Near-future quarterly financial projections

[luvb2b]

@brian45011 i took a deeper look at the non-zev credits, using your data. here's a chart of ttm non-zev credits / ttm vehicle deliveries (thousands of dollars) on they y axis.


while the number has trended lower as you mentioned, we've been relatively flat the last 10 quarters (low to high variation is < $250). that's not to say it couldn't go down more, but i remain confident in prior statement that any error introduced by ignoring these is well within the error bars i likely have on my estimates. i can't even estimate asp with precision of less than $1k.

My tracking shows the following revenue (and net income) from non-ZEV regulatory credits (in $MM) :

YEAR	Q1	Q2	Q3	Q4	TOTAL
2018	30.3	..	..	..	30.3
2017	15.9	24.5	21.6	19.3	81.3
2016	15.0	20.1	30.7	21.0	87.7
2015	15.0	13.0	16.0	12.7	56.7
2014	11.6	15.8	17.0	20.0	64.4
2013	17.1	17.9	14.8	14.8	64.6

I think Tesla reports all credit sales as Auto Sales Revenue rather than also allocating them to Auto Lease Revenue. (Who knows?) Regardless, I offer three observations:

1. While non-ZEV credits may be "mouse nuts," they are not inconsequential to the bottom line.

2. By reporting them in Auto Revenue rather than Other Income, what ever trend may be occurring in Auto %GM is obscured.

3. The historical data shows that non-ZEV regulatory credits do not increase proportionately (scale) with increases in deliveries or Auto Revenues.

 

[Ocelot]

I am going to post the following in this thread, as I feel this thread is doing a lot of the 'heavy lifting'.

I must admit I get somewhat lost during these conversations, as the level of analysis seems above me.

In the market action thread, one of the shorts was taking about the recent 10-Q. I have learned from GTAT, not to ignore the counter arguments, and hence read their main concern a few times, specifically "note 10". I also asked my sister-in-law to take a quick look, as she is an accountant who has also done a bit of forensic accounting. I will post her reply to this section of the 10 Q below.

I post, as if someone has an exact question for her, I do not mind asking her to take a look, but also do not want to ask her to spend hours pouring over Tesla's balance sheet, as to be frank, I know she has no interest in the company like those of us here. What she saw on the surface, is probably what many of the short sellers see. I know debt conversion has been discussed before, but it seems relevant in the next few quarters and years, and i never saw anything 'exact', just general consensus (although maybe i missed something).

10-Q
Tesla - Quarterly Report

response
"What I can say from note 10 is that they are highly leveraged. They are showing loses and have a tremendous amount of debt. The potential issue I see with what's disclosed in note 10 is that there are quite a few debt instruments coming due in the next few years and where they are convertible there is always the option to convert into common shares which adds the total number of outstanding shares diluting overall earnings per share. I also find the split between recourse and non-recourse interesting and wonder what the recourse would be - that would be in historical agreements which I would not see from the statements.

It's not to say that they will not meet all obligations but from the quick look at it that's what it signals to me and the amount of debt, especially convertible being disclosed in note 10 is concerning. I can look at it in more detail but would have to pull out last few years financial statements and read the complete reports."

 

[mershaw2001]

I thought that they had offered as collateral the gigafactory?

response
"What I can say from note 10 is that they are highly leveraged. They are showing loses and have a tremendous amount of debt. The potential issue I see with what's disclosed in note 10 is that there are quite a few debt instruments coming due in the next few years and where they are convertible there is always the option to convert into common shares which adds the total number of outstanding shares diluting overall earnings per share. I also find the split between recourse and non-recourse interesting and wonder what the recourse would be - that would be in historical agreements which I would not see from the statements.

 

[brian45011]

@brian45011 i took a deeper look at the non-zev credits, using your data. here's a chart of ttm non-zev credits / ttm vehicle deliveries (thousands of dollars) on they y axis.
View attachment 304600
;
while the number has trended lower as you mentioned, we've been relatively flat the last 10 quarters (low to high variation is < $250). that's not to say it couldn't go down more, but i remain confident in prior statement that any error introduced by ignoring these is well within the error bars i likely have on my estimates. i can't even estimate asp with precision of less than $1k.

