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I may be wrong, but I predict a small profit.
Rationale: Start with Q3 reported profits. Subtract an amount for fewer cars delivered. Add Q3 reported SCTY profits (SCTY accounting is wacky but they can arrange to report profits by opening a smaller dollar value of new PPAs/loans than the dollar value of those they monetize). Subtract something for integration costs. Add an estimate for battery sales profits...
Profits from battery sales are uncertain due to uncertain volume of sales and uncertain gross margins. I suspect it will balance out somewhere between half and all of the loss from selling fewer cars. The SCTY numbers are so driven by financial engineering that they're manipulable (unfortunately), but anyway I'm pretty sure they can book enough of a profit off of them to pay for the integration costs and the rest of the car sales miss. One wild card: accounting costs may skyrocket for a little while, but I suspect that will happen in Q1 instead of Q4.
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Later quarters have interesting accounting changes coming. I am no expert on accounting standards, but this is my layman's interpretation of what seems to be happening:
The revenue recognition standard must be adopted in Q1 2018 and can be adopted as early as Q1 2017 (but not earlier).
This, if I'm correct (and I might not be) causes variable income from PPAs (where SCTY owns the panel and the homeowner contracts to pay for the power) to be recognized upfront upon contract signing and panel installation, rather than over time. (Defaults on payment or bad estimates of production level would lead to write-downs later.) This makes SCTY look *much* more profitable. I don't know how the transition works but there should be an enormous one-time accounting change profit.
It also cleans up the ungodly accounting mess related to the resale value guarantee. I might be wrong, but I believe the full value of the sales of cars with the RVG gets recognized immediately (apart from the part already recognized). The RVG probably gets entered as a liability to compensate. Should be a large accounting-change profit.
Later, the lease accounting changes. This is required to be adopted in 2019, but can be adopted early.
If I'm right, this changes most fixed-payment SCTY leases from "operating" leases to "sales-type leases", causing revenue to be recognized upfront upon sale. (Again, defaults == write-downs.) It probably changes some to "direct financing leases".
These are both going to be nontrivial to adopt. Every one of the hundreds of specialized LLCs used for financing by SCTY has to redo its accounting. In order to present "comparable results", the accounting probably has to be redone going back an entire year. It might be worth seeing whether there are filings relating to these accounting changes at the LLCs as an early hint. Accounting costs may be very large for a couple of quarters. :-(
Anyway, right now the accounting for SCTY is whacked: it's very close to cash accounting, reporting every single sale as a loss now and income later, totally inconsistent with accrual accounting principles. That's desirable for a cash flow statement, but way off for a P&L statement. These changes should fix that.
I don't know when Tesla is going to adopt the lease accounting, though if I were them I'd be doing it as soon as I could. (The revenue accounting they *have* to adopt for Q1.) But it'll cause a large one-time accounting-change-driven improvement in the balance sheet, which will end up being booked as profit (since that's the only way to make the books balance).
The short-sellers will no doubt find ways to say bad things about this, but the fact is the new accounting standards make a lot more sense than the old ones. (It means SolarCity accounting will be pretty transparent. You'll be able to tell whether the monetization transactions were at a profit or a loss, you'll be able to tell what the effective interest rates on the leases were, etc.)
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So I'm currently anticipating a profitable Q4, and a ridiculously profitable Q1 due primarily to one-time accounting changes. The big question: can they pull off a profitable Q2, or will ramping up for Model 3 put them back into GAAP losses?
One thing that you should be aware of is that the $190 per kWh pack figure is for car packs, which have a greater energy density, hence a lower cost per kWh .FWIW, I expect massively high margins on battery sales. When you compare the price on the website ($400/kwh+) with Tesla's claims about production cost for battery packs (<$190/kwh, probably as low as $133/kwh), a reasonable estimate for inverter costs ($25/kwh), and something for installation (a plausible but maybe-too-high estimate is $75/kwh), the gross margins just look enormous to me.
