineers see room to beat that eventually.

​

 

[schonelucht]

That makes sense regarding 2019. Thanks for the reference.

I really don't even dare to think about end of 2019 in terms of margin. I'll likely be severely wrong for the current quarter There is so much that I don't know yet. How will the ZEV credit market evolve? Will there be synergies in Model Y and 3 production? What about SR uptake in the Model 3? What about Semi manufacturing synergies? What will be the impact of splitting production over several continents? All these questions are certainly not relevant today but by the end of 2019 they very much will be.

 

[EinSV]

That makes sense regarding 2019. Thanks for the reference.

I really don't even dare to think about end of 2019 in terms of margin. I'll likely be severely wrong for the current quarter There is so much that I don't know yet. How will the ZEV credit market evolve? Will there be synergies in Model Y and 3 production? What about SR uptake in the Model 3? What about Semi manufacturing synergies? What will be the impact of splitting production over several continents? All these questions are certainly not relevant today but by the end of 2019 they very much will be.

Personally I think the short term exercise in this thread — while very useful — has larger error bars than late 2019. But I will leave it at that since Q2-Q4 2018 is the topic of this thread and I believe I have derailed it enough already.

 

[Boomer19]

i’m a little worried now about possible scenario @Zhelko Dimic laid out here. i guess some of this will happen to a certain degree.
q2-q4 2018 financial projections

from reading @generalenthu thread about what was thought to be GA2
q2-q4 2018 financial projections
and re-listening to the shrhldr meeting q&a (mind you i’m novice at this part of the equation at best)

but as i understood it the one line was crammed purposely, didn’t work as planned, and reconstructing would have interefered greatly with just producing cars on the other lines, which obviously was of greater need at time.

but, isn’t it safe to assume that all that is not dead money, or wasted per se. won’t that still be used in future, when production flow is steady and sufficient on other lines? at which point they’ll have time to revisit, reposition (which is major time/expense in this case bc of the cramming of line) update software, etc

and didn’t some of this already occur? (the step change functions in the line shutdowns).
but doubting now if those had anything to do with what was once thought GA2.

the automation errors, is Q2 when all that will come out in the wash? does it have to be immediate write off or are they forced to depreciate them over time? (especially if they aren’t exactly throwing bots in the trash, but reusing them at later date).

maybe just answering ZDs post will indirectly answer my mess.
thanks in advance

 

[Zhelko Dimic]

i’m a little worried now about possible scenario @Zhelko Dimic laid out here. i guess some of this will happen to a certain degree.
q2-q4 2018 financial projections

from reading @generalenthu thread about what was thought to be GA2
q2-q4 2018 financial projections
and re-listening to the shrhldr meeting q&a (mind you i’m novice at this part of the equation at best)

but as i understood it the one line was crammed purposely, didn’t work as planned, and reconstructing would have interefered greatly with just producing cars on the other lines, which obviously was of greater need at time.

but, isn’t it safe to assume that all that is not dead money, or wasted per se. won’t that still be used in future, when production flow is steady and sufficient on other lines? at which point they’ll have time to revisit, reposition (which is major time/expense in this case bc of the cramming of line) update software, etc

and didn’t some of this already occur? (the step change functions in the line shutdowns).
but doubting now if those had anything to do with what was once thought GA2.

the automation errors, is Q2 when all that will come out in the wash? does it have to be immediate write off or are they forced to depreciate them over time? (especially if they aren’t exactly throwing bots in the trash, but reusing them at later date).

maybe just answering ZDs post will indirectly answer my mess.
thanks in advance

I don't think Tesla has to write off almost anything, except some setup/integration costs, if they were capitalized and then thrown out. However, I believe they have option to do it for equipment purchased, but not used in the current production process, or at least to take a percentage loss for reserve for 'impaired assets'. This would help them look better in the future. Do they want to do it?

 

[ValueAnalyst]

This is incorrect on several accounts. First of all I suppose the 2019 is a typo and should be 2018 because neither Tesla (to my knowledge) nor me have estimated specific model 3 margins for that particular quarter. They (and I) did for 2018Q4. That said, my 2018 Q4 estimate was 16%. 14% is my Q3 estimate. Secondly, Tesla is not guiding high 20's by then. It is saying "slightly below 20%". Here is the full relevant exchange from the last quarterly conf call

Sorry, this is blatantly wrong. The following is from the most recent earnings call.

