q1 2018 earnings estimates

[luvb2b]

Tesla can monetize existing leases by selling them off and thus create extra cash? Yes. In so far that those leases were not already monetized under the warehouse agreement by Tesla.

yes that's what i am saying.

I looked it up : it's 673M in outstanding balance by the end of 2017. Including downpayments, federal rebates and lease payments since the start of the agreement that's good for at least 20-30k cars.

can you expand on that math? in my simple view 673m = 6,730 cars at 100k (asp's were higher before too). i know it may represent a few more cars due to paydowns, etc. however approx 7k cars were just added as leases in q4.

you're saying 20k-30k leases are covered by that 673m and the warehouse agreement just started q3 2016. my guess is the warehouse agreement haircuts the lease value much more than a securitization does.

We will have to see the details but the $540M securization of leases this quarter was likely matched with an equal drop in outstanding warehouse debt. I don't think we will see much cash creation there. That operation was more about opening up regular lease financing by packaging them up for wholesale investors instead of through a bank agreement (and potentially interest optimization?)

nice work! i found it buried in the 10k:
On February 6, 2018, we issued $546.1 million in aggregate principal amount of automobile lease-backed notes with interest rates ranging from 2.3% to 4.9% and maturities ranging from December 2019 to March 2021. The proceeds from the issuance, net of discounts and fees, were $543.1 million. Contemporaneously, we repaid $453.6 million of the principal outstanding under the Warehouse Agreements.

net cash creation of 90m only. but, it frees up extra borrowing capacity under the warehouse agreement that i am thinking they will use this quarter as s/x deliveries accelerate q over q. i am very curious to see how they manage the cash this quarter - this one large line item has the potential to shift the end of quarter figure by hundreds of millions.

 

[schonelucht]

can you expand on that math? in my simple view 673m = 6,730 cars at 100k (asp's were higher before too). i know it may represent a few more cars due to paydowns, etc. however approx 7k cars were just added as leases in q4.

You only need to fund costs, not revenue so that brings it back to 70k per car. Then there is the federal rebate Tesla gets with a direct lease construct. 62.5 left per car. Add in an average down payment of another 12.5k we are at 50k then average lease payments already paid by costumers and we are well below $50k. Mmm maybe I was a little too optimistic there. You may be right that the haircut is too much on the warehouse agreement. That would mean we’ll see a nice cash contribution in further securitizations. Thanks I’ll try to modify my thinking on cash here.

 

[Out4aDuck]

I think you are low on leasing revenue with the new rules, and high on Gross Margin @ 16% of auto, overall looks like a solid model though. I think net Income is closer to 950k, but they definitely do everything possible to keep it under a billion.It is going to be a really really bad looking set of financials.

Really great model

First of all, thank you luvb2b for sharing your detailed analysis. I'm always impressed.
The only question I had was regarding lease revenue. You expect it to increase significantly despite selling 6600 fewer S/X than last quarter. Then to puzzle me even more, Reality was of the opinion that your estimate was low. Is the new lease accounting going to make that much difference?

 

[brian45011]

On February 6, 2018, we issued $546.1 million in aggregate principal amount of automobile lease-backed notes with interest rates ranging from 2.3% to 4.9% and maturities ranging from December 2019 to March 2021. The proceeds from the issuance, net of discounts and fees, were $543.1 million. Contemporaneously, we repaid $453.6 million of the principal outstanding under the Warehouse Agreements.

net cash creation of 90m only. but, it frees up extra borrowing capacity under the warehouse agreement that i am thinking they will use this quarter as s/x deliveries accelerate q over q. i am very curious to see how they manage the cash this quarter - this one large line item has the potential to shift the end of quarter figure by hundreds of millions.

"The interest rate under the 2017 Warehouse Agreement is generally based on (i) LIBOR plus a fixed margin, currently resulting in an interest rate of approximately 2.7%, or (ii) the interest rate of short-term commercial paper notes used by certain lenders to maintain their loans. The 2017 Warehouse Borrower is subject to various customary events of default, covenants and limitations. The ability to draw under the 2017 Warehouse Agreement is scheduled to end on August 17, 2018, and the loan maturity date is September 20, 2019, in each case subject to specified acceleration or extension conditions. "

All the cash proceeds from the transferred leases now goes to the ABS trustee and the ~$90 MM net cash creation is "amortized" over the remaining terms of the transferred leases. Also, interest expense (and use of cash) is reduced by the amount that would have been paid to the Warehouse lenders if the $453.6 MM had not been repaid.

