My formulas were intended to show all regulatory credit revenue included in S&X revenue with no corresponding S&X COGS; the S&X GM% is after deleting the regulatory credit revenue.
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The coming Tesla cash cow and the short burn of the century
- Thread starter DaveT
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My formulas were intended to show all regulatory credit revenue included in S&X revenue with no corresponding S&X COGS; the S&X GM% is after deleting the regulatory credit revenue.
jelloslug
Active Member
How do we know two or more of the pumpers aren’t the same person?
It still does not add up. Assuming a very high estimate of an average of 2000 employees, for 8 weeks at 40 hours and $50 hourly rate is 32 million. Or 1.2% in gross margin.
Now you have completely left out the impact of decreasing per unit depreciation and added a significant amount of write off. Your math wouldn't work unless direct material cost is like 80-90% of ASP. I reckon it's closer to 35%.
Edit: I think you are assuming a drop in GM for the 3. That is impossible. The letter, while it talks about a drop in GM, that's for all Auto, because obviously Tesla doesn't breakout GM by product.
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Why 40 hours/week if M3 production is running 24/7's? No PTOT pay for non-exempt employees in a labor friendly state like California for more than 40 hours/week? PTOT would apply to all workers, not just new hires. Does your hourly rate include benefit adds including SBC? How about additional D&A on new equipment placed in service? There have been two announced shut downs for Q2--do you think those hourly employees are just told to go to the beach without pay or use vacation time?
The letter said:
In the medium term, we expect to achieve slightly lower margin due to higher labor content in certain areas of manufacturing where we have temporarily dialed back automation, as well as higher material costs from recently imposed tariffs, commodity price increases and a weaker US dollar.
Are you saying that M3 GM% will improve while S & X GM% will decline in Q2 or for the remainder of 2018? Please elaborate:
| QUARTER | 2Q18 | 3Q18 | 4Q18 |
| S & X GM % | ? | ? | ? |
| M3 GM % | ? | ? | ? |
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Esme Es Mejor
Member
Because they are adding one shift & that shift is working 40hrs/week. All other workers had already been accounted for in the previous GM calculation.
The 2000 additional employees comes from Elon's employee letter where he is saying they'd hire 400 employees every week for several weeks. Assuming they stick to the pace over 9 weeks in Q2, that is 3600 additional headcount over that time. Conservatively averaging 2000 additional personnel over 9 weeks. As I said before, that is not significant expense - add about 32 Million for the Q. The biggest driver is potentially the writedown of the conveyance system. Since they said they'll bring it back later, I am not sure if they'd write off and if they did write off, whether some of that has been in Q1. Too much uncertainty there. In any case if there is a charge in Q2, it will not be more than about 100 Million IMO.
Other than that, I have substantially lower M3 deliveries, but slightly positive GM in Q2 and going up from there. Guidance while generally optimistic on topline, was generally in-line with their GM projections. In your model, you also have severely worsening Service & Other, which i adjusted some. Auto over all GM line i added at the bottom looks really good due to the inclusion of ZEV and GHG credits in Q3 and Q4. For Q2, I am sticking with your assumption of no-sale of credits.
To your question on the language in the letter, I read that as a decline in neither S&X not 3 Margins. I see both improving, but the overall GM declining due to a mix shift towards the 3.
(Looks like i need to be schooled in adding tables)
Mario Kadastik
Active Member
I think what he means is that the overall GM will go down because of higher mix of Model 3. Let me give you an example. If Model S and X are at 25% GM let's say and a quarterly production of 25k units @ 100k, then let's assume Model 3 is at -10/0/+10 % GM (3 scenarios) @ 50k. Then for 10k/35k/60k units of Model 3 the gross margins would be:
| \ | -10% | 0% | +10% |
| 10k | 19% | 21% | 23% |
| 35k | 11% | 15% | 19% |
| 60k | 6% | 11% | 17% |
As you can see as the Model 3 rampup will reduce overall auto GM assuming Model 3 GM is lower than S+X one purely due to the mix and it being weighted average. However the gross profit will increase substantially with the positive GM on Model 3.
