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q2-q4 2018 financial projections

Discussion in 'TSLA Investor Discussions' started by luvb2b, May 23, 2018.

  1. Singer3000

    Singer3000 Member

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    #1321 Singer3000, Oct 26, 2018
    Last edited: Oct 26, 2018
    Not for Q4 obvs but I wondered what the views were on gross margins for Shanghai factory output? Lower cost of labour, energy, domestically produced components etc... Once most stages of production are being produced/sourced locally, could we be looking at a significantly better gross margin for units sold in China than those sold in the US? And to what extent might local tax treatment take away with the other hand? Guess it's a hard question to answer without knowing where the batteries will be sourced.
     
  2. Fact Checking

    Fact Checking Active Member

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    • I believe with locally sourced batteries every Tesla customer in China would qualify for a ~$9k per unit price incentive - not tax incentive but direct incentive available to everyone. This is the highest tier incentive for the longest range EVs.
    • Both parts, materials and labor would be significantly cheaper.
    • Corporate overhead would be lower: showroom employees, logistics costs, upkeep, etc.
    I believe Tesla would pass through savings to customers to increase demand, production, service and Supercharger network - i.e. similar 30% gross margin targets.

    A locally made Tesla could easily cost half of what an imported one is costing with 40% tariffs right now.

    Totally guesswork though.
     
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  3. Singer3000

    Singer3000 Member

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    Maybe... I thought Mr Musk had been quite publicly of the position so far that he’d sell for the same price globally were it not for shipping, tariffs and sales tax. You’d have thought that between 3&Y, the Chinese market could easily absorb 500k per year, which I guess is where the Shanghai plant roughly tops out at. Which makes me wonder whether the average gross margin for Chinese 3&Y could be more like 30% or even 40% rather than 25% in rest of world. Off topic a little here though, sorry gang!
     
  4. Fact Checking

    Fact Checking Active Member

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    Typo correction in the numbers above - 6.8, not 6.1, and 20.6% not 23% - still amazing cash generation! :D
     
  5. Fact Checking

    Fact Checking Active Member

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    #1325 Fact Checking, Oct 28, 2018
    Last edited: Oct 28, 2018
    Just to follow up on my reply to @luvb2b regarding inventory management, I was trying to figure out why my crude 2-component DIO (Days Inventory Outstanding) estimate came so shockingly close to Tesla's reported Q3 inventory numbers.

    Here's the main DIO parameters I suggested originally:
    • MSX DIO is 45 days
    • M3 DIO is 20 days
    Here's some new, inventory related disclosures from the Q3 conference call:

    "Elon Musk:

    Yeah. That is our goal. We do not intend to raise equity or debt. At least that's our intention right now, that may change in the future. But the current operating plan is to pay off our debts not to refinance them, but pay them off and reduce the debt load and overall leverage of the company. But I actually almost forgot one quite important thing. As - and this is quite helpful, it's always helpful to have these sort of crisis situations with logistics, for example.

    As I dug into the inventory like basically finished product inventory from factory to the customer, I was quite surprise to see how long that took that took, and that it was quite expensive in a lot of cases to get cars to customers. This was something I didn't fully appreciate before. And we really have a major initiative at Tesla to get the average time from the exiting the factory to receiving the check from the customer, being in the customers hand, if we can only get the check when we give the car to the customer. So getting car from factory to customer to get that to as short as possible.

    In August, the average time in North America to get a car from the factory to a customer was 30 days, which is embarrassingly long. By the end of the quarter, we've reduced it to around 20 days. And our goal in Q4 - this is a goal, not a promise. But our goal is to get the average time of the car from factory to customer under 10 days. This is a giant improvement in the capital efficiency of the company, because we're making on the order of $75 million worth of products per day - of cars per day. So every day, it required $75,000 - $75 million with capital, so every 10 days, it's $750 million.

    And we - obviously, we have a loan from the bank that we can make use of. But the banks will only loan us 85% of the cost of the vehicle, which translates to about 70% of the price of the vehicle. So - and then we've got this loan outstanding, which effectively increases the COGS of the car. And it dilutes the company to the tune of 30% of one of the inventory - of the finished goods in transit it.

    So that this is really like tightening that and getting that below 10 days in North America and then also improving dramatically the time - the transit time to Europe and Asia. It is where like having local factories is actually very important for capital efficiency of the overall system. Because, I think, over time, we want to get the time from a car going from a factory to customer under 7 days worldwide. And then, the terms that we have with from our suppliers are, on average, just over 60 days.