 

[brian45011]

Then there is the federal rebate Tesla gets with a direct lease construct. 62.5 left per car..

How does Tesla get a $7,500 "federal rebate?" Isn't it a federal credit against income tax liability only in the year the car is first titled for leasing? Tesla has billions in NOLs to carry forward and shows a full valuation allowance against its deferred US tax assets.

 

[schonelucht]

Thats a good question. From what I understand the tax credit for EVs must be taken the exact year that the car is put in use. Use it or loose it. Therefore they can’t end up in NOLs. But clearly Tesla gets the money somehow (otherwise the least payments don’t work out) Therefore I assumed they had some clever VIE like structure that allowed external parties to claim the taxe crédits yet have the leases wholly consolidated on the Tesla balance sheet. But I really don’t know enough here. If you have additional info much appreciated!

 

[brian45011]

... clearly Tesla gets the money somehow (otherwise the least payments don’t work out) Therefore I assumed they had some clever VIE like structure that allowed external parties to claim the taxe crédits yet have the leases wholly consolidated on the Tesla balance sheet. But I really don’t know enough here. If you have additional info much appreciated!

I have not been able to figure out how Tesla could monetize the EV credits. When we obtained a quote for a leased vehicle in 2016, it was from Tesla Finance, and the credit was added back to the estimated residual value at the end of the lease's term, reducing the monthly payments.

Unlike the solar credits, the EV credits are not transferable. If a clever VIE-like structure is involved, that entity would have to be the one that first titles the car. We did not consummate the lease, so don't know for sure.

Looking at the August.2017 Warehouse agreement amendments, they were signed for Tesla 2014 Warehouse SPV LLC, and Tesla Finance LLC, by William J. Donnelly (who is no longer a Tesla employee). Both entities are LLCs so there could be some undisclosed owner/partnership agreements. Section 6.03 (b) in the Covenants article contains some heavily redacted language about risk retention. Who knows???

I have been assuming one of the primary reasons for the losses at the Gross Profit level in Services & Other is because, when the cars are returned at the end of the direct leases, Inventory write-offs are necessary to align carrying costs with the true re-sale market value.

 

[luvb2b]

you only need to fund cost, but the customer owes the whole amount of the lease (essentially + interest), so isn't it the higher value that can be turned to cash?

You only need to fund costs, not revenue so that brings it back to 70k per car. Then there is the federal rebate Tesla gets with a direct lease construct. 62.5 left per car. Add in an average down payment of another 12.5k we are at 50k then average lease payments already paid by costumers and we are well below $50k. Mmm maybe I was a little too optimistic there. You may be right that the haircut is too much on the warehouse agreement. That would mean we’ll see a nice cash contribution in further securitizations. Thanks I’ll try to modify my thinking on cash here.

 

[luvb2b]

@brian45011 when you say the 90mm net cash creation is "amortized" over the terms, do you mean from an accounting standpoint? as i understood that 90m in net cash walks in the door b/c the securitization buyers paid that much more than was repaid.

"The interest rate under the 2017 Warehouse Agreement is generally based on (i) LIBOR plus a fixed margin, currently resulting in an interest rate of approximately 2.7%, or (ii) the interest rate of short-term commercial paper notes used by certain lenders to maintain their loans. The 2017 Warehouse Borrower is subject to various customary events of default, covenants and limitations. The ability to draw under the 2017 Warehouse Agreement is scheduled to end on August 17, 2018, and the loan maturity date is September 20, 2019, in each case subject to specified acceleration or extension conditions. "

All the cash proceeds from the transferred leases now goes to the ABS trustee and the ~$90 MM net cash creation is "amortized" over the remaining terms of the transferred leases. Also, interest expense (and use of cash) is reduced by the amount that would have been paid to the Warehouse lenders if the $453.6 MM had not been repaid.