So to get overall GM reduction with improving Model 3 GM doesn't require S+X GM to come down, it just requires the mix to be weighed more towards the Model 3 due to sheer numbers. In Q1 the Model 3 count was close to the 10k units and -10% GM so overall GM would have been 19%. Going now to 0% GM on Model 3 and 35k units would give 15% overall GM even though the Model 3 GM improved 10%.
Singer3000
Member
Bit off topic given everyone is now looking forwards not backwards but I promised further up that I'd adjust my last chart to strip out ZEV Credits. I hope you find it both informative and pretty.
If you've read the reports you already know but we can conclusively say that Gross Margin for the M3 is improving with volume, not the opposite as had been claimed (were you actually being serious ShortSeller?). The pertinent question is the stable state GM (and time taken to reach), which our friend Mr Jonas seems suddenly worried about. I tend to more or less believe management guidance on gross margins, it's an area where past promises have been met and pretty much on time too.
Since we're on the subject of profitability, I've stuck in a picture for you on Operating Leverage too, which I think is the real make or break for this company. Intuitively, given the likely high gross profit from the M3 programme relative to MS/X, you'll see substantial operating leverage if product development carries on at roughly the same pace as previously. So the R&D and execution teams move from the completed M3 project to the Y for example. Most likely we'll just see a temporary pause in rate of growth, with 2020 onwards seeing multiple new products and initiatives all at once.
As regards the S in SGA, depends on your view on demand. I'd argue that the structural shift to electric and Tesla's brand strength outweighs competition risks and market saturation. My concern is actually less on the 3, Y or Semi which are economically compelling to the consumer in their own right, but the S&X (see impact on Tesla's sales in HK and Denmark after the removal of subsidies). That's what Tesla's superior innovation will have to counter.
If you've read the reports you already know but we can conclusively say that Gross Margin for the M3 is improving with volume, not the opposite as had been claimed (were you actually being serious ShortSeller?). The pertinent question is the stable state GM (and time taken to reach), which our friend Mr Jonas seems suddenly worried about. I tend to more or less believe management guidance on gross margins, it's an area where past promises have been met and pretty much on time too.
Since we're on the subject of profitability, I've stuck in a picture for you on Operating Leverage too, which I think is the real make or break for this company. Intuitively, given the likely high gross profit from the M3 programme relative to MS/X, you'll see substantial operating leverage if product development carries on at roughly the same pace as previously. So the R&D and execution teams move from the completed M3 project to the Y for example. Most likely we'll just see a temporary pause in rate of growth, with 2020 onwards seeing multiple new products and initiatives all at once.
As regards the S in SGA, depends on your view on demand. I'd argue that the structural shift to electric and Tesla's brand strength outweighs competition risks and market saturation. My concern is actually less on the 3, Y or Semi which are economically compelling to the consumer in their own right, but the S&X (see impact on Tesla's sales in HK and Denmark after the removal of subsidies). That's what Tesla's superior innovation will have to counter.
Singer3000
Member
And hello, I'm back again with two more charts. That bloke on Twitter isn't the only one with Excel...
Much chat about cashflow currently, rightly so. I like numbers as pictures, so here is the breakdown of free cashflow, with the second chart focusing specifically on the impact of working capital from production. You should hopefully see what Tesla needs to achieve to stop the bleed and be able to delay a raise until it's on the company's own terms (i.e. 2019 with proceeds for growth).
We're probably looking at two things, 1) the much discussed margins and volumes of the M3 (see above), and 2) the associated working capital impact from the ramp (picture 2).
Way back, we were promised that the MS ramp would be working capital positive and it wasn't, due to the build up of finished stock inventory. Calendar timing of international sales leading to large In-Transit is only part of it. Necessary build up of showroom/service centre inventory? Sluggish demand? It started to go wrong just before the "Cash Is King" Jason Wheeler period but was pretty sticky throughout his tenure. We've been promised a positive working capital cashflow contribution from the M3 ramp. Let's see. In support of the claim, we know there is demand for 2018 production so we shouldn't see inventory lying about the place for long (claims to the contrary are silly), and international sales are unlikely to start in volume until 2019, which should limit inventory In Transit.
