Near-future quarterly financial projections

[Artful Dodger]

I don't understand. Elon has taxable income when he exercises shares. But exercising options does not affect Tesla's GAAP SBC.

It's a simple connection: how much income does it take to offset $130M in charitable deductions.

 

[Doggydogworld]

It's a simple connection: how much income does it take to offset $130M in charitable deductions.

I understand the possible connection between Musk's charitable contributions and his taxable income. But you said "This may be informative as a component of SBC." I see no way to connect it to Tesla's GAAP SBC. Whether Musk exercises zero options or 20 million options has no effect on Tesla GAAP SBC.

FWIW, I imagine these contributions relate to options from his 2012 Plan which expire before long. Tesla hasn't recognized meaningful SBC for the 2012 Plan in several years.

 

[Thekiwi]

Question: "recourse debt" reduced from $5,660m at Q4 end to $4,483m at Q1 end.

Can anyone flesh out what this reduction was? Some of it convertible bonds, but what was the rest? could it be related to reduced in-transit financing due to elimination of S/X inventory?

 

[kengchang]

Question: "recourse debt" reduced from $5,660m at Q4 end to $4,483m at Q1 end.

Can anyone flesh out what this reduction was? Some of it convertible bonds, but what was the rest? could it be related to reduced in-transit financing due to elimination of S/X inventory?

 

[Artful Dodger]

Question: "recourse debt" reduced from $5,660m at Q4 end to $4,483m at Q1 end.

Can anyone flesh out what this reduction was? Some of it convertible bonds, but what was the rest? could it be related to reduced in-transit financing due to elimination of S/X inventory?

Thanks for bringing up this important part of the Q1 story, that Tesla has traded some FCF for a significant reduction in long-term debt.

We should also mention that Tesla's quartely interest expense was also reduced by $100M vs 2020Q4 due to Tesla's consistant pay down of debt.

This results is a permanent 'bump' in Tesla's profitability going forward.

Cheers!

 

[Rarity]

I was poking around some other companies that will have similar issues going forward and my general conclusion is that you would not have the ability to include upward valuations, even under a non-GAAP presentation.

Non-GAAP presentation does not allow a reporter to introduce new information, it only allows someone to change the order of presentation or to add sub totals (eg, EBIT and EBITDA are non-gaap measures) or adjust sub totals to remove amounts (eg, removal of SBC).

One example would be Microstrategy, below are extracts from their recent 10-K. Not only do they not even report the FMV value of their BTC in notes disclosure (I would have at least expected that, but apparently the auditors didn’t agree), they took a loss on some of their BTC, given that impairment is an any point in time test ( if it drops below your purchase price for even one second you have an impairment loss to take).

This is very helpful. Just to clarify on recognition of gain/loss, my understanding is that the reporter can choose the lots to sell, thereby choosing how much or how little of a gain they wish to report (assuming the lots trade above purchase price). Can you confirm that my understanding is correct?

 

[EVNow]

This is very helpful. Just to clarify on recognition of gain/loss, my understanding is that the reporter can choose the lots to sell, thereby choosing how much or how little of a gain they wish to report (assuming the lots trade above purchase price). Can you confirm that my understanding is correct?

Don't know about corporate law - but personal income tax allows selecting lots to be sold (separately, there are complications about average pricing etc that you may have used in earlier years - probably not relevant here).

 

[Doggydogworld]

Hi,

I have a question i got from Tesla's Q1 earnings. I usually don't read much on forums and such, and i've got admit i've never used Tesla Motors Club before, so i'm sorry if this is not the right place to ask investing related questions.

At Tesla earnings for Q1 we know they only sold model 3 and model Y. The average selling price (without credits) for this quarter was 45 890 USD and the margin was 22,0%. From this we can calculate the cost price by subtracting the margin % from the sales price 45 890 - 22% = 35800. Despite this tesla stated that they had reduced their cost price to [below] 38000 usd. My question is then, where do they get the extra 2000 USD from in this equation?

I replied in this thread because I think others here might add some good comments.

You need to tweak your math a little. Tesla delivered 184,877 cars in Q1, but they only sold 171,275. The other 13,602 were leased (or effectively leased). See page 6 of the earnings release. Similarly, auto sales revenue, ex-credits was 8187m (page 24). Sales revenue excludes the 297m of leasing revenue. Page 24 also shows COGS for new car sales (not leases) was 6457m.