 

[luvb2b]

my lease revenue model is complex but in what i posted that increase is coming from what i estimate are additional rvg release this quarter.

however @Reality brought up a good point, that the new accounting will cause rvg partnered leases to be booked as sales right away vs. being subject to lease accounting. so there should be some unusual uptick in revenue this quarter from that effect, i am still trying to understand how to estimate it.

this accounting change may also affect how the lease revenue is reported so i need to spend more time to understand it. @brian45011 do you know how recognition of present and historical rvg parnered leases will change this quarter with new rules?

First of all, thank you luvb2b for sharing your detailed analysis. I'm always impressed.
The only question I had was regarding lease revenue. You expect it to increase significantly despite selling 6600 fewer S/X than last quarter. Then to puzzle me even more, Reality was of the opinion that your estimate was low. Is the new lease accounting going to make that much difference?

 

[ggr]

my lease revenue model is complex but in what i posted that increase is coming from what i estimate are additional rvg release this quarter.

however @Reality brought up a good point, that the new accounting will cause rvg partnered leases to be booked as sales right away vs. being subject to lease accounting. so there should be some unusual uptick in revenue this quarter from that effect, i am still trying to understand how to estimate it.

this accounting change may also affect how the lease revenue is reported so i need to spend more time to understand it. @brian45011 do you know how recognition of present and historical rvg parnered leases will change this quarter with new rules?

I'm not sure, but I thought the new accounting didn't come in until 2019? Or is it phased in or something?

 

[Reality]

I'm not sure, but I thought the new accounting didn't come in until 2019? Or is it phased in or something?

The new revenue recognition standard goes into effect in 2018 and the new lease accounting standard go into effect in 2019.

I probably phrased it poorly, but what i meant was i think the new revenue recognition standard might make accounting for a car lease different in that most of the sales price is pulled forward.

 

[luvb2b]

The new revenue recognition standard goes into effect in 2018 and the new lease accounting standard go into effect in 2019.

I probably phrased it poorly, but what i meant was i think the new revenue recognition standard might make accounting for a car lease different in that most of the sales price is pulled forward.

my work indicates 3rd party leases backed by a tesla rvg will now be treated as a cash sale. so, my revenue estimate is likely a bit low for auto revenue this period. still trying to understand how past period 3rd party lease w/tesla rvg's are changed.

 

[brian45011]

@brian45011 when you say the 90mm net cash creation is "amortized" over the terms, do you mean from an accounting standpoint? as i understood that 90m in net cash walks in the door b/c the securitization buyers paid that much more than was repaid.

No, more from a generic standpoint. When the direct leases were held by Tesla Finance but financed by draws against the Warehouse Lines, Tesla kept all the monthly cash payments from the lessees minus remittances of interest to the Warehouse creditors. By transferring the leases to the ABS trustee, Tesla gets the $90MM differential up-front now but the ABS trustee keeps all the monthly cash payments from the lessees and uses it to pay the P&I obligations to the ABS holders.

It's unclear how the dynamic surrounding return of the vehicles at the end of the lease periods will play out. Under Warehouse line financing, it was relatively straight forward: the cars were turned into Tesla Finance which then controlled their ultimate disposition. Tesla Finance could effectively also control the resale market pricing as long as it did not mind holding the used vehicles longer than most lessors traditionally hold returned cars.

The ABS trustee owes a fiduciary duty to the security's holders. My understanding (possibly incorrect) is that the trustee has rights to the returned vehicles. If so, the trustee may be more interested in generating cash from the returned vehicles to meet his P&I obligations to the holders than in maintaining high resale market pricing.

 

[brian45011]

@brian45011 do you know how recognition of present and historical rvg parnered leases will change this quarter with new rules?

No. I really haven't had the time (nor to be candid, the interest) to wade into the FASB ASUs. The 10k states: "We plan to adopt the new revenue recognition standard ASC 606 effective January 1, 2018. This will impact the way we account for vehicle sales with a resale value guarantee and vehicles leased through our leasing partners, which now will qualify to be accounted for as sales with a right of return."