Beyond the profit margin and working capital aspects, it might be that there are some ZEV sales down the back of Tesla's sofa, or some more lease related assets that can be monetised via VIE raise. Or Model Y reservation payments... Place your bets and buckle up.
Much chat about cashflow currently, rightly so. I like numbers as pictures, so here is the breakdown of free cashflow, with the second chart focusing specifically on the impact of working capital from production. You should hopefully see what Tesla needs to achieve to stop the bleed and be able to delay a raise until it's on the company's own terms (i.e. 2019 with proceeds for growth).
We're probably looking at two things, 1) the much discussed margins and volumes of the M3 (see above), and 2) the associated working capital impact from the ramp (picture 2).
Way back, we were promised that the MS ramp would be working capital positive and it wasn't, due to the build up of finished stock inventory. Calendar timing of international sales leading to large In-Transit is only part of it. Necessary build up of showroom/service centre inventory? Sluggish demand? It started to go wrong just before the "Cash Is King" Jason Wheeler period but was pretty sticky throughout his tenure. We've been promised a positive working capital cashflow contribution from the M3 ramp. Let's see. In support of the claim, we know there is demand for 2018 production so we shouldn't see inventory lying about the place for long (claims to the contrary are silly), and international sales are unlikely to start in volume until 2019, which should limit inventory In Transit.
Beyond the profit margin and working capital aspects, it might be that there are some ZEV sales down the back of Tesla's sofa, or some more lease related assets that can be monetised via VIE raise. Or Model Y reservation payments... Place your bets and buckle up.
Singer3000
Member
We're all guessing but I wanted to look more quantitatively at "... we expect to also achieve full GAAP profitability in each of these quarters."
IMO, while there are a lot of counteracting parts to get there, the best metric to look at is Net Income (before the NCI layoff). (The NCI quarterly layoff is unknowable prospectively; and even though I progressed it nominally, I suspect it could actually decline going forward, as the solar generation business transitions more to a sales/leasing with 3rd party financing model from SCTY's old model of PPA's/ direct leases with subsequent transfer of the solar credit benefits to SPEs. The 10Q broke out Energy Generation & Storage revenue between sales and leasing so there may be more visibility going forward)
Anyway, the bottom line differences between our respective assumption for the next three quarters (in $ MM):
| "GUESSER" | 2Q18 | 3Q18 | 4Q18 | 9 MONTHS |
| G | -761.6 | -91.0 | 128.8 | -723.9 |
| B | -1,050.3 | -431.7 | -178.6 | -1,660.6 |
The language is ambiguous, but the paragraph explicitly refers to M3 margins. After trying to parse it, I realized the "slightly lower" may have been referring to Tesla's target GM % and not what it achieved during the quarter being discussed in the SH letter. My new interpretation is corroborated by
This is primarily based on our ability to reach Model 3 production volume of 5,000 units per week and to grow Model 3 gross margin from slightly negative in Q1 2018 to close to breakeven in Q2 and then to highly positive in Q3 and Q4.
which I had forgotten (but differing views on "our ability" can be reflected in the Assumptions--differing view are also what causes the share price volatility).I just copied luvb2b's approach after realizing that if you click on reply to a message with an embedded table, the coding shows up and it's somewhat intuitive from there.
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Thanks The product mix's effect on Gross Profit is handled automatically in the spreadsheet's formulas.
Thanks for noting that. I went back and found incorrect cell references in my formulas for Auto Leasing, Energy Generation & Storage, and Services & Other in Q3 & Q4. After correcting those errors [and in this edit changing Q2 GM % from -12.0% to -2.0% to reflect my newly enlightened interpretation of the SH letter] , the table of our differences is closer and now looks like:
| "GUESSER" | 2Q18 | 3Q18 | 4Q18 | 9 MONTHS |
| G | -761.6 | -91.0 | 128.8 | -723.9 |
| B | -844.1 | -301.4 | 20.1 | -1,125.4 |
Updated spreadsheet link: TESLA 2018-2019
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What do you attribute to the widening of the gap between the red and blue line? do you expect the blue line to be higher than the red line at some point?
Your graphs are really well made, is that Tableu or something?
Singer3000
Member
Thanks, just excel.
