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I think everyone seems to have forgotten what production constrained meant. Tesla only produced 14-15k in Q4. Combined with refilling of the pipeline (especially to europe/asia), we're really looking at only 12-13k deliveries of model S in Q1 + whatever model X deliveries.
Since Tesla only recognizes revenue from delivered vehicles, yet reports the costs from all that was produced, Q1 FCF will NOT happen. But that's not as bad of a thing as people fear it to be. I think if Musk explains this out in the conference call, it might temper the "see Tesla lied again about being Q1 FCF positive" reaction.
dreamingof3
Member
Excellent and thorough post Julian- I agree with your points and believe them to be accurate from my experience. I have heard many shorts scream about rising inventory on the balance sheet. They are not understanding that these represent leased assets.
McMuggets
Member
I second this. The inventory measurement is incorrect because of the leased assets, but time and time again the word "inventory" is mentioned as if Tesla were a traditional car maker with tons of cars parked on lots around the world. Auto analysts keep scouting for the "inventory" and "sales", even though Tesla doesn't report a sale until the cars are in their buyers' garages. Most actual inventory are CPO's and demo models that are used by the stores for test-drives. Many of these, by the way, end up in the hands of buyers who do not want a brand new built car and would rather have the discount in price.
OK, I really want someone to explain this to me know. I found one site that says that Q3 FCF is ($595 million) which is way off from what I got and then another one saying reduced CapEx will help Tesla reach that goal when CapEx is the first thing removed by every definition I have found. So basically, either I am missing something huge, or the Internet is full of investors who have no idea what FCF is and I have to assume the vast majority of posters here have no idea what it is either.
This is exactly correct and the main point of the exercise with a side benefit of reassuring customers.
The GAAP view of RVG is an accounting freeze-frame that only has relevance if Tesla actually went bust i.e. it has no relevance to investors other than the nagging misrepresentation of GAAP headline figures in the media as though accrual accounting of GAAP profits were some authorative picture related to making or losing cash which as any (honest) accountant will attest is nothing to do with cash accounting or cash flows at all.
FredTMC
Model S VIN #4925
Heres a new article on FCF:
Will Tesla Motors, Inc. Become Free Cash Flow Positive in 2016? -- The Motley Fool
reinforces my point that FCF comes down to CapEx.
Thank you - but for the avoidance of all doubt: "leased assets" that don't exist because there is no lease in an RVG sale. The customer owns the car with a lien to the bank, as far as the Customer and Tesla is concerned the car is bought and sold with the paperwork to prove it in front of any judge and jury in the world, end of.
Minor nitpick: One should probably calculate two weeks, not one, less production, since the cars made in the second to last week of 2015 probably did not get delivered before New Year and I believe the factory closed one week before and one week after New Year? Or maybe I'm just confused.
Count on it being lower than Q4, probably way lower. Then a week later comes estimate for all of Q1 and that will likely be a major disappointment. I don't share the optimism of those thinking ER will be a positive catalyst, but rather something to survive. fwiw re: the X situation I think we can now see why a former loyalist like Jerome Giullen took his "leave" in July and then didn't come back.
OK on the 10th time reading the definition I now understand that if you were working with positive numbers you would subtract CapEx. Since Tesla cash flow is negative I was subtracting it from the negative number as it it were a positive number. In any event sometimes making myself look like a fool is the easiest way to understand something.
Naturally FCF comes down to CapEx (or the absence of it) in any given quarter when CapEx is huge.
The other piece that is more elusive in the case of perceptions of Tesla is Massive Hiring in advance of Production. This hits Tesla in the SG&A and in turn that hits Tesla in FCF from Operations.
The latter is the real deal that matters to the markets IMO.
CapEx is a straight swap of Cash for Assets. It is neutral in terms of profitability prior to depreciation and if they bought something well (like $6 million for a $50 million stamping machine) then you'd have to be a dunce to imagine that this is a bad thing for the outlook of the business.