Thanks "Different strokes...." In my spreadsheet (linked here The coming Tesla cash cow and the short burn of the century ) I include them in revenue but not in the GM% assumption (They are not as "lumpy" as ZEV credits but could probably just have a single entry called Regulatory Credits.)

I'm thinking my Q3 and Q4 M3 %GM may be too low (but off-set by too high M3 delivery assumptions for those quarters.) I'll probably tweak my assumptions based on new information from InsideEVs' estimates for May and the annual meeting.

As for OpEX, I realized the reference may have been to Q over Q (but "sequentially" has been used ambiguously in prior SH letters).

I will revert when I have more time why I think OpEx will continue to grow (not as fast as gross profits, but more than many here expect) Until then for those interested, take a gander at Exhibit 21.1 of: Tesla - Annual Report While you are it, peruse through all the other Agreements and amendments thereto listed as Exhibits to the 10k.

Some of that is historical, but most needs on-going maintenance. It's not just the expense of homologation in order to sell the M3 in all those jurisdictions, but business licenses, annual (often manditorily audited) financial statements, tax returns, entry visas for ex-pat problem solvers, etc.

If anyone thinks there are too many "barnacles on barnacles" in the construction and production operations, what might be going on administratively in foreign jurisdictions? (the pay scales for competent foreign legal, financial, and "lobbying" consultants would boggle your mind)

 

[Reality]

I am going to post the following in this thread, as I feel this thread is doing a lot of the 'heavy lifting'.

I must admit I get somewhat lost during these conversations, as the level of analysis seems above me.

In the market action thread, one of the shorts was taking about the recent 10-Q. I have learned from GTAT, not to ignore the counter arguments, and hence read their main concern a few times, specifically "note 10". I also asked my sister-in-law to take a quick look, as she is an accountant who has also done a bit of forensic accounting. I will post her reply to this section of the 10 Q below.

I post, as if someone has an exact question for her, I do not mind asking her to take a look, but also do not want to ask her to spend hours pouring over Tesla's balance sheet, as to be frank, I know she has no interest in the company like those of us here. What she saw on the surface, is probably what many of the short sellers see. I know debt conversion has been discussed before, but it seems relevant in the next few quarters and years, and i never saw anything 'exact', just general consensus (although maybe i missed something).

10-Q
Tesla - Quarterly Report

response
"What I can say from note 10 is that they are highly leveraged. They are showing loses and have a tremendous amount of debt. The potential issue I see with what's disclosed in note 10 is that there are quite a few debt instruments coming due in the next few years and where they are convertible there is always the option to convert into common shares which adds the total number of outstanding shares diluting overall earnings per share. I also find the split between recourse and non-recourse interesting and wonder what the recourse would be - that would be in historical agreements which I would not see from the statements.

It's not to say that they will not meet all obligations but from the quick look at it that's what it signals to me and the amount of debt, especially convertible being disclosed in note 10 is concerning. I can look at it in more detail but would have to pull out last few years financial statements and read the complete reports."

Thats without even considering the purchase obligations to Panasonic that essentially act as debt as well (albeit appearing as COGS)

 

[neroden]

It's a lot of debt, but a huge portion of it is convertibles. The thing about the convertibles is, if the stock price is high enough, they convert; no worries about debt there. I already run my models *assuming* they'll convert and dilute the stock; have done since the first convertible was issued.

Without the convertibles, the debt is very manageable, assuming of course that they start showing profits in Q3/Q4 (which is of course critical). The only "debt" issue is therefore if the stock languishes enough that the convertibles have to be *paid off*, which would probably require stock issuance at an unfavorable price. I still think this is unlikely if they are showing profits in Q3/Q4, which is of course critical.

This pretty much reduces all debt questions to "will they show profits in Q3/Q4". We have strong reasons from pretty much any decent model of the company, as well as from Musk's definitive (and actionable!) statement, to believe that they will.