8187m / 171,275 cars = 47,800 revenue per car
6457m / 171,275 cars = 37,700 COGS per car

Note that this is 21.13% gross margin, not 22%. That's because they report margin for sales and leases combined, and 46% leasing margin pulls the blended number up a bit. (Side note: leasing is not twice as profitable, they just report leasing revenue and COGS in a way that inflates margin. This partially contributes to their recurring negative gross margin in Services & Other).

Final note - these per car numbers are a blend of 3/Y and S/X. They produced zero S/X in Q1, but they sold 2030 S/X out of inventory. They report both the revenue and COGS for inventory cars in the period the car was delivered, not the period it was produced. Since there was almost a 99:1 3/Y to S/X sales ratio in Q1 we can guess that 3/Y ASP and COGS were a few hundred dollars below the blended numbers shown above.

 

[PKEllefsen]

I replied in this thread because I think others here might add some good comments.

You need to tweak your math a little. Tesla delivered 184,877 cars in Q1, but they only sold 171,275. The other 13,602 were leased (or effectively leased). See page 6 of the earnings release. Similarly, auto sales revenue, ex-credits was 8187m (page 24). Sales revenue excludes the 297m of leasing revenue. Page 24 also shows COGS for new car sales (not leases) was 6457m.

8187m / 171,275 cars = 47,800 revenue per car
6457m / 171,275 cars = 37,700 COGS per car

Note that this is 21.13% gross margin, not 22%. That's because they report margin for sales and leases combined, and 46% leasing margin pulls the blended number up a bit. (Side note: leasing is not twice as profitable, they just report leasing revenue and COGS in a way that inflates margin. This partially contributes to their recurring negative gross margin in Services & Other).

Final note - these per car numbers are a blend of 3/Y and S/X. They produced zero S/X in Q1, but they sold 2030 S/X out of inventory. They report both the revenue and COGS for inventory cars in the period the car was delivered, not the period it was produced. Since there was almost a 99:1 3/Y to S/X sales ratio in Q1 we can guess that 3/Y ASP and COGS were a few hundred dollars below the blended numbers shown above.

Aah. Lots of things i haven't considered here. Thank you for very much for the response - it really bothered me. I'll read through the earnings thoroughly a few more times i think and read-do some of my numbers. Thanks again!

 

[dc_h]

Well @The Accountant , what are you thinking for Q2. 3Y deliveries are likely to be 200,000 with increased Shanghai Y production increasing and still me increase likely from Fremont and add about 7000 Model S, margins should improve another 1%. Reduce SBC and that could add another 1%. I think reg credits are a score of the competition and they’re not keeping up and that means the numbers are likely to rise before declining. VW paying Tesla in China could keep this number over 400 or 500 million through 2022.
I’m thinking no more or less SX charges, 100-200 less SBC and about 2 billion more revenue. TE should be better as well, but 509 million barely moves the needle. Non-GAAP seems likely about 1.2 billion.

 

[StarFoxisDown!]

Well @The Accountant , what are you thinking for Q2. 3Y deliveries are likely to be 200,000 with increased Shanghai Y production increasing and still me increase likely from Fremont and add about 7000 Model S, margins should improve another 1%. Reduce SBC and that could add another 1%. I think reg credits are a score of the competition and they’re not keeping up and that means the numbers are likely to rise before declining. VW paying Tesla in China could keep this number over 400 or 500 million through 2022.
I’m thinking no more or less SX charges, 100-200 less SBC and about 2 billion more revenue. TE should be better as well, but 509 million barely moves the needle. Non-GAAP seems likely about 1.2 billion.

If Tesla only did 200k 3/Y for Q2, that would mean that they stayed at MIC Y March production levels all throughout Q2........which seems very unlikely. Considering no Chinese new year in Q2 plus about 2-3 extra days in the quarter plus no downtime in Fremont (about 4-5 days total in Q1), and it's really hard for me to see how anyone could be predicting less than 210k 3/Y for Q2.

And we know demand won't be an issue because Tesla's order book is at it's highest ever and the rate of orders is the highest ever.

