Thinking about Q1 2013 earnings

[ModelS8794]

OK, time to hazard a guess, just for fun:

While there will be lots of good news coming today, I wouldn't be surprised if the market gets spooked by the declining reservation backlog. That has always been the cushion to show that demand for Model S won't plummet like it has for other EVs (even though some have recovered from their lows). Shorts will point to the low reservation count as indication that Tesla is running out of customers, and so they'll hold on for another couple of quarters. People who don't fully believe will get scared and sell to take what profits they have. Only those, like us, who really "get it" will understand that Tesla has to move towards a more typical "want a car, buy a car, get a car soon" sales cycle.

However, I expect that the reservation backlog overseas is quite strong. I think demand for Model S in European countries with high gas prices and other huge tax incentives will stroke demand for Model S. Heck, even Fisker had some traction there for a while. So that could compensate in total, but shorters will still point to "shrinking demand in the US."

At any rate, I don't expect a short squeeze this week.

I believe Tesla will not disclose a backlog figure anymore - and this may have the same impact (or worse) than disclosing a declining backlog figure. I agree in practice though, that discord around the backlog has the biggest chance of being the spoiler this earnings season. A bit odd of course, given Tesla's fairly transparent and disclosed plan of producing quickly enough to get the wait times (and thus, backlog) down to as low as possible (one month on average), thereby making the sales decision easier for a customer who wants their car 'now' and is used to getting it.

Last call for instance:

Well, our intention is really not to have people wait 6 months per car. Like, we'd much prefer that our demand generation and production are closely synced so that when you order a car you get it within less than a month. Where you'd ideally want to get a car within maybe a few weeks or something like that. So it's not our intent to have a long waiting list. I think that's pretty inconvenient for people.

Adding: I think a second item has a big chance to spoil the call for TSLA long investors... that's the GAAP accounting for Tesla's new financing plan where Tesla is giving away a 3 year put option to buyers at that fixed residual value. Elon stated he believed up to half (is that right?) of new reservations may very well come through this financing program.

This is something not much discussed among TMC or elsewhere, but Barclays has written a bit about it. I'll post Brian's summary comments, they seem on target to me:

New financing approach makes us more comfortable with sales goals but does
muddy GAAP accounting.

Tuesday afternoon, Tesla announced that it had reached an
agreement with two leading banks to offer 66 month loan financing with a TSLA and
Elon Musk backed buyback guarantee after 36 months. The program outs Tesla on a
par with other luxury markers, giving us further comfort in sales projections However,
it also shifts revenues into later quarters as deliveries will no longer be “true sales”...


...But the program should be a headwind to GAAP revenue and earnings for a while.
As TSLA retains residual risk, any deliveries made under the new financing mechanism
will need to be booked as deferred revenues, with deferred revenue recognized over the
course of the three years. While this will have no cash flow, gross margin or economic
value impact, the lease accounting GAAP treatment will likely be a headwind to 2013
revenue and EPS, with the actual impact depending on take rates.

 

[ShortSlaver]

The prudent move is to have some stake in it all and also have cash on hand to buy if there's a backlash. You lose some top end if things go great but you also leave yourself open to an opportunity if things don't go so great.

It feels like the deck is stacked against TSLA in this call. The bears will just point at anything and you get the feeling no matter they announce it won't be good enough. They might have a high margin and higher going forward, but bears might say they didn't sell enough cars. Or the margin is too low and so many cars sold.

I think for things to pop a bit we need higher than expected margins and projects of over 22,000 MS's being sold this year with margins potentially rising slightly about 25% sometime this year.

I'd like to believe they wouldn't have released such great news in April only to really not back it up with anything else here. I'd hope there would be a surprise here of some sort. But if there isn't and it's 4750 vehicles, 15% margins and still on pace for 20,000 cars this year - but we made a profit - then I would expect a buying opportunity for longterm TSLA investors.

 

[luvb2b]

So that could compensate in total, but shorters will still point to "shrinking demand in the US."

i think the last unveiled financing is pretty darn compelling when you look at it from the point of view of anyone driving 30,000+ miles per year.

also the upcoming consumer reports article where they describe model s as the "best car" they have ever tested will have significant impact, something similar to winning motor trend car of the year i would guess.

if you consider my reservations model from the other thread, there's a third positive factor vs. that model: the cancellation rates in my model were deliberately high. with the time between reservation and finalizing cut down as much as it is, you should find cancellation rates are much lower.

the combination of these 3 factors should result in tesla's commentary getting closer to being totally sold out for 2013. if there was any doubt before it will surely be erased with the consumer reports review.

- - - Updated - - -

New financing approach makes us more comfortable with sales goals but does
muddy GAAP accounting.

