Q2 2013 Results - Expectations and Projection

[sleepyhead]

I have often wondered about this myself. It is obviously a liability from Tesla's perspective, but I am not sure that it really does qualify as a lease which would affect the P&L. If the title is in the name of the owner, as opposed to Wells Fargo, or a leasing company of your choice, I would maintain that it is just a creative financing option with a guarantee. Surely there is an accountant active on the forum. All of the leases I have seen require some action at the end of the period to transfer title into your name. I suspect that this was thought through and reviewed very carefully before being announced. I also wonder if the lack of definitive clarification may indeed be just a tool to add controversy and lure in shorts. Elon did a masterful job in creating a squeeze to finance his payoff of the government loans and could use another one now to convert the bonds issued very inexpensively. I truly believe they used every tool they had (selling loaner cars, delaying Europe shipments etc.) to create another profitable quarter and would not have been so clumsy with a half baked sales tool that would negatively impact the bottom line.

1. I have an undergraduate and masters degree in accounting.
2. If you finance the vehicle, then the title is not in your name but in the banks name until you pay it off 100% (it's called collateral).
3. This is not a "clumsy half baked sales tool". The purpose of it is to increase sales of Model S, which it does.
4. Accounting is just accounting. They can report a $20 billion loss as far as I am concerned as long as their cash flows are positive and will stay that way. Cash is king, and no matter how they report revenue for these "leases" they still receive 100% of the vehicle price in cash.
5. I have said this about 20 times already, but GAAP earnings don't mean squat on Wall St. Adjusted earnings will exclude the effects of lease accounting (for the most part, since their is some risk to Tesla that the car will not be worth 50% in 3 years) and that is all that investors really care about.
6. They are going to be profitable on a GAAP basis anyway even with the effects of lease accounting.

 

[ces]

From Q1 10Q:

"In April 2013, we announced a financing plan whereby customers could conveniently obtain financing through one of our partner banks and also receive a residual value guarantee from Tesla. We believe that through this arrangement, customers will be able to realize some of the same benefits as those from a traditional lease. As a result of the residual value guarantee, we expect to apply lease accounting to these sales which would defer the recognition of the associated revenues over time instead of full recognition at delivery. Although lease accounting will not impact our cash flows and liquidity, a significant uptake under this program could adversely impact our 2013 revenues and operating results. Furthermore, while we do not assume any credit risk related to the customer, we are exposed to the risk that the vehicles’ residual value may be lower than our estimates and the volume of vehicles returned to us may be higher than our estimates."

 

[bollar]

2. If you finance the vehicle, then the title is not in your name but in the banks name until you pay it off 100% (it's called collateral).

Maybe you've oversimplified the explanation, but you've confused me.

If it's a loan, then the title is in the owner's name and the bank is a lien holder until the loan has been paid. The bank is not the owner unless the owner defaults and the bank exercises their lien. If it's a lease, then the lessor is the owner and the lessee won't be on the title at all. The other issue is that the owner of the car gets the EV incentives, so in the case of a lease, that incentive would go to the lessor.

To me, what Tesla has done with their banking partners is create a loan, not a lease, with a guaranteed buyback, which may create a contingent liability on Tesla's books.


Just a sample title with lien for others to reference:

 

[sleepyhead]

bollar - you are correct in what you wrote.

ces - thanks for finding the quote from the 10Q. I hope we can give this topic a rest once and for all.

 

[gregincal]

bollar - you are correct in what you wrote.

ces - thanks for finding the quote from the 10Q. I hope we can give this topic a rest once and for all.

Although technically they say they "expect" to apply lease accounting. The accountants have the final say.

 

[longtrader]

Wow, sorry if I offended you. I am fully aware of what collateral is. I have always bought my own cars, but in SC, on the back of the title there is a place for the lienholder to mark the title. However, all of the vehicles we have leased for the company have been in the name of the leaseholder until the buyout (or not) at the end when the ownership changes. As far as the half baked comment is concerned, you don't have to look far to find that many other auto manufacturers have used incentives and for a long time to lure in buyers that at the end of the day really have little or no actual value. The guaranteed trade in value will become a non issue in a few years as soon as the car has a chance to really start selling itself from a reliability point of view. I just don't think the types of people buying these cars right now needed that as an incentive. Gen III would be a whole different story. I agree with your 4th point whole heartedly. My fear is that there are a lot of powerful market makers who are looking for any reason, rational or not, to poke holes in this next quarterly report, which would hurt all of us as investors.

 

[toastypasta]

Great write-up Julian. I agree with everything you said, but:

1. How are you calculating 44% short interest? I assume you are subtracting Elon's shares from the public float since he is not selling?
2. Why aren't you long TSLA?
3. I hope you are right that the shorts will have their last hoorah before Q2, so that I can buy some more TSLA for cheap. But IMO this stock is only going up until Q2 earnings and most likely in a straight line up. Meaning that the sooner you buy the better off you will be.