Elon Reeve Musk: "Yeah, exactly. That's why I was looking forward to clarify what these things mean. Q4 is when we expect to be on or about 20%. Then – but by the middle of next year, 25% gross margin should be where we are. And then, we'll also try to get to the high-20s by the next year."
----------

Given the two independent, third-party cost estimates, I have high confidence in Model 3's excellent profitability in 2H18 and 2019.

 

[YasB]

I'm convinced that Tesla really screwed up M3 ramp up. Like really screwed it up. As in, they ordered $2B of robots and for the 9 months out of last 12, they've spent trying to make it work. And in he last three months, they've ripped out part supply system, shut down many robots, and potentially abandoned the whole line. If GA3 is making 4K a week, and GA4 is making 1K, what is GA2 doing? Is it completely shut down?

GA 1: Combined mostly automated line for S+X production (~2.5k per week)
GA 3a: Automated Model 3 line (? per week)
GA 3b: Automated Model 3 line (? per week)
GA 4: Mostly manual Model 3 tent line (~1k per week)

In my imagination the current setup looks something like above. If that is correct, line 3a+b should be at a combined 4k per week and the tent line is adding some additional capacity. As an example, what we may be talking about, here is what an assembly line may look like: Evolution of Toyota Assembly Line Layout – A Visit to the Motomachi Plant | AllAboutLean.com

Looking at such a monster, i do not share your concerns regarding a potential big write-off. You need every segment and station to make that Model 3 and it's rumored they have been building some last quarter. Afaik, the only thing we know they have thrown out, is a conveyor system and the poor old flufferbot in the Gigafactory. I believe that conveyor was supposed to deliver materials and parts to the stations and was simply replaced by another mode of transportation. I can't imagine they have had so much trouble, that complete stations or segments are running in manual mode. So they probably installed all the machines quite some time ago and brought them online, but have trouble to achieve consistent results at higher speeds. If so, there is no need to write anything off, since they are actually using it. We also have another clue: There's so much gossip and internal information leaking out of that factory, that we would probably have heard by now, if they had thrown out hundreds of robots or replaced stations and segments with a completely manual operation.

Regarding the future of GA4 i think, it will simply be abandoned sooner or later, when they get the 3a+b lines up to the takt rate they were initially aiming for. Or they keep it around to assemble a limited amount of other cars ... like ... uh ... a Roadster or so? I still think Q2 numbers are pretty bad, just not because of a big write-off.

 

[Esme Es Mejor]

How will the ZEV credit market evolve?

If Tesla acquired a legacy automaker, would Tesla receive full nominal value for their ZEV credits, rather than the ~50% of nominal value they normally receive when selling them on the market?

 

[ggr]

If Tesla acquired a legacy automaker, would Tesla receive full nominal value for their ZEV credits, rather than the ~50% of nominal value they normally receive when selling them on the market?

Only if they continued to build ICE vehicles, which would be against the mission. I don't see them doing that.

 

[EinSV]

I can’t resist one additional comment re the discussion above.

IMO one reason Munro’s preliminary analysis was so terrible that he had to “eat crow” after a deeper dive was that his bias in favor of traditional manufacturers led him to overlook what he later described as a symphony of engineering.

I think that same bias among incumbent manufacturers and others has now shifted to views on Tesla’s ability to manufacture at volume.

As Munro and the German teardown engineers seem to recognize, the Model 3 is extremely well engineered for manufacturing. My prediction is that Tesla’s culture of constant innovation, deep talent pool — including from Grohmann and Perbix — and engineering excellence will result in Tesla reaching its goal of becoming the best in the industry at manufacturing, leading to another heaping helping of crow to be eaten by the incumbents.

 

[Reality]

Here is my fear: massive write-off in Q2, in the range of $500M to $1.5B

Now that you digested that click-bait title , here is what I'm pondering. I'm convinced that Tesla really screwed up M3 ramp up. Like really screwed it up. As in, they ordered $2B of robots and for the 9 months out of last 12, they've spent trying to make it work. And in he last three months, they've ripped out part supply system, shut down many robots, and potentially abandoned the whole line. If GA3 is making 4K a week, and GA4 is making 1K, what is GA2 doing? Is it completely shut down? (BTW, this 9 months vs. 3 is why I think Doug is gone - Elon would have expected him to recognize problem earlier)

Hence, I'm afraid that there is lots of unused equipment, that will weight in on M3 gross margins. As of now M3s are being built with higher content labour than originally anticipated, and you add depreciation...