Tuesday afternoon, Tesla announced that it had reached an
agreement with two leading banks to offer 66 month loan financing with a TSLA and
Elon Musk backed buyback guarantee after 36 months. The program outs Tesla on a
par with other luxury markers, giving us further comfort in sales projections However,
it also shifts revenues into later quarters as deliveries will no longer be “true sales”...


...But the program should be a headwind to GAAP revenue and earnings for a while.
As TSLA retains residual risk, any deliveries made under the new financing mechanism
will need to be booked as deferred revenues, with deferred revenue recognized over the
course of the three years. While this will have no cash flow, gross margin or economic
value impact, the lease accounting GAAP treatment will likely be a headwind to 2013
revenue and EPS, with the actual impact depending on take rates.

i thought about this issue a bit and i think the note isn't quite right.

first, tesla's financing program is a bank-financed purchase, not a lease. in a bank financed purchase tesla will get the full cash proceeds and the bank will hold the loan and default risk. it's not any different than if a buyer finances through penfed (for example). tesla gets a check, the bank gets the loan & risk.

second, i believe the guarantee requires a balance sheet liability that reflects the likely cost to perform on the guarantee. in tesla's case, i think that figure is the net value provided by the guarantee. i believe this value would be the difference between the market value of a model s and the guaranteed value. i think that's why they used the mercedes s class as the initial comparison. since that was one of the worst performing luxury sedans on resale value tesla could reasonably say the value of the guarantee was something small. there is no information on residual market value of a model s, so the auditors would likely require the guarantee value was calculated off a close comparable. i think elon probably realized he could provide this guarantee essentially without a significant impact to eps.

with the financing update, they up the guarantee value a bit, by what seems like about 7%: prior guaranteed resale was 43%, now it's 50%. if they assumed for accounting purposes that model s would retain only 40% of its original value, then i think the guarantee liability would have to be 10% of the selling price for a tesla-financed purchase (50% guaranteed value - 40% presumed market value = value of guarantee).

on the last call elon said about 25% of customers are using the tesla financing. so as a percentage of revenues, i think you could expect:

25% users of financing x 10% market value of guarantee x selling price = guarantee liability = 2.5% x selling price.

since average revenue per vehicle seems to be about 10% higher than selling price (due to credits), you could expect something on the order of 2-2.5% impact to gaap gross margins for this program.

that's my guess anyway. a cpa with better knowledge of how gaap accounting will work for the guarantee would be able to provide the best answer... anyone out there like that?

 

[deonb]

I just can't imagine a credible scenario where they can exceed the expectations that are built into the current stock price. At least not on reported numbers. The only thing that I can see making a rally happen from here is superb guidance. I'm not quite sure what that guidance looks like though.

That would be accurate for a long position.

However, keep in mind that the shorts aren't just betting on lackluster performance. They're betting on outright failure. Ala Fisker.

Otherwise it's insane to pay 50% interest in the hope that the price will maybe trickle down a bit before you can make a profit. The risk-reward just isn't in there.

So I don't think they'll be looking at backlog - a small backlog is not going to cause the company to fail in a year. The thing to look out for is cashflow and whether or not there is going to be a secondary.


This thing is unprecedented. I think even if you have the earnings release in your hand you'd probably not be able to predict with any degree of accuracy what the price is going to do as a result.

I can however totally imagine that tomorrow price won't start with a 5.

 

[smorgasbord]

I'd like to believe they wouldn't have released such great news in April only to really not back it up with anything else here. I'd hope there would be a surprise here of some sort. But if there isn't and it's 4750 vehicles, 15% margins and still on pace for 20,000 cars this year - but we made a profit - then I would expect a buying opportunity for longterm TSLA investors.

This. Elon and Co. are smart. They know what their previous conference calls did to the stock price, and their recent moves show they don't want that to continue to happen. If they're rolling out good news continuously before the earnings call, then one has to believe that they're saving something for the call itself.

After hours trading is going to be wild today. Initial reaction might not be the reaction tomorrow morning. For instance, the reaction to the original financing plan was way overdone. All that's really changed is a longer term and different defaults on the payback calculator. Yet, that's what enabled Tesla to reach the $60 level.

Right now, the market seems tepid about pre-earnings positioning. Stock briefly touched $58, but since then has steadily sunk to just about $56.60 as I write this. If you're a long term investor, you can enjoy the show. If you've got some short-term skin in the game, there will be some nail biting in the next several hours.

 

[ShortSlaver]

I can however totally imagine that tomorrow price won't start with a 5.

I don't know, I put $500.00 in play.

I have to imagine, even at these high premiums, there are a lot of option straddle plays going on.

I think the speculation is this thing is going to move one way or another- which leads me to assume it will be fairly ho-hum and just sort of be flat. Nobody is predicting that. The bulls and bears may each have their case causing the stock to sort of standstill or not move very much.

 

[deonb]

If you've got some short-term skin in the game, there will be some nail biting in the next several hours.

Nails?? What nails??