 

[The Accountant]

Well @The Accountant , what are you thinking for Q2. 3Y deliveries are likely to be 200,000 with increased Shanghai Y production increasing and still me increase likely from Fremont and add about 7000 Model S, margins should improve another 1%. Reduce SBC and that could add another 1%. I think reg credits are a score of the competition and they’re not keeping up and that means the numbers are likely to rise before declining. VW paying Tesla in China could keep this number over 400 or 500 million through 2022.
I’m thinking no more or less SX charges, 100-200 less SBC and about 2 billion more revenue. TE should be better as well, but 509 million barely moves the needle. Non-GAAP seems likely about 1.2 billion.

Your numbers and logic make sense...can't argue with any of it. I may take a first stab at Q2 financials this weekend using 2-3 scenarios for deliveries.

 

[EVNow]

I think reg credits are a score of the competition and they’re not keeping up and that means the numbers are likely to rise before declining.

Does anyone know how Tesla is recognizing reg credits - has anything changed in the last few quarters ? Size of reg credits seems to drive SP. Somehow market seems to think of reg credits as "one time" / "fake" - even though they have been a part of Tesla business for 5+ years. Transparency on the part of Tesla in how they deal with reg credits will be useful for the market.

Right now its as if they can produce whatever amount of reg credit they want to get to whatever profit level they aim for (obviously within reason). One of the reasons I even stopped trying to model earnings.

ps : From 10-Q. So, they can sell credits as and when they need to hit certain numbers for a quarter - apart from whatever their deal is with Fiat?

Automotive Regulatory Credits

We earn tradable credits in the operation of our automotive business under various regulations related to zero-emission vehicles, greenhouse gas, fuel economy and clean fuel. We sell these credits to other regulated entities who can use the credits to comply with emission standards and other regulatory requirements.

Payments for automotive regulatory credits are typically received at the point control transfers to the customer, or in accordance with payment terms customary to the business. We recognize revenue on the sale of automotive regulatory credits at the time control of the regulatory credits is transferred to the purchasing party as automotive sales revenue in the consolidated statements of operations. Deferred revenue related to sales of automotive regulatory credits was $61 million and $21 million as of March 31, 2021 and December 31, 2020, respectively. We expect to recognize the majority of the deferred revenue as of March 31, 2021 in the next 12 months. Revenue recognized from the deferred revenue balance as of December 31, 2020 and 2019 was immaterial for the three months ended March 31, 2021 and 2020, respectively.

 

[st_lopes]

Does anyone know how Tesla is recognizing reg credits - has anything changed in the last few quarters ? Size of reg credits seems to drive SP. Somehow market seems to think of reg credits as "one time" / "fake" - even though they have been a part of Tesla business for 5+ years. Transparency on the part of Tesla in how they deal with reg credits will be useful for the market.

Right now its as if they can produce whatever amount of reg credit they want to get to whatever profit level they aim for (obviously within reason). One of the reasons I even stopped trying to model earnings.

ps : From 10-Q. So, they can sell credits as and when they need to hit certain numbers for a quarter - apart from whatever their deal is with Fiat?

Automotive Regulatory Credits

Depends on geography. The EU credits are not earn and trade. They are all pre sold within a multi party pool. So Tesla earns the credit, which is already pre sold at an agreed to price with a pool member, for every car they sell in EU. The buying party then gets to count Tesla’s sale against their emissions targets. Those agreements with FCA and Stelantis are up for renewal next year I believe, and are likely to be renegotiated for several more years given the EU’s increasing emissions restrictions.

Other geographies are a trade system. So rather than have pre defined priced arrangements, the credit holder would have the ability to sell the credit whenever they want at whatever the market price is for that credit at that point in time. This is what the deferred revenue balance is. I believe this mechanic is the case in China, and was the case for the California credits that existed once upon a time.

All that said, the lions’ share comes from the EU deal, and will only be going up as Berlin comes online.

So no they don’t have that much flexibility to just decide to sell them (the EU version) to hit a profit target. Hence why the deferred balance is quite low (relative to prior years) and has been for some time now. They can however decide to direct more cars to EU than they otherwise would so as to maximize the credits they earn.

 

[EVNow]

All that said, the lions’ share comes from the EU deal, and will only be going up as Berlin comes online.