Ummmm.... this doesn't make sense to me. Do you mean that the car CELLS have a greater energy density than the stationary CELLS? Because if the car packs are simply packing the cells closer together, that doesn't really change the cost per kwh at all.One thing that you should be aware of is that the $190 per kWh pack figure is for car packs, which have a greater energy density, hence a lower cost per kWh .
Ummmm.... this doesn't make sense to me. Do you mean that the car CELLS have a greater energy density than the stationary CELLS? Because if the car packs are simply packing the cells closer together, that doesn't really change the cost per kwh at all.
Yes. They use cells that are optimized more for high cycle life in the TE products and are more optimized for energy density.Ummmm.... this doesn't make sense to me. Do you mean that the car CELLS have a greater energy density than the stationary CELLS? Because if the car packs are simply packing the cells closer together, that doesn't really change the cost per kwh at all.
No need to guess. 2016 Q3 reported the gross margin for TE was in the negative territory. For TE scale matters a lot. You have the big GF depreciation cost on it.If I base the costs on the car packs, I get ludicrous gross margins like 85%. If the stationary battery cells cost twice as much as the car cells -- still in the vicinity of 18%.
Edit Addition: After I wrote this post I noticed that you said small loss. Maybe the small profit I remember was after Q4? In any case I think the remaining part of my post is accurate.No need to guess. 2016 Q3 reported the gross margin for TE was in the negative territory. For TE scale matters a lot. You have the big GF depreciation cost on it.
There was automated pack assembly but no Gigafactory cell production in Q42016.Obviously scale matters. If I use the costs for the 18650s from Japan and hand-assembled packs I get *much* higher costs. The wildly high profit margins I'm looking at assume successful Gigafactory cell production and automated pack assembly.
They reported a small gross profit for Q1 2016 and said that in the letter. No information for Q2 2016. For Q3 2016 they didn't say anything in the letter, but provided some numbers in the 10-Q report about the increased revenue and cost for TE and the result was a negative gross margin.Edit Addition: After I wrote this post I noticed that you said small loss. Maybe the small profit I remember was after Q4? In any case I think the remaining part of my post is accurate.
That was when they were producing packs by hand, which is part of scale, which I agree does matter a lot. Those margins were also using-18650's produced in Japan. They stated it as a positive. Starting production and having low volume production they still made a small profit.
In any case the current production is so different that I don't believe that we know enough to to use that to draw any meaningful conclusions.
There are more cost to this. The entire GF they have built, no matter if only 10% or 90% of the space is utilized, is a depreciation cost on the activities happening there. In Q3 they already have the robots assembling the pack so it shouldn't be a big factor to the then high cost. But the mostly empty space of the huge factory shared by so little output is the biggest cost item.Obviously scale matters. If I use the costs for the 18650s from Japan and hand-assembled packs I get *much* higher costs. The wildly high profit margins I'm looking at assume successful Gigafactory cell production and automated pack assembly.
<snip>
Later quarters have interesting accounting changes coming. I am no expert on accounting standards, but this is my layman's interpretation of what seems to be happening:
The revenue recognition standard must be adopted in Q1 2018 and can be adopted as early as Q1 2017 (but not earlier).
This, if I'm correct (and I might not be) causes variable income from PPAs (where SCTY owns the panel and the homeowner contracts to pay for the power) to be recognized upfront upon contract signing and panel installation, rather than over time. (Defaults on payment or bad estimates of production level would lead to write-downs later.) This makes SCTY look *much* more profitable. I don't know how the transition works but there should be an enormous one-time accounting change profit.
It also cleans up the ungodly accounting mess related to the resale value guarantee. I might be wrong, but I believe the full value of the sales of cars with the RVG gets recognized immediately (apart from the part already recognized). The RVG probably gets entered as a liability to compensate. Should be a large accounting-change profit.
Later, the lease accounting changes. This is required to be adopted in 2019, but can be adopted early. <snip>
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So I'm currently anticipating a profitable Q4, and a ridiculously profitable Q1 due primarily to one-time accounting changes. The big question: can they pull off a profitable Q2, or will ramping up for Model 3 put them back into GAAP losses?