Should Tesla do an opportunistic cash raise?

[vgrinshpun]

Even though I am a fan of tsla, I have to disagree. If there is one thing that has been bugging me, it is that tesla consistently come out at the lower end of their guidance. Projections are anything but conservative and gets guided down numerous times.

I understand the need for healthy pessimism, and that was exactly the reason I’ve put qualifier “cautiously” before the word optimism in my original post. On another hand, I was pretty diligent on doing my homework, as investing decisions that are baseless can be very costly.
The two metrics that I based my statement about Tesla being conservative with their guidance were margin and sales.

MARGIN
During the Q4 2012 CC EM indicated that Tesla expects gross margin to be in “the mid-teens”, i.e. 16.5%. I’ve used two reference points to try to verify this: Tesla’s initial guidance on selling 4500 cars in Q1 and being marginally profitable on non-GAAP, and Tesla consequent announcement on being profitable on both GAAP and non-GAAP basis while selling 4750 cars. Calculation based on these two reference points indicate that Tesla achieved approximately 20.5% gross margin in Q1, beating their own guidance of 16.5%. See my post (#130) in the “Thinking about Q1 earnings “ thread.

SALES 2013
Tesla clearly beat their guidance of 4,500 cars for Q1 and Q2. They sold 4,750 cars in Q1 and currently are building at least 500 cars a week, which yields 6,500 cars in Q2. We also know that they are planning to increase production to 650 cars a week in early fall. So we can conclude that they are going to deliver at least 6,500 cars in Q3 and 8,450 cars in Q4. The total = 4750 + 2 x 6,500 + 8,450 = 26,200 cars in 2013. Once again they were conservative with their guidance of 4,500 in Q1 and Q2 and “more than 20,000 cars in 2013”.

SALES 2014
The 2014 guidance given in Q4 2012 CC was that Tesla will deliver 10-15K cars in NA, 10K in Europe and 10-15K in Asia. Based on tracking information that was available before Tesla eliminated sequential numbering of reservations, NA reservations were around 33 cars per day or approximately 12K per year. This compares well with the 10-15K guidance given by Tesla, especially if one considers that January and February are usually lower yield months as far as automotive sales are concerned. Regarding the projection for worldwide sales they are conservative if one takes ratio of luxury car sales in US vs. worldwide. In 2012 BMW Series 5 sales worldwide were 6.3 times sales in US (359,016 worldwide vs. 56,798 in US). The ratio of worldwide to US sales for MB Class E was 4.8 (310,408 worldwide vs. 65,171). The projections given by EM are more conservative as the ratio of worldwide to US sales is 40 / 15 = 2.67.

It would be very interesting to get Tesla’s update on the above numbers and projections during the Q1 2013 earnings call.

 

[Causalien]

I understand the need for healthy pessimism, and that was exactly the reason I’ve put qualifier “cautiously” before the word optimism in my original post. On another hand, I was pretty diligent on doing my homework, as investing decisions that are baseless can be very costly.
The two metrics that I based my statement about Tesla being conservative with their guidance were margin and sales.

MARGIN
During the Q4 2012 CC EM indicated that Tesla expects gross margin to be in “the mid-teens”, i.e. 16.5%. I’ve used two reference points to try to verify this: Tesla’s initial guidance on selling 4500 cars in Q1 and being marginally profitable on non-GAAP, and Tesla consequent announcement on being profitable on both GAAP and non-GAAP basis while selling 4750 cars. Calculation based on these two reference points indicate that Tesla achieved approximately 20.5% gross margin in Q1, beating their own guidance of 16.5%. See my post (#130) in the “Thinking about Q1 earnings “ thread.

SALES 2013
Tesla clearly beat their guidance of 4,500 cars for Q1 and Q2. They sold 4,750 cars in Q1 and currently are building at least 500 cars a week, which yields 6,500 cars in Q2. We also know that they are planning to increase production to 650 cars a week in early fall. So we can conclude that they are going to deliver at least 6,500 cars in Q3 and 8,450 cars in Q4. The total = 4750 + 2 x 6,500 + 8,450 = 26,200 cars in 2013. Once again they were conservative with their guidance of 4,500 in Q1 and Q2 and “more than 20,000 cars in 2013”.

SALES 2014
The 2014 guidance given in Q4 2012 CC was that Tesla will deliver 10-15K cars in NA, 10K in Europe and 10-15K in Asia. Based on tracking information that was available before Tesla eliminated sequential numbering of reservations, NA reservations were around 33 cars per day or approximately 12K per year. This compares well with the 10-15K guidance given by Tesla, especially if one considers that January and February are usually lower yield months as far as automotive sales are concerned. Regarding the projection for worldwide sales they are conservative if one takes ratio of luxury car sales in US vs. worldwide. In 2012 BMW Series 5 sales worldwide were 6.3 times sales in US (359,016 worldwide vs. 56,798 in US). The ratio of worldwide to US sales for MB Class E was 4.8 (310,408 worldwide vs. 65,171). The projections given by EM are more conservative as the ratio of worldwide to US sales is 40 / 15 = 2.67.

It would be very interesting to get Tesla’s update on the above numbers and projections during the Q1 2013 earnings call.

Agreed that this quarter should be exceeding expectation, which is what the market is pricing in. However, in my investment book, this hasn't happened yet and will not happen until the Q1 earnings conf call. Up until this point, the previous guidances haven't been met and is what I base my investment decisions on.