However, Tesla may decide to focus and to make long term look good, and may write off every single piece of equipment that hasn't been put to a good use. How much of that there is, I can't know, but with uncertainties around GA2, knowing that part supply system (conveyer) has been removed, and knowing that many stations have been replaced with people, I figured it could go into really high numbers, like $500M, $1B, or even $1.5B, on top of any other loses (and those 86M impaired research from Silevo).

I wonder if some of the monstrous drop we've seen after end of quarter numbers was smart money figuring out this possibility?

BTW, I don't think this is necessarily too bad. I've already made my mind that Tesla incinerated and irrevocably destroyed $2B of good money (that's already paid!?). Lessons are probably worth it, there is a lot they've learned as an organization, and they've come up with technologies and processes than no one else has. But, if I turn out to be right, sheer size of the loss will allow for some serious FUD and 'interesting' titles of articles. Wall Street may not care as much though, as they tend to discount one off items, or give them very low weight. I feel that after the mandatory knee jerk reaction and massive drop, this kind of action maybe even clear the air for serious, sustained rally? Just a thought, zero conviction on that projection.

Thoughts? Am I off my rocker to think this? @luvb2b @neroden @YasB @schonelucht @brian45011 @jhm @Causalien @DaveT @jesselivenomore

BTW, my numbers are very rough approximation, nothing too precise.

Even tho you mentioned a bunch of people who provide lower quality analysis than me, i will still answer


I think it is a very reasonable assumption and probably correct *IF* you are correct that GA2/significant number of robotics is unuseable and they can support the write off. I actually think it is a very smart thing to do.

With that said I have given up trying to predict what they do

 

[Esme Es Mejor]

Only if they continued to build ICE vehicles, which would be against the mission. I don't see them doing that.

I assume the acquisition would be for the purpose of converting ICE production to EV production as quickly as batteries are available, which seems in line with the mission. In the meantime, if it did get Tesla more money for their ZEV credits, that would help them accelerate the transition.

Obviously, the ICE vehicles would be sold under the legacy brand. As production lines switch to EV production, I assume they would be Tesla vehicles. Anyway, I just wanted to make sure that roughly double ZEV income.

 

[YasB]

I think it is a very reasonable assumption and probably correct *IF* you are correct that GA2/significant number of robotics is unuseable and they can support the write off. I actually think it is a very smart thing to do.

Can somebody explain to me, where the idea they had to throw away GA2 is coming from?

 

[Reality]

One other thing about the Munro report, I dont want to argue it anywhere else because it seems like all the good accounting discussion comes from this thread.


Munro tears apart costs and prices out the pieces, then adds in labor. Munro is not an accountant.


Labor and raw materials are not the only parts of COGS, his margin numbers are relatively meaningless UNLESS he says the parts alone would cost 50k.


So while they are a good baseline that Tesla will definitely be profitable on 50k+ model 3's, you cant just pencil in 30% margins in your models because you havent included some of the largest variables AND an ASP of 50k is going to go away fairly quickly if Tesla wants to be able to sell close to 250k Model 3s a year (simply put, demand for 50k+ vehicles is way less than 35k vehicles)

 

[Reality]

Can somebody explain to me, where the idea they had to throw away GA2 is coming from?

Well, I am not really saying they had to throw away GA2.


But what if they threw away robotics from GA3 and GA2 that they didnt need/broke/cant use/effed up, all of which they have basically admitted in the attempt to overautomate.


Call it scrapping GA2 or whatever, im thinking more along the lines of useless PPE they now own getting run off even if its 2k on GA and 2k on GA3

 

[Reality]

One other thing about the Munro report, I dont want to argue it anywhere else because it seems like all the good accounting discussion comes from this thread.


Munro tears apart costs and prices out the pieces, then adds in labor. Munro is not an accountant.


Labor and raw materials are not the only parts of COGS, his margin numbers are relatively meaningless UNLESS he says the parts alone would cost 50k.