    Now, our product inventory management also there's a lot of room for improvement there. We think we can probably cut that down to a few $100 million or so, Deepak, something like that, maybe $200 million or $300 million of COGS at the factory. So effectively, what we're going to go is reverse the working capital requirement for the company quite dramatically, so to a point where the faster we grow the more capital we have. This is incredibly important for capital efficiency of the company. It's night and day.

    Deepak, is there anything you would like to…

    Deepak Ahuja:

    No. I think, you are totally - we are reducing the raw material inventory on one hand by keeping production stable, finding efficiencies and warehouse management and the supply chain. And at the same time, reducing the time to deliver the car and convert that car into a cash. And that significantly improves working capital needs.

    Elon Musk:

    Yeah, it's really quite dramatic. So, yeah, I think it sure profoundly changes the financial effectiveness of Tesla.

    Deepak Ahuja:

    Yeah, we reduced our inventory in Q3, which helped. And then, although we had higher payables because - sorry, higher receivables, because the quarter end, the weekend, we won't have that in Q4, so all of this should continue to help us in Q4 and beyond, the working capital again.

    Elon Musk:

    Yeah, I mean, it occurs to me that, even if the only thing - like even if this was the only thing that Tesla did different was to shorten the time from factory to end customer. In any given company that would outcompete all of the companies over time. It would not be a contest."​

    So my 20 days DIO for the Model 3 was too optimistic for when I made it, but they actually matched that exact number by the end of September - which with the ASPs and the various probable inventory categories, splits and expected growth I recovered from previous financials gave the right inventory figure with ~90% accuracy. So it's actually a pretty close guess of their real inventory position at the end of Q3, enabled by the fact that their other inventory components (solar, power) did not change much.

    (The 45 days DIO for S/X still looks reasonable based on weighing of N.A./EU/APAC and the average shipping time of containers to these destinations from Fremont.)

    Note that they also improved some other aspects of their inventory management, better warehousing and it appears from Elon's comments that they are aiming for $200m-$300m of supplies/parts inventory on the automotive side.

    So the 20 days DIO was a lucky first principles guess, but it looks like they are aiming for 10 days, which is pretty significant now that the Model 3 is becoming the biggest part of their finished goods inventory in 18'Q4 or in 19'Q1.

    Every day improvement of DIO improves their inventory by about $75m, but the Model 3 portion is roughly 40%-50% of that at Q3 levels and Q4 production isn't rising dramatically over that, and they probably cannot improve S/X DIO numbers because they are dominated by the ~30 days shipping times to both APAC and Europe, and some final assembly overhead in Europe.

    So every day of DIO reduction for Model 3 North American deliveries should improve inventory by about $30m-$40m in Q4, roughly half of which could be cash improvement - i.e. perhaps $15m-$20m improvement in cash per 1 day of Model 3 DIO reduction.

    Their excellent inventory management should also (largely) explain why accounts payable didn't expand nearly as dramatically.

    So if we account for Elon time and assume that by end of Q4 they manage to achieve 15 days of DIO for Model 3 deliveries, the cash effect of that could be about $75m-$100m.

    Also note the other thing that Deepak said that I highlighted: "because the quarter end, the weekend, we won't have that in Q4": Q3 ended on a weekend (September 30 was a Sunday), which caused banks to not clear two day's worth of customer payments in time and thus certain deliveries were delayed to Q4. This should give a nice start-of-the-quarter boost to Q4. Q4 will end on a Monday which should give time to clear many North American payments at least over the December 29/30 end of Q4 rush that is a Saturday and Sunday.
     
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  6. AudubonB

    AudubonB Mild-mannered Moderator Lord Vetinari*

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    Looking further out then:

    1Q19: Ugh. Mar 30-31 is Sat-Sun
    2Q19: Ugh. Jun 29-30 is Sat-Sun
    3Q19: Yay! Sep 30 = Mon
    4Q19: Yay! Dec 31 = Tue
     
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  7. Singer3000

    Singer3000 Member

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    A lot of the Twitter bears are quite fixated right now on the explanation that Trade Receivables were high because quarter end fell on a weekend. They think Tesla is hiding a large sale of Model 3s to a bulk buyer (Enterprise Rent a Car, 1000 units is their rumour) and that the bulk buyer managed to obtain credit terms from Tesla that extended beyond quarter-end.