I'm going to give you a thorough answer, as it feels to me that there is far too much focus on this issue in the bear thesis.
The info is pretty much all there for you in the reports and letters. The key sentence is from June 2017: "we plan to increase Model 3 production to 5,000 vehicles per week by the end of 2017 and to 10,000 vehicles per week at some point in 2018".
If we skip forward to the most recent quarter: "Service and Other gross loss in Q1 2018 increased to $118 million as a result of the continued growth and maturation in our service infrastructure. We expect Service and Other losses to reduce substantially in the coming quarters as our service infrastructure becomes significantly more utilized with the ramp of our Model 3 fleet size".
In short, the recent negative gross margin from this segment is another casualty from the botched M3 ramp. And we can see why from other data points and statements:
And March 2017: "Our new facilities are generally larger than they were in the past. For example, new service locations commonly have many more service bays, and we have tested the implementation of large delivery hubs in Los Angeles, San Francisco, Hong Kong and Beijing. Delivery hubs create an exciting reception for new customers and support much higher delivery levels, so we plan to expand this customer experience to more cities".
So more service locations and bigger / more costly ones at that. The 300 mobile service centres at March 2018 are claimed to be equivalent of 60 standard ones.
Depreciation is not stripped out for this sector but I expect it's pretty substantial relative to revenues. There is hence good reason for optimism that margins from this segment will improve through H2 2018 and into 2019, as the M3 ramp to 5,000 is completed and there are many more vehicles on the road. And as was pointed out by someone above (sorry forget who), older MS/X sales that come off warranty will also start to add to the revenue column in a meaningful way soon. Tesla had this to say in March on both points:
"We expect Service and Other losses to reduce substantially in the coming quarters as our service infrastructure becomes significantly more utilized with the ramp of our Model 3 fleet size. There are also substantial revenue generating opportunities as we open our own body shops in 2018 to improve costs of out-of-warranty repairs and as we increase our offering of accessories and merchandise."
What is the "Other" in "Service and Other"?
"includes after-sales vehicle services, used vehicle sales, powertrain sales and services by Tesla Grohmann Automation".
Of note, there's nothing here about Superchargers, because the costs and revenues of those are specifically included within Automotive.
You'll see in every recent letter/report, the reason for the large growth in costs/revenues from Service and Other was due to increasing volumes of used car sales. For a while I had concerns that in its attempts to kick-start the brand and turbocharge sales, Tesla may have been too generous with the residual value guarantees/resale value guarantees and that it might be making a loss on used car sales. This would in effect bring down the core gross margin reported by Total Auto and be a problem that could get worse as the lease/RVG sales book matured. But...
Sep 2017: "Gross profit from used car sales was approximately break-even in Q3."
Dec 2017: "Gross margin on used cars sales was close to breakeven."
Mar 2018: "Our used car sales had slightly positive gross margin."
Dec 2017: "Gross margin on used cars sales was close to breakeven."
Mar 2018: "Our used car sales had slightly positive gross margin."
The only caveat I should add is from Dec 2017: "Service and Other gross loss increased to $89 million due to the significant growth of our service network in Q4 that has not been fully utilized yet as the Model 3 production ramp works to catch up, reserves for settlements with former customers of Grohmann and a one-time warranty true-up for used car sales". No more details provided on this, so I suppose your comeback will be that you expect to see "one-time" warranty true-ups repeated again and again. For this to be meaningful, you'd be needing to see super-sized warranty costs in the core business and I don't think you are.
Finally, Tesla Grohmann (this includes the powertrain sales). As above, there have been write-offs relating to cancelled/incompleted contracts, given Grohmann is now exclusively serving in-house projects. A management call as to the cost/benefits of this decision. But regardless, any write-offs will not be repeated once cleared. The March 2018 report did not mention this as a contributing factor but it's possible it continued into 2018.
So in summary, with the info on hand I have every expectation that the gap between the red and blue dotted lines begins converging in the next couple of quarters, though a sizeable gap may remain into 2019, dependent upon how smooth the ramp is up to 10,000 M3/week versus management's expectations. If the gross margin from Services and Other keeps getting worse, then I too would be looking for a good explanation as to why.
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