If Tesla is FCF negative *from Operations* however, that's really really bad - at least on first impressions, and definitely if it was an ongoing feature of the business. What this means at a glance is that the company is losing cash in the course of doing the stuff that is supposed to make money to pay the bills. Where it is important to be smarter than the bears about this, is to appreciate that hiring a vast number of people to make Model X when there is a $4 billion backlog of Model X cars to make is going to produce a period of FCF negative from Operations during hiring and training (because you need to hire people in advance of making stuff and shipping the stuff to customers, not the other way round), hence investing in a workforce to do that job is a really bullish signal, and not a really bearish one. You know, the opposite of downsizing. Information advantage 1.02.
I'm kind of with you on surviving the ER. To me the X delivery numbers will be key, if they have delivered >800 Model X by Feb 10th then we are probably OK as it shows that production is ramping, albeit not as fast as hoped.
FredTMC
Model S VIN #4925
Analyst estimates have Tesla with positive EPS in Q4 and all the quarters in 2016.
So, tesla will have positive "Operating" cash flow. Right?
I agree hiring is good. It's investment.
And from the Q3'15 ER outlook:
During the next several quarters, operating leverage should improve with revenue and gross profit both growing faster than operating expenses.
I was assuming they only spend 100m on capex on Q1, half their RND cost compared to Q3 2015, and maintain their sales, administration, and general cost (which is very unlikely, given the 50% increase in deliveries). Even under this kind of extreme saving on cost, they still need a lot of X in Q1, unless they are aiming for 20k S, which is more impossible.
What's to say Tesla can't get to FCF+ in Q1 from just delivering a significant amount of Model S like last quarter, and sprinkle in some high ASP X's?
Deepak said on the Q3 call that much of the CapEx required for Tesla Energy will be put in place by the end of 2015 for their needs next year. [28:52 - search 'q3 tesla' on YouTube]
Deepak also said the majority of CapEx for 2016 will be Model 3 and Gigafactory. Don't those two get a little more serious towards year end? The heavy costs of X tooling/sign off/etc were taken care of last year.
You're making me feel all warm and fuzzy inside.
800/week, or even close to it and I say we're off to the races in short order.
If you look at Yahoo Finance the estimates there are usually non GAAP, which is up to the company to define.
Analyst estimates are almost always positive one or two years out. Don't know why that is the case but I guess it has to be for their models. Amazon for example had positive and growing estimates 1-2 year out but they always delivered around 0.
We can debate whether non-GAAP or GAAP revenue should be used in calculating FCF all day, but TSLA themselves are using GAAP revenue in their past FCF calculations consistently. No reason for them to suddenly change how they calculate it unless they want to throw themselves to a pyre.
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Analysts use non-GAAP revenue to calculate EPS. And yes, TSLA has been positive operating cash flow for the past at least one quarter if not two on a non-GAAP basis.
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Analysts use non-GAAP revenue to calculate EPS. And yes, TSLA has been positive operating cash flow for the past at least one quarter if not two on a non-GAAP basis.
The only thing that I feel I know about Q4 is that the bears expect it to be a disaster and that they are wrong. Which side of the EPS or FCF lines they are on I don't know. Positive cash flow from operations is almost certain however keep in mind that Q4 was the maximum head count of Model X workers in return for the minimum Model X deliveries that will ever occur. My guess is that they have done enough to line up a surprise beat into positive territory on both counts, or to come so close that it lends credibility to great guidance from Q1 onwards. If anything a positive consensus of EPS estimates is the biggest short term risk factor.
As for the flap about Model X ramp, I don't buy it. Last guidance stated exponential ramp with no significant obstacles. That I expect is entirely true and I there is a Model X event tonight at Fremont which is unlikely to pass with no word of reassurance on that score.
GAAP and non-GAAP cash flows are the same. The weirdness with GAAP trying to bend an RVG sale into a lease shape severely misrepresents the timing of revenue and profit recognition, not cash.
Do you read the other threads on Model X on this forum or the Tesla Motors site?
Interesting discussion on RVG.