+1 to #1. Curious about that short interest..

 

[redharel]

4. Accounting is just accounting. They can report a $20 billion loss as far as I am concerned as long as their cash flows are positive and will stay that way. Cash is king, and no matter how they report revenue for these "leases" they still receive 100% of the vehicle price in cash.

hi sleepyhead
i'm not sure about 100% cash receiving straight away, as far as my logic says tesla will get 50% of the amount and the rest 3 years later(if the leaser decide to buy the car)
the bank who finance the leasing plan needs some risk hedging(tesla promise to buy back is not enough for the bank with all due respect)
for the record, accounting is not my profession, just a thought of mine...

 

[Julian Cox]

Kevin that's awesome, thanks for the kind thoughts make that +1 for the Mrs.

Regards the 44% that was a recollection of a recent % of free float. The % of total float atm on NASDAQ figures for public consumption is around 25.8%. Interesting: days to cover 2. Gentlemen if that means what I think it means that bear raid last week might have been all the shorts had, complacent not, curious definitely.

BTW 25.8 is c 34.4% if you take out Musk 44% of free float sounds ballpark to me.

Would not get too hung up about it +/- 5% I don't have a live feed for short interest. All I know is that there has been a lot of effort put into attracting shorts to the stock. Whatever it is, it is large and running headlong into good news.

The funny thing to me is that they go on about irrational exuberance despite all the data social trends and guidance to back it up, and cannot look themselves in the mirror for the emotion of irrational cynicism that has exactly nothing to back it up.

Seriously, I'm no professional in stock analysis, I just understand disruptive tech companies in the energy space, but I can definitely figure out that whatever modeling method you use pretty much better come up with the right price and direction for the stock or it is worthless. I cannot comprehend the idea of a bunch of smart guys applying a financial model to a stock price, come up with the wrong number and start complaining that the market is wrong instead of the obvious fact that the model is wrong because it cannot even tell you what the price is let alone what it is going to be. Fundamentals analysis on a single data point, give me a break! Show me a trend and I'll show you the money. There is no fundamentals trend data. If we are going to be rational numbers people, why not map Q1 2012 onto Q1 2013 and run a line through it. > 1800% revenue growth. You might at least get a hint not to short it and if you ignore the numbers that makes you an irrational right? On that basis predicting that a great movie director is likely to produce another good movie rather than a bad one is actually better data because at least there is a meaningful trend.

Shorting TSLA is a self-punishing error and transfer mechanism for economic influence from the naysayers to the yaysayers. All good. Financial modeling with no trend data is the domain of really hard-core delusional.

BTW - I was very pleased to see anecdotal evidence that the reservation wait list was out at 2~3 months. Production up, Demand piling in, that's good news.

Maybe the stock goes to $200 on a squeeze. Gut feel $140 (conservative) - always said so, maybe the market remembers Jeffryes @$150 as a support level. I think there is no need to look at more than $140 short term, by then there will be new info to work with. TSLA trending downwards. No.

 

[gregincal]

hi sleepyhead
i'm not sure about 100% cash receiving straight away, as far as my logic says tesla will get 50% of the amount and the rest 3 years later(if the leaser decide to buy the car)
the bank who finance the leasing plan needs some risk hedging(tesla promise to buy back is not enough for the bank with all due respect)
for the record, accounting is not my profession, just a thought of mine...

No, as far as the bank is concerned it's a loan like any other car loan. Tesla receives the full cost of the car up front. The accounting only comes in because Tesla has to (at least in accounting terms) save aside some of the money in case it needs to buy the car back. It's not a lease, it's a purchase with a guaranteed buy back price.

 

[Acmykguy]

No, as far as the bank is concerned it's a loan like any other car loan. Tesla receives the full cost of the car up front. The accounting only comes in because Tesla has to (at least in accounting terms) save aside some of the money in case it needs to buy the car back. It's not a lease, it's a purchase with a guaranteed buy back price.

Gregincal, that is exactly the way someone fairly high up the food chain told me. I guess we will all see in the report.

 

[NigelM]

Mod Note: Some posts went here....Proposal-for-Q2-Celebration-and-beyond-Invitation-for-Julian-Cox!!!

Please keep discussions in one place.

 

[ModelS8794]

Tesla watchers... perhaps already covered somewhere i can't find, but can anyone here recall when/what/where elon commented on regarding "waiting for xxx to be achieved before i publish my hyper loop ideas"? Was it 2 quarters of profitability? Positive cash flow? Margins? something... I remember him saying it somewhere but can't recall where or what now.

this is re: his tweet; with earnings call just a few days before that August 12 date I make the obvious leap that whatever that hurdle was he was aiming for, has been met... and the tweet is very strong evidence of same, just a tiny step shy of overtly pre-announcing the quarter...