So no they don’t have that much flexibility to just decide to sell them (the EU version) to hit a profit target. Hence why the deferred balance is quite low (relative to prior years) and has been for some time now. They can however decide to direct more cars to EU than they otherwise would so as to maximize the credits they earn.

The problem with the Fiat deal is we don't know when Tesla recognizes the revenue. Is it #of cars sold in EU x credit per car ? If that was the case the credits won't vary so wildly.

It seems to me they have considerable flexibility in deciding when to recognize the revenue and show it on the P&L.

 

[st_lopes]

The problem with the Fiat deal is we don't know when Tesla recognizes the revenue. Is it #of cars sold in EU x credit per car ? If that was the case the credits won't vary so wildly.

It seems to me they have considerable flexibility in deciding when to recognize the revenue and show it on the P&L.

We do know. It’s a fundamental accounting concept. Every car sold in EU gives rise to a credit that is ALREADY pre-sold. From an accounting perspective that leaves you zero flexibility on recognition. It’s recognized in full on date of selling the vehicle in the EU.

Any deferred balances are relating to credits in non-EU programs. So put it this way, as long as Tesla keeps increasing volumes in EU, credit revenue will keep rising. The only obstacle to that reality is an expiration of the contract or their being some kind of declining volume scale on pricing the credits.

Think of it this way, you can only defer the revenue if there is an action left for you to take to monetize the credit. An action like having to go on a credit exchange to sell it or needing to find a buyer for the credit. The EU credits don’t have those actions. The day they earned by Tesla, they are already sold, and Tesla already has a receivable from Fiat. Those facts make it 100% recognized on sale of the vehicle.

 

[EVNow]

Think of it this way, you can only defer the revenue if there is an action left for you to take to monetize the credit.

Depends on the contract. You are assuming a linear simple model it can be a non-linear model that only kicks in after certain conditions are met apart from the sale. We just don’t know.

I’ll gather the EU sales and the credits and show them together. We’ll see how well they correlate.

Better still - has someone already compared them ?

 

[JohnnyEnglish]

Those facts make it 100% recognized on sale of the vehicle.

I am not sure they will be recognised on the sale of the vehicle due to the following:

• the credit is obtained by the pool
• the credit value is against a penalty which may or may not become due - if the total credits outweigh the penalty then only a portion of the credit value would be utilised
• the credit value per vehicle varies - there are credits and super credits. Not that knowledgeable on this point so do not know if the regulations are prescriptive as to which specific vehicle from the pool earns a super credit or a credit.

All that being said I agree that Tesla probably does not have any flexibility as to when these EU credit amounts are recognised.

 

[CorneliusXX]

I am not sure they will be recognised on the sale of the vehicle due to the following:

• the credit is obtained by the pool
• the credit value is against a penalty which may or may not become due - if the total credits outweigh the penalty then only a portion of the credit value would be utilised
• the credit value per vehicle varies - there are credits and super credits. Not that knowledgeable on this point so do not know if the regulations are prescriptive as to which specific vehicle from the pool earns a super credit or a credit.

All that being said I agree that Tesla probably does not have any flexibility as to when these EU credit amounts are recognised.

It may be organised in a way that the estimated credit value is applied to each vehicle, with a portion provisioned for uncertainty around the final number - then the figures are trued up at the end of the year when the provision is released.

 

[st_lopes]

It may be organised in a way that the estimated credit value is applied to each vehicle, with a portion provisioned for uncertainty around the final number - then the figures are trued up at the end of the year when the provision is released.

I agree. The credit values are a lot more predictable than analysts are recognizing. The difficulty is that for some reason each EU pool is highly secretive about the terms of each of their agreements.

Also Tesla is in a pool that has never met it’s emissions target. I had done a deep dive of the mechanics of the pools at one point and I believe it was that all pure EVs were super credits and if you did end up in a net credit position there were carry over mechanics to subsequent periods. This would reinforce that the credit revenue is recognized in full on each vehicle sale.

I agree that Tesla likely earns an estimated credit on each vehicle with a true up payment at year end. I would not expect there to be a scenario where Tesla doesn’t earn a credit on every vehicle because then they would not have incentive to stay in that particular pool.

I would expect that once Berlin is online and Tesla’s EU volumes are more predictable that they’ll have more negotiating ability to demand pricing that favors them. Keep in mind that Tesla entered these agreements at a time where it had very low volume EU sales.