 

[ModelS8794]

The 2014 guidance given in Q4 2012 CC was that Tesla will deliver 10-15K cars in NA, 10K in Europe and 10-15K in Asia.

careful, Musk most certainly did not provide this guidance in the Q4 2012 call. He did quote those numbers as a mid term goal, once Europe and Asia store rollouts were complete, but in no way was this statement given as 2014 guidance, which is a term with a very specific meaning (explicit operating performance expectation for a defined period) in the context of corporate investor communication.

 

[vgrinshpun]

careful, Musk most certainly did not provide this guidance in the Q4 2012 call. He did quote those numbers as a mid term goal, once Europe and Asia store rollouts were complete, but in no way was this statement given as 2014 guidance, which is a term with a very specific meaning (explicit operating performance expectation for a defined period) in the context of corporate investor communication.

I am afraid you've got it wrong. EM was asked a question about demand/reservation pace in Q1 2013. His answer covered Tesla internal view on the demand picture in 2013 and 2014. There were no mentioning of any other "mid term" period at all. The question was from Aaron Chew of Maxim Group, it can be found at the time mark of 16min 30sec on the Tesla Events and presentation page: Tesla - Events Presentations.

The transcript is available from Seeking Alfa site and is included below. There were numerous complaints about the accuracy of this transcript in general, so I listened to the Q4 2012 call again and verified that this particular Q/A as written in the transcript is accurate.

Additionally there are other references and logical inferences that can be made from various bits of information provided by Tesla which will lead to the same 40K figure for 2014. I think that belaboring this issue any further is not necessary, but will post if there is an interest. I would be grateful, though, if you can indicate what do you think Tesla internal demand generation goal for 2014 is, and when do you think they plan to reach 40,000 cars /year.

Aaron Chew[/URL] - Maxim Group
Good afternoon guys. Thanks for the question. I was wondering if you could just drill a little bit deeper into the slower pace of reservations in Jan and Feb to date following the price hike going into effect at the year end. Is it safe to say what you’re saying, it is down from December but still over the October, November levels, maybe just given the big jump from 3Q to 4Q, if you could just highlight if it’s pacing above 3Q and below 4Q or where you’re at a little bit more in detail?
Elon Musk - Chairman, CEO, and Product Architect
Actually, I’m not sure what I recall offhand what our third quarter numbers were. The key point to bear in mind is like, as mentioned earlier is like, we have enough reservations right now to fill out the year, -- and just on sheer momentum sell every car we make, even if we closed every store we have got.
So there were certainly cancellations in January that were as a function of asking people to confirm. So we’re trying to clean out basically anyone who wasn’t serious about buying the car. But I don’t think those were indicative of demand for rest of the year. So, if you -- okay, sorry, Jeff has confirmed, yes, it is certainly high in Q3.
Aaron Chew - Maxim Group
Okay.
Elon Musk - Chairman, CEO, and Product Architect
If you exclude the sort of reservations that will go -- the cancellations that were just as function of asking people to confirm their order or not, we have a lot of demand in North America, I would say well in excess of half of about 20,000 units per year demand or production target.
So you maybe have heard me say before where I think kind of demand breaks down between Asia, North America, and Europe is something like 10 to 15 in North America, probably 10 in Europe, and maybe 10 to 15 in Asia. But it will take us some time to build up Asia, particularly China.
So, it doesn’t really affect, I think, this year all that much. I am quite certain that we will deliver more than 20,000 cars this year and that’s not really a concern like I said, literally, we could say goodbye to every store and every sales person and still meet that target, but we want to make sure that we’ve laid the ground work for an improvement above 20,000 units a year in 2014. So, as we are thinking about demand generation, it’s really not about this year, it is about how do we exceed the 20,000 unit number next year.

 

[ModelS8794]

Yes, we are both referencing the same exchange. It is not guidance in the way the term "guidance" is used in investor relations. There is no explicit reference to a production goal in 2014, no specific expectation of timing in that exchange, regarding exactly when retail store expansion would be sufficiently complete to drive those 10-15/10/10-15 demand figures, and nothing beyond "it will take us some time" and "our thinking is about how to exceed 20,000 units in 2014" to indicate even what Tesla's internal targets are, never mind setting external corporate- guided expectations.

Musk has often been accused of over promising and under delivering. I would just be careful to recognize that no such over promising was made here, on Musk's part, regarding specific guidance for 2014 sales goals. Those remarks he made are helpful in painting a picture of the company's hopes and current expectations, but they are very far from official guidance. " something like 10 to 15 in North America", "probably 10 in Europe", "maybe 10-15 in Asia", and " but it will take us some time" are all useful and valuable insights about Tesla's hopes and current expectations, but they are not Capital G Guidance, and they should not lead an investor to conclude "Tesla will deliver10-15, etc..." All IMO, and of course whether I am making a point worth anything, or just splitting hairs and focusing on semantics, is a matter of opinion. I think it's a big difference but surely others will differ.

I think Tesla's internal sales goals are 25k for 2013 and 30-40k for 2014. But That's a different discussion than what they did or did not express as corporate guidance.

 

[DonPedro]

I think this makes management's thinking on the issue clear (from "risks" part of today's SEC filing):

We expect that our principal sources of liquidity will provide us adequate liquidity based on our current plans. However, until we are consistently generating positive free cash flows, if the costs for developing and manufacturing Model S variants or Model X exceed our expectations or if we incur any significant unplanned expenses or embark on or accelerate new significant strategic investments, we may need to raise additional funds through the issuance of equity, equity-related or debt securities or through obtaining credit from government or financial institutions.