    All very odd. Firstly, I've not seen any evidence to back this up. Secondly, if it were true then I'd see it as a hugely positive development. If Tesla cracks fleet buyers of this type then that materially adds to demand as they replace their aged inventory. And then indirectly, for every 100 people that rent a Tesla, X number will be converted to buyers. Winner winner chicken dinner.
     
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  8. Fact Checking

    Fact Checking Active Member

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    So what do bears hope to gain from that? Firstly, 1,000 units is ~$58m of revenue at Q3 ASPs, way smaller than cash flow or profits. Secondly, Tesla not receiving payment and it all supposedly being done on a weekend would ensure that it's not booked as revenue for Q3, and that those Model 3's were thus still on Tesla's Model 3 inventory at the end of Q3 ...

    Yeah, but note that Tesla doesn't really have any big incentives to do Model 3 fleet sales at this point yet IMHO, they still have a significant backlog to serve and private customer word-of-mouth is a (much) better viral marketing tool right now than putting those Model 3's into dull corporate fleets. They'd first want to deliver to Europe and to APAC before doing big fleet sales in the U.S.

    But the thing is, accounts receivable was high because of the weekend: quarter end weekends are super busy, I'd not be surprised if Friday/Saturday/Sunday would have clocked $100m+$100m+$100m in deliveries - the overwhelming majority of which wouldn't be booked as a completed delivery because bank wires and checks don't clear over the weekend. This is why they had a relatively large number of Model 3's in transit at end of Q3: 8,048.

    So this end of quarter rush would directly improve Q4 numbers - and Q4 will end on a Monday, with enough time for a lot of the weekend payments to clear.

    So Q3 ending on a Sunday was a worst-case scenario for Tesla in terms of timing deliveries and payments, which increased their accounts receivable by about +$200m and decreased their booked revenue by about -$200m, and they still hit the ball out of the park ...

    So I don't know why bears want to fixate on that, it weakens the bear thesis even more ...

    Got a link to such a Twitter discussion perhaps?
     
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  9. Matias

    Matias Active Member

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    It won't. In CC Musk said, that 7000/week can be done without much investing, but 10 000/week needs new investment. End of the year is in two months.
     
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  10. Singer3000

    Singer3000 Member

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    F182873A-56BF-4BFF-8F6B-3989E119F6F2.png
     
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  11. Singer3000

    Singer3000 Member

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    My apologies, seems they are saying it was a sale of 1000 Model S.

    What’s exciting of course is that quarterly reports come every quarter. So not long to wait to see if this “kitchen sink quarter” gets converted into a “kitchen sink half year” or even a “kitchen sink three quarters”.

    @Fact Checking did some useful back of envelope of cashflow and leverage out to q4 2019 in the Big Thread. When the wiser heads here get the downtime I’d love to see the detail. Normally you’d solve CFO - CFI to see debt / dividends capacity but given we don’t have much clue at all on the 2019 capex profile (hello conf call analysts?), perhaps it should solve for capex, given CFO assumptions and debt repayment obligations.
     
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  12. brian45011

    brian45011 Active Member

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    #1332 brian45011, Oct 29, 2018
    Last edited: Oct 29, 2018
    Tesla uses accrual accounting.

    We recognize revenue on automotive sales upon delivery to the customer, which is when the control of a vehicle transfers. Payments are typically received at the point control transfers or in accordance with payment terms customary to the business.
     
  13. Fact Checking

    Fact Checking Active Member

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    Here is how Elon described it in the recent conference call:

    "Elon Musk:

    [...]

    And for us, the car is only counted as delivered if it reaches the end customer and all the paperwork is completed correctly. So it's the highest possible standard for considering a sale a sale."

    ... and I believe 'all the paperwork' also includes checks cleared and cash in bank.

    This is how Deepak described it:

    "Deepak Ahuja

    Yeah, we reduced our inventory in Q3, which helped. And then, although we had higher payables because - sorry, higher receivables, because the quarter end, the weekend, we won't have that in Q4, so all of this should continue to help us in Q4 and beyond, the working capital again."​

    And this is how the Q3 update letter described it:

    "Although our accounts payable increased as expected, our accounts receivables also increased by a similar magnitude since the quarter ended on a Sunday, which limited our ability to collect cash from the banks financing our customer loans."​

    I.e. the sale could not be considered a sale on customer loans until it cleared and was put in accounts receivables. Clearly not accrual accounting, at least for these flows.
     