So while they are a good baseline that Tesla will definitely be profitable on 50k+ model 3's, you cant just pencil in 30% margins in your models because you havent included some of the largest variables AND an ASP of 50k is going to go away fairly quickly if Tesla wants to be able to sell close to 250k Model 3s a year (simply put, demand for 50k+ vehicles is way less than 35k vehicles)

one more comment here, the munro report was definitely very bullish, not denying that, but just want to make sure we are qualifying that Munro is saying 36% of a 55k car (whatever it was, LR, prem w EAP, 36+9+5+5?) after parts and labor (then he later said 18k in parts and 10k labor right? Somewhat confusing but he isnt an accountant), still means ~35k in COGS......which means 20% margin on a 35 car is probably pretty unlikely unless that battery savings is much larger than we think.

 

[gluu]

one more comment here, the munro report was definitely very bullish, not denying that, but just want to make sure we are qualifying that Munro is saying 36% of a 55k car (whatever it was, LR, prem w EAP, 36+9+5+5?) after parts and labor (then he later said 18k in parts and 10k labor right? Somewhat confusing but he isnt an accountant), still means ~35k in COGS......which means 20% margin on a 35 car is probably pretty unlikely unless that battery savings is much larger than we think.

Munro also estimated gross margin for the base vehicle at 18%. The battery size difference is actually quite enormous. Roughly 50kwh vs 80kwh for LR. One bullish aspect that may scare you if you plan to hold your short position through 2019 is that the the base model margin doesn't include EAP/FSD. Over the medium and longer term, those options are going to have a really high take rate, which will push the gross margins to absolutely insane numbers. FSD option price will likely increase as it reaches maturity.

 

[bdy0627]

Munro also estimated gross margin for the base vehicle at 18%. The battery size difference is actually quite enormous. Roughly 50kwh vs 80kwh for LR. One bullish aspect that may scare you if you plan to hold your short position through 2019 is that the the base model margin doesn't include EAP/FSD. Over the medium and longer term, those options are going to have a really high take rate, which will push the gross margins to absolutely insane numbers. FSD option price will likely increase as it reaches maturity.

What is Munro assuming for the battery cost?

 

[gluu]

What is Munro assuming for the battery cost?

Unfortunately he does not share those numbers, as you have to pay for the report for that kind of detail. But I think Elon/Management's guidance is roughly correct for this to all work. They are probably at pack level ~$125 kwh now, $100kwh once they bring in more of the battery process to Giga (What I remember them saying is that cathode manufacturing would occur at Giga at some point) and a few other optimizations.

 

[StockCynic]

I assume the acquisition would be for the purpose of converting ICE production to EV production as quickly as batteries are available, which seems in line with the mission. In the meantime, if it did get Tesla more money for their ZEV credits, that would help them accelerate the transition.

Obviously, the ICE vehicles would be sold under the legacy brand. As production lines switch to EV production, I assume they would be Tesla vehicles. Anyway, I just wanted to make sure that roughly double ZEV income.

ZEV credits will have less of an impact going forward for Tesla. We already saw this happen last year (2017 vs 2016) with the growth in revenue from regulatory credits being much smaller on a percentage basis than the growth in deliveries and auto revenue. The reason being is that the other big manufacturers (Ford, GM, FCAU, Hyundai etc.) have all already "banked" enough credits to last through probably 2021-2022 based on their current sales in ZEV states and the regulations under the program.

What you are seeing happen in real time is a massive flood of ZEV supply hitting the market all at once. Not only is the model 3 generating massive amounts of credits, but the other manufacturers are SPECIFICALLY targeting their sales of EV hybrid vehicles in states like California and New York. They will take $2000 - $3000 off the sticker price in those states to move that metal and grab the 3 credits that they previously bought from Tesla. Nobody really knows what the going rate for the credits is other than those doing the actual buying and selling but the fact is going forward ZEV credit supply will dramatically outstrip demand. Every Leaf, Niro, I-Pace, Kona, Bolt of targeted sales in the ZEV states will give rise to more and more credits.

If I were an auto manufacturer and I know that Tesla needs the revenue and cash flow in Q3/Q4, that only increases my negotiating power when it comes to the ZEV market. None of the auto manufacturers NEEDS the credits today, whereas Tesla NEEDS to sell a bunch in the next 6 months. That puts them in a tough position and I think you will see sales of regulatory credits being reduced even further on a %age basis (maybe even absolute) in the back half of this year as compared to last year.