When the resale and residual guarantees first started in 2013, Tesla used to recognize in its non-GAAP reporting all the revenue and GM in the quarter the delivery was made. This practice effectively assumed none of the guarantees would be exercised (The practice has since been discontinued, which may have been at the SEC's behest.) I suspect the new FASB ASUs will be similar to the old Non-GAAP reporting, possibly with some kind of probabilistic reserve/contingent liability for exercised guarantees.

The Resale Guarantees are a diminishing issue. That offer was discontinued in the US in June 2016, and the 10k started: "Through 2017, we only had an insignificant number of customers who exercised their resale value guarantees and returned their vehicles to us." and " Resale value guarantees available for exercise within the 12 months following December 31, 2017 totaled $ 375.7 million in value." Most Resale Guarantees had an exercise period of between 36-39 months after purchase.

To me the issue going forward is whether financial institutions will have enough confidence in predicting S,X, and 3 residual values to write lease contracts without a residual guarantee from Tesla. If not, the back-end risk persists, and the recent credit rating downgrade may influence some "bank leasing partners."

 

[Reality]

my work indicates 3rd party leases backed by a tesla rvg will now be treated as a cash sale. so, my revenue estimate is likely a bit low for auto revenue this period. still trying to understand how past period 3rd party lease w/tesla rvg's are changed.

I believe it would go below the line with extraordinary items and one time items as 'change in accounting principle, im not an expert of car manufacturer accounting, but that would be my best guess'.

That or you have to prepare proforma statements for prior years as if the accounting principle had been applied the whole time. You definitely can't just dump revenue deferred in previous year into the current period.

 

[Drax7]

These numbers explain the sense of urgency. 24/7 , 2 shifts etc

 

[brian45011]

I believe it would go below the line with extraordinary items and one time items as 'change in accounting principle, im not an expert of car manufacturer accounting, but that would be my best guess'.

That or you have to prepare proforma statements for prior years as if the accounting principle had been applied the whole time. You definitely can't just dump revenue deferred in previous year into the current period.

"In addition, for certain vehicles sales with a resale value guarantee and vehicles leased through leasing partners prior to 2018, we will cease recognizing lease revenue starting in 2018 and record the associated cumulative adjustment to equity under the modified retrospective approach."

Possibly no effect on current quarter's Income Statement for pre-2018 resale/residual guaranteed transactions, just an adjustment on the Balance Sheet in the Stockholder's Equity section under "Accumulated other comprehensive gain (loss)" ? Not sure how period to period comparisons on the Income Statement will be handled going forward.

 

[luvb2b]

I believe it would go below the line with extraordinary items and one time items as 'change in accounting principle, im not an expert of car manufacturer accounting, but that would be my best guess'.

That or you have to prepare proforma statements for prior years as if the accounting principle had been applied the whole time. You definitely can't just dump revenue deferred in previous year into the current period.

i tend to agree with you, there's not going to be an income statement impact from the retroactive adjustments.

from our collective wisdom, it seems that (a) 3rd party rvg-backed leases for this period will now be booked under auto revenue (++ for the auto revenue line), (b) revenue that was being ratably realized from past 3rd party rvg-backed leases will no longer be realized (-- for the lease revenue line), and (c) the historical rvg-related stuff on the balance sheet will get taken as a one-time balance sheet adjustment / extraordinary item that won't otherwise impact the eps.

i have a feeling the net impact of this will be to raise gaap revenue by 100-200m, because new rvg-backed leases have averaged around 300m/quarter the last 4 quarters.

 

[Reality]

Unless I am mistaken, RVG shouldnt change, only the deferred revenue piece that relates to new auto leases.


I also want to point out, that if you think Tesla is a company that has been known to practice aggressive or controversial accounting methods (I personally do, but dont really want to debate it). This quarter, with the new 606 guidance, would be a very good opportunity to press auditors for a favorable interpretation because the auditors dont have a lot of historical precedent to use, and Q GAAS requirements for a Q are pretty light.


I agree you are probably 100-150m short on leasing revenue, but honestly, i could be way off on that. COGS will come with that though.