 

[neroden]

Some of that is historical, but most needs on-going maintenance. It's not just the expense of homologation in order to sell the M3 in all those jurisdictions, but business licenses, annual (often manditorily audited) financial statements, tax returns, entry visas for ex-pat problem solvers, etc.

If anyone thinks there are too many "barnacles on barnacles" in the construction and production operations, what might be going on administratively in foreign jurisdictions? (the pay scales for competent foreign legal, financial, and "lobbying" consultants would boggle your mind)

This is ongoing OpEx, but it should be roughly constant-value OpEx except when Tesla expands to an additional country. Countries don't increase their fees by more than inflation very often.

 

[luvb2b]

i'm not sure i totally got the question, but in the 2018 calendar year convertibles are a non-issue.

the convertible due in q3 is so far out of the money it's not likely to get converted to shares, and therefore not modeled.

the next date is q1 2019 for a convertible. that's with a 360ish strike price and outside the scope of a q2-q4 2018 model.

I am going to post the following in this thread, as I feel this thread is doing a lot of the 'heavy lifting'.

I must admit I get somewhat lost during these conversations, as the level of analysis seems above me.

In the market action thread, one of the shorts was taking about the recent 10-Q. I have learned from GTAT, not to ignore the counter arguments, and hence read their main concern a few times, specifically "note 10". I also asked my sister-in-law to take a quick look, as she is an accountant who has also done a bit of forensic accounting. I will post her reply to this section of the 10 Q below.

I post, as if someone has an exact question for her, I do not mind asking her to take a look, but also do not want to ask her to spend hours pouring over Tesla's balance sheet, as to be frank, I know she has no interest in the company like those of us here. What she saw on the surface, is probably what many of the short sellers see. I know debt conversion has been discussed before, but it seems relevant in the next few quarters and years, and i never saw anything 'exact', just general consensus (although maybe i missed something).

10-Q
Tesla - Quarterly Report

response
"What I can say from note 10 is that they are highly leveraged. They are showing loses and have a tremendous amount of debt. The potential issue I see with what's disclosed in note 10 is that there are quite a few debt instruments coming due in the next few years and where they are convertible there is always the option to convert into common shares which adds the total number of outstanding shares diluting overall earnings per share. I also find the split between recourse and non-recourse interesting and wonder what the recourse would be - that would be in historical agreements which I would not see from the statements.

It's not to say that they will not meet all obligations but from the quick look at it that's what it signals to me and the amount of debt, especially convertible being disclosed in note 10 is concerning. I can look at it in more detail but would have to pull out last few years financial statements and read the complete reports."

 

[luvb2b]

they don't act like a debt because they don't bear interest. you mean liability.

purchase obligations only act as a liability if the goods are not needed.

if goods tesla is obliged to purchase are needed the behavior is basically indistinguishable from other elements of cogs.

these are just semantic differences b/c the main point is they actually need all those batteries.

Thats without even considering the purchase obligations to Panasonic that essentially act as debt as well (albeit appearing as COGS)

 

[neroden]

Regarding "debt" in general as a potential life-threatening risk to Tesla (TLDR -- it's not):

If you model Tesla's cash flow, you see that the Q3 SolarCity convertible just isn't very large, and will be paid off without any worries.

The revolving lines are unlikely to shrink, since collateral keeps increasing, so they don't need to be paid off; interest rates could go up (probably won't any time soon), so you can model an increase in interest rates, but Tesla's credit rating is also improving as they make profit, so that probably counters that.

If you model Tesla's cash flow, you might wonder whether they have an issue with having enough cash to pay off the Q1 2019 convertibles (if they don't convert), and that's a legitimate question. I expect those to convert and assume the dilution in my models. If they don't, I expect Tesla to issue some amount of stock to cover the payoff, which would be an undesirable outcome but not that bad.

The later bonds should be easy enough to pay off assuming Tesla continues to make profits and uses them to pay down debt.