 

[gym7rjm]

Tesla watchers... perhaps already covered somewhere i can't find, but can anyone here recall when/what/where elon commented on regarding "waiting for xxx to be achieved before i publish my hyper loop ideas"? Was it 2 quarters of profitability? Positive cash flow? Margins? something... I remember him saying it somewhere but can't recall where or what now.

this is re: his tweet; with earnings call just a few days before that August 12 date I make the obvious leap that whatever that hurdle was he was aiming for, has been met... and the tweet is very strong evidence of same, just a tiny step shy of overtly pre-announcing the quarter...

I think someone mentioned before that it was just when Tesla was profitable, but I didn't look myself. A part of me was wondering if that was a hint for longs. Elon loves his loyal investors and hates the shorts, he also loves cryptic messages such as the 5 part trilogy reference from Hitchhikers Guide to the Galaxy or the "Under your nose" announcement.

 

[NigelM]

Mod Note: More posts got moved to Refugee-from-SA-Julian-Cox-now-on-TMC

This thread is on Q2-2013-Results-Expectations-and-Projection so even if I understand that it's of interest maybe we can give Julian a break from asking him every detail of his SA split for a while?

[/lecture]:wink:

 

[StapleGun]

Tesla watchers... perhaps already covered somewhere i can't find, but can anyone here recall when/what/where elon commented on regarding "waiting for xxx to be achieved before i publish my hyper loop ideas"? Was it 2 quarters of profitability? Positive cash flow? Margins? something... I remember him saying it somewhere but can't recall where or what now.

this is re: his tweet; with earnings call just a few days before that August 12 date I make the obvious leap that whatever that hurdle was he was aiming for, has been met... and the tweet is very strong evidence of same, just a tiny step shy of overtly pre-announcing the quarter...

"I'm putting the hyperloop stuff on hold until I get Tesla to profitability" ... "I think once Tesla's has been profitable for at least a quarter maybe two quarters, then I'll talk about the Hyperloop"

Elon Musk Keynote - SXSW Interactive 2013 - YouTube

I'm not sure this guarentees profitability, but if one of his main concerns is Tesla shareholders thinking he's distracted by announcing the Hyperloop, he certainly wouldn't do it immediately after a bad earning report.

 

[kevin99]

"I'm putting the hyperloop stuff on hold until I get Tesla to profitability" ... "I think once Tesla's has been profitable for at least a quarter maybe two quarters, then I'll talk about the Hyperloop"

Elon Musk Keynote - SXSW Interactive 2013 - YouTube

I'm not sure this guarentees profitability, but if one of his main concerns is Tesla shareholders thinking he's distracted by announcing the Hyperloop, he certainly wouldn't do it immediately after a bad earning report.

Thanks Staplegun! Do you know by what minute mark Elon starts on the topic? It is an one hour video!

 

[Convert2013]

"I'm putting the hyperloop stuff on hold until I get Tesla to profitability" ... "I think once Tesla's has been profitable for at least a quarter maybe two quarters, then I'll talk about the Hyperloop"

Elon Musk Keynote - SXSW Interactive 2013 - YouTube

I'm not sure this guarentees profitability, but if one of his main concerns is Tesla shareholders thinking he's distracted by announcing the Hyperloop, he certainly wouldn't do it immediately after a bad earning report.

Sounds like profit it'll be for 2nd Quarter as well. Must be spreading himself thin between all of these ventures.. But I'd think he wants to stimulate change in multiple spectrums while he is still young and capable and has the capital for it. I kinda see Tesla as his cash cow to help fund his other ventures to finish if need be. The bigger Tesla gets the better for him...and he'll probably sell Tesla at the point other Auto majors are well committed into building EVs. Must be part of his whole "Masterplan".

 

[maekuz]

Thanks Staplegun! Do you know by what minute mark Elon starts on the topic? It is an one hour video!

50:26

 

[Grendal]

Must be spreading himself thin between all of these ventures.. But I'd think he wants to stimulate change in multiple spectrums while he is still young and capable and has the capital for it. I kinda see Tesla as his cash cow to help fund his other ventures to finish if need be. The bigger Tesla gets the better for him...and he'll probably sell Tesla at the point other Auto majors are well committed into building EVs. Must be part of his whole "Masterplan".

Elon's Hyperloop idea is not in the same category as Tesla, SpaceX, and SolarCity. I think it is mostly his mind dealing with the problem of California wanting to spend an enormous amount of money on something that Elon sees as being outdated technology. Tesla, SpaceX, and SolarCity are about changing the world. I think that is why he is going to giving the idea to world and letting the world see what they can do with it. At some point he might put some money into the idea but, in my opinion, I don't see this as being a priority.

Back to the topic - I am fairly certain there will be a happy surprise in the numbers. I don't know if we'll see profit like we did for Q1, but I do think we will exceed expectations.