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  14. Fact Checking

    Fact Checking Active Member

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    They are apparently saying that it was a sale of 1,000 used Model S's.

    Then they say, quote:

    "But what was the CoGS they associated with it? If they failed to assign a cost, this could be a HUGE margins gain."​

    There's no way to 'fail' to assign a cost: the carrying value of used Teslas (either coming back from lease or offered by a customer as a trade-in) get assigned the cost of the purchase (trade-in value or lease value), or its fair market value, whichever is lower.

    Here is how they describe used car inventory carrying costs (only in their 10-K):

    "Inventory Valuation
    Inventories are stated at the lower of cost or net realizable value. Cost is
    computed using standard cost for vehicles and energy storage products, which
    approximates actual cost on a first-in, first-out basis. In addition, cost for
    solar energy systems are recorded using actual cost. We record inventory write-
    downs for excess or obsolete inventories based upon assumptions about on
    current and future demand forecasts. If our inventory on-hand is in excess of
    our future demand forecast, the excess amounts are written-off.

    We also review our inventory to determine whether its carrying value exceeds
    the net amount realizable upon the ultimate sale of the inventory. This
    requires us to determine the estimated selling price of our vehicles less the
    estimated cost to convert the inventory on-hand into a finished product. Once
    inventory is written-down, a new, lower cost basis for that inventory is
    established and subsequent changes in facts and circumstances do not result in
    the restoration or increase in that newly established cost basis.
    Should our estimates of future selling prices or production costs change,
    additional and potentially material increases to this reserve may be required."​

    So:
    • This inventory valuation method is pretty conservative and there's no space to 'fail' to value 1,000 Model S's close to their true used market value without write-offs. Note that it's FIFO not LIFO: LIFO can be gamed, FIFO forces old inventory through the system.
    • Write-downs of inventory can and do happen (about $20m-30m per quarter), but they'll go directly into cost of revenues and impact the income sheet and reduce taxable income.
    The whole act of actually realizing the true value of 1,000 Model S's will actually reduce margins: for example if they are selling those at lower than purchase (trade-in) or lease value they might generate cash but will have negative margins due to the write-downs. If these were actual new cars they didn't sell then the margin effect is even worse.

    So what these bears/shorts are saying doesn't seem to make any sense to me.
     
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  15. luvb2b

    luvb2b Member

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    i agree with your comments directionally. the magnitude might be off by up to a factor of 3.

     
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  16. copyhacker

    copyhacker Member

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    Oh, just that Tesla is a bunch of lying liars. That's pretty much the size of it.

    Their first principle seems to be that Elon is a crook and Tesla is shady. No idea why.
     
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  17. brian45011

    brian45011 Active Member

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    You seem to have forgotten the fundamental distinctions between cash and accrual accounting.

    "A majority of our automotive sales revenue is recognized when control transfers upon delivery to customers...

    We recognize revenue for products and services when: (i) a persuasive evidence of an arrangement exists; (ii) delivery has occurred and there are no uncertainties regarding customer acceptance; (iii) pricing or fees are fixed or determinable; and (iv) collection is reasonably assured....


    We recognize revenue on automotive sales upon delivery to the customer, which is when the control of a vehicle transfers. Payments are typically received at the point control transfers or in accordance with payment terms customary to the business."
    It also might help to refresh your understanding of UCC Article 3 "Negotiable Instruments" and Article 4 "Bank Deposits and Collections"


     
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  18. brian45011

    brian45011 Active Member

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    Unless the vehicle has never been titled (showroom models and service loaners), the sale of used vehicles (trade-ins and lease returns) are booked in Services & Other and would not affect Auto Sales GM%.
     
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  19. schonelucht

    schonelucht Active Member

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    Incorrect. Revenue is booked at time of sale, not time of cash payment. For most sales to ordinary customers this will be the same quarter. For fleet sales, we don't know. @brian45011 is quite right here.
     
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  20. Fact Checking

    Fact Checking Active Member

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    You are right, thanks for the correction!

    I'm wondering how Deepak's comment about collecting cash from consumer loans should be interpreted. Did he only make a cash flow argument?
     

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