 

[luvb2b]

the biggest risk i see is that near term we are in a bit of a liquidity valley. going through q3/q4 18 and into q1 19 we run the co pretty close to the edge on cash balances.

a meaningful disruption in global capital markets in the next 3 quarters could open up meaningful downside in the stock.

one example, let's say all the auto tariffs go through and trade partners retaliate. that affects sourced parts and sale prices in foreign countries. so a hit to gross margin and an incremental negative towards demand. regardless of actual financial impact the markets will shoot first and ask questions later. they will know that tesla has to do a meaningful equity raise as the credit markets effectively close to tesla. and instead of issuing $10m shares at 300 to raise $3b we could end up issuing 20m shares at $150.

if we had a multi-billion dollar cash balance, there would be enough room on the balance sheet to be flexible about making needed changes over time under the new economic regime (raising prices, or cutting workforce, etc). i just find myself scratching my head when i think about they didn't raise a few billion when they easily could have a 1-2 quarters back. even just 6m shares at 330 is about 2b dollars.

Regarding "debt" in general as a potential life-threatening risk to Tesla (TLDR -- it's not):

If you model Tesla's cash flow, you see that the Q3 SolarCity convertible just isn't very large, and will be paid off without any worries.

The revolving lines are unlikely to shrink, since collateral keeps increasing, so they don't need to be paid off; interest rates could go up (probably won't any time soon), so you can model an increase in interest rates, but Tesla's credit rating is also improving as they make profit, so that probably counters that.

If you model Tesla's cash flow, you might wonder whether they have an issue with having enough cash to pay off the Q1 2019 convertibles (if they don't convert), and that's a legitimate question. I expect those to convert and assume the dilution in my models. If they don't, I expect Tesla to issue some amount of stock to cover the payoff, which would be an undesirable outcome but not that bad.

The later bonds should be easy enough to pay off assuming Tesla continues to make profits and uses them to pay down debt.

 

[bdy0627]

i just find myself scratching my head when i think about they didn't raise a few billion when they easily could have a 1-2 quarters back. even just 6m shares at 330 is about 2b dollars.

That seems to suggest that the model 3 ramp delays have continued to surprise Tesla. They remained overly optimistic even after the first couple of quarters of delays. Once Moody's issued the downgrade, then it was really too late to raise capital, even though it would have been much safer for the company to do that. This is where Elon's hubris/optimism becomes a legitimate risk for Tesla.

 

[schonelucht]

i just find myself scratching my head when i think about they didn't raise a few billion when they easily could have a 1-2 quarters back. even just 6m shares at 330 is about 2b dollars.

Elon has been quite clear that he does not want a raise. (Not sure why he is so against, but he is against). Therefore unless absolutely forced his hand, it's not going to happen.

 

[Reality]

It's a lot of debt, but a huge portion of it is convertibles. The thing about the convertibles is, if the stock price is high enough, they convert; no worries about debt there. I already run my models *assuming* they'll convert and dilute the stock; have done since the first convertible was issued.

They have an implied price in them, and its unlikely ANY convert, the march 2019 are like 375 or something

 

[Waiting4M3]

That seems to suggest that the model 3 ramp delays have continued to surprise Tesla. They remained overly optimistic even after the first couple of quarters of delays. Once Moody's issued the downgrade, then it was really too late to raise capital, even though it would have been much safer for the company to do that. This is where Elon's hubris/optimism becomes a legitimate risk for Tesla.

Looking at the timeline, Tesla guided at the end of 2017, when they released the Q4 delivery report, that they were aiming at 2500/wk for Q1/E, and 5k/wk for Q2/E. This happened way before the Moody downgrade. I think for the most part of 2018 the ramp seems to be executing according to that plan.

If there was any surprise, they had a little more difficulty in getting to 2.5k/wk than they expected, and only reached 2k/wk by March/E, after the Moody downgrade. That seems very minor to me, at best if they got to 2.5k/wk at the end of March, they could've maybe deliver 2k more cars in Q1, another $100m of revenue. I can't imagine that difference would significantly alter their financial plan.