Just a little bit to add regarding GAAP revenue recognition, though feel free to correct me if I'm wrong (I'm certainly not an accountant). I think we should start to see some tailwind from the first RVG sales in Q3 2016. (I think that means this belongs in short-term trading, right?)
The first RVG sales should be hitting the 36 month mark in April or May. At that point, there are only 2 possible outcomes: (1) customer lets option lapse and Tesla recognizes the remaining 50% of the sale or (2) customer exercises option, Tesla repurchases the MS and then re-sells it as a CPO -- recognizing ~50% (or more?) of the original purchase price. Either way, Tesla recognizes the revenue.
Obviously (as was the case with AAPL when they had a similar deferred revenue recognition issue with older iPhone sales), as long as unit sales are increasing, it's not a 1-for-1 swap of new RVG sale for old RVG recognition. However, it may have a bigger impact than anticipated (if it's anticipated at all).
Just took a gander at old 10-Qs, and here's the rough schedule of RVG reserves that should be released (you have to back out the prior reserves from the total to figure out what will be released):
Q3: $75.2 million
Q4: $84.8 million
And here are some later periods
FY 17: up to $327 million
Q1-Q3 18: up to $585 million
Another way to see this number (I think), is to look at the Current liabilities section of the most recent balance sheet. Effectively, the Resale value guarantees line item there should match those RVG sales that will be released (either by lapse or exercise/CPO sale) in the coming 12 months. As of 9/30, that current liability RVG was $85 million. (I think the discrepancy has to do with the precise timing of sales within a given quarter).
Finally, I think this has a direct impact on earnings as well. While associated automotive expense will also coincide with deferred RVG recognition, it's just gross profit that's impacted. Gross automotive profit has long been positive for Tesla. Stated another way, if automotive gross profit was 25% on those $85 million in sales, Tesla should have a positive boost to Q3 earnings of ~$21.25 million.
In the grand scheme of things, it's not enough yet to move the needle to positive GAAP net earnings, but it does help.
To put things into perspective, through Sep 30, there were $1.03 billion of RVG sales waiting to be recognized.
Just a little bit to add regarding GAAP revenue recognition, though feel free to correct me if I'm wrong (I'm certainly not an accountant). I think we should start to see some tailwind from the first RVG sales in Q3 2016. (I think that means this belongs in short-term trading, right?)
The first RVG sales should be hitting the 36 month mark in April or May. At that point, there are only 2 possible outcomes: (1) customer lets option lapse and Tesla recognizes the remaining 50% of the sale or (2) customer exercises option, Tesla repurchases the MS and then re-sells it as a CPO -- recognizing ~50% (or more?) of the original purchase price. Either way, Tesla recognizes the revenue.
Obviously (as was the case with AAPL when they had a similar deferred revenue recognition issue with older iPhone sales), as long as unit sales are increasing, it's not a 1-for-1 swap of new RVG sale for old RVG recognition. However, it may have a bigger impact than anticipated (if it's anticipated at all).
Just took a gander at old 10-Qs, and here's the rough schedule of RVG reserves that should be released (you have to back out the prior reserves from the total to figure out what will be released):
Q3: $75.2 million
Q4: $84.8 million
And here are some later periods
FY 17: up to $327 million
Q1-Q3 18: up to $585 million
Another way to see this number (I think), is to look at the Current liabilities section of the most recent balance sheet. Effectively, the Resale value guarantees line item there should match those RVG sales that will be released (either by lapse or exercise/CPO sale) in the coming 12 months. As of 9/30, that current liability RVG was $85 million. (I think the discrepancy has to do with the precise timing of sales within a given quarter).
Finally, I think this has a direct impact on earnings as well. While associated automotive expense will also coincide with deferred RVG recognition, it's just gross profit that's impacted. Gross automotive profit has long been positive for Tesla. Stated another way, if automotive gross profit was 25% on those $85 million in sales, Tesla should have a positive boost to Q3 earnings of ~$21.25 million.
In the grand scheme of things, it's not enough yet to move the needle to positive GAAP net earnings, but it does help.
To put things into perspective, through Sep 30, there were $1.03 billion of RVG sales waiting to be recognized.
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