 

[bdy0627]

Looking at the timeline, Tesla guided at the end of 2017, when they released the Q4 delivery report, that they were aiming at 2500/wk for Q1/E, and 5k/wk for Q2/E. This happened way before the Moody downgrade. I think for the most part of 2018 the ramp seems to be executing according to that plan.

If there was any surprise, they had a little more difficulty in getting to 2.5k/wk than they expected, and only reached 2k/wk by March/E, after the Moody downgrade. That seems very minor to me, at best if they got to 2.5k/wk at the end of March, they could've maybe deliver 2k more cars in Q1, another $100m of revenue. I can't imagine that difference would significantly alter their financial plan.

That's true. I still wonder if they really thought it best to cut it this close financially. Maybe they thought they were being very conservative with the guidance for Q1 and Q2, thinking they should actually be able to beat those production estimates but it just didn't happen. Who knows, but it does seem a little reckless to have not done a raise. Of course, maybe Elon knows something about a coming infusion of cash from Tencent or some other entity. That would put a totally different perspective on this.

 

[Waiting4M3]

That's true. I still wonder if they really thought it best to cut it this close financially. Maybe they thought they were being very conservative with the guidance for Q1 and Q2, thinking they should actually be able to beat those production estimates but it just didn't happen. Who knows, but it does seem a little reckless to have not done a raise. Of course, maybe Elon knows something about a coming infusion of cash from Tencent or some other entity. That would put a totally different perspective on this.

I guess we will find out, but Elon and Deepak don't appear to be the reckless type to me. You can call Elon optimistic, but risk-wise he is actually pretty cautious, at least Watson thinks so. Deepak, for sure I don't see him as the risky type.

 

[neroden]

the biggest risk i see is that near term we are in a bit of a liquidity valley. going through q3/q4 18 and into q1 19 we run the co pretty close to the edge on cash balances.

a meaningful disruption in global capital markets in the next 3 quarters could open up meaningful downside in the stock.

one example, let's say all the auto tariffs go through and trade partners retaliate. that affects sourced parts and sale prices in foreign countries. so a hit to gross margin and an incremental negative towards demand. regardless of actual financial impact the markets will shoot first and ask questions later. they will know that tesla has to do a meaningful equity raise as the credit markets effectively close to tesla. and instead of issuing $10m shares at 300 to raise $3b we could end up issuing 20m shares at $150.

if we had a multi-billion dollar cash balance, there would be enough room on the balance sheet to be flexible about making needed changes over time under the new economic regime (raising prices, or cutting workforce, etc). i just find myself scratching my head when i think about they didn't raise a few billion when they easily could have a 1-2 quarters back. even just 6m shares at 330 is about 2b dollars.

Fair point. I personally suspect Elon or Deepak has identified private finance sources other than stock issuance in case the stock is languishing during the Jan 2019 bond maturity date. He wouldn't need to publish it if he had a verbal agreement from Tencent, or Larry Page, or SpaceX, or whatever. Apparently Tesla's factory recently got added to the asset-backed lines so that may actually be enough borrowing capacity to refinance the Jan 2019 bonds.

I'm pretty sure personally that Tesla will only end up with a bad dilution if we both have a meaningful disruption (such as auto trade retaliation) *and* an interest rate spike (since the problem with the asset-backed lines is variable interest rates). Oh -- and don't get to 10K/week this year.

 

[neroden]

They have an implied price in them, and its unlikely ANY convert, the march 2019 are like 375 or something

$359.87 and if you don't think that's likely in March 2019... you haven't noticed that Tesla's already been that high *before* turning a profit?

 

[Mario Kadastik]

$359.87 and if you don't think that's likely in March 2019... you haven't noticed that Tesla's already been that high *before* turning a profit?

Yes, I'd assume as well that if indeed they manage to get Q3-Q4 positive EPS and cash flow with trending towards more positive and we're approaching by March 3Q positive EPS then the looming S&P inclusion will also put buying pressure beyond the positive pressure anyway from profit. I'd say 360 is a minimum level by that time, more likely is closer to ATH.