 

[raymond]

However, it also shifts revenues into later quarters as deliveries will no longer be “true sales”...

Is that a Tesla guarantee or an Elon guarantee?

 

[akula]

There are none left here...

Nails?? What nails??

 

[smorgasbord]

Focus is going to be on the reservation backlog and the margins (sans credits). I don't have any better visibility into either of those than anyone else, which makes me nervous.

Non-Petersen article in SA on same: http://seekingalpha.com/article/1414231-will-there-be-big-waves-from-tesla-s-earnings-announcement

 

[ModelS8794]

Is that a Tesla guarantee or an Elon guarantee?

It is a Tesla guarantee with Elon backstopping it.

Luvb2b, I believe Brian's take is accurate. Our business experimented with multi-year full money back guarantees in recent years, and the income statement and balance sheet impact was as Brian describes wrt Tesla. Not exactly the same, we sell subscription services, not cars. But setting up a 3 year 100% money back guarantee meant establishing a large deferred revenue liability and likewise reduced current period revenue, though not impacting cash flow.

 

[luvb2b]

It is a Tesla guarantee with Elon backstopping it.

Luvb2b, I believe Brian's take is accurate. Our business experimented with multi-year full money back guarantees in recent years, and the income statement and balance sheet impact was as Brian describes wrt Tesla. Not exactly the same, we sell subscription services, not cars. But setting up a 3 year 100% money back guarantee meant establishing a large deferred revenue liability and likewise reduced current period revenue, though not impacting cash flow.

that would still be consistent with what i said. a subscription has no resale value if refunded and your guarantee is 100%, so you'd have to set aside a big chunk of revenue to honor it.

for sure a car has residual value, and the guarantee is only 50%, and even then applying only to 25% of domestic customers. it should be much less impact imo.

 

[DonPedro]

I think there is a psychological factor at play today which might be easy to overlook. This time, Elon Musk is presenting as a CEO who has proved that he can deliver (product, production and demand). They doubted him and he proved them wrong.

This means that when he puts forward expectations, visions, strategies and musings, they may be be taken much more seriously/literally than at previous earnings calls. This may be a positive factor.

 

[CapitalistOppressor]

FYI, there was an anecdotal report in another thread about a customer who visited the factory last week and had them say they were nearly 500/week and had reduced costs by a lot. Dunno about credibility (its just one report).

Nothing in the data precludes a late April or early May ramp back to ~500/week. Deliveries last week look to be ~400, but production increases take a couple of weeks to echo into the delivery data.

 

[luvb2b]

now the earnings are out and it's time for my last post on this thread.

with full benefit of hindsight you can see that i underestimated revenue, but by being conservative on the expense figures my bottom line ebitda ended up being spot on.

hope you guys made a few bucks off the research in this thread. thanks for all your comments and suggestions.

hello all. my first post here. been following this company a long time and i luv them.

i have been thinking about first quarter earnings a lot lately, esp after the last call when elon was adamant they would be profitable. until the 10k was released i couldn't make the math work. you guys have probably read the comments on seeking alpha etc talking about how there is no way tesla could make a profit. for example:
Despite Tesla's Light Results, It Could Be Turning The Corner - Seeking Alpha

the light bulb for me came on with the revelation that the various environmental credits added up to $40.9 million in 2012. using 2750 model s sales, that number works out to an insane $15k per car. considering they only earn the credits in a dozen or so states, it's even more amazing as it implies the credit value per vehicle sold in a qualifying state is probably something like $25-30k. all guesswork on my part. further research indicates that the 85kwh pack seems to qualify for maybe 50+% more credits than the 60kwh pack, although this is not clear to me as there are two types of credits at work: ghg and zev.

now a second light bulb has come on lately in reviewing the various delivery threads. we are starting to hear about vin numbers as high as 87xx getting scheduled delivery at the end of march. there are multiple reports in vin #8000s. considering the delivery numbers were 2750 last year, it seems like they must be well past their target of 4500 vehicles this quarter. is it possible they will produce 6000 cars in q1? that's what that vin number 87xx seems to indicate. i don't want to be so optimistic, so i am working with a number around 5200.

finally my last light bulb is in reading the forums about the problem reports. it seems that even though the number of model s on the road will triple this quarter vs. end of q4 2012, the number of problems are not exploding. that's consistent with what they said on the call, that the problems and issues with the car have gone down substantially. in some ways the biggest risk they face is a recall, but that might even be manageable if it was a small item (10000 cars x $2000 to fix each is still only $20m plus whatever reputational hit they take).

i am very curious what people think of my estimates as i have laid out below, if they sound realistic? also i really wonder if that delivery number could get to around 6000 the way the vin numbers are progressing. anyone have thoughts on that? every time i read about someone going to a service center sounds like they are loaded with model s's being prepped for delivery.

anyway, i run the math this way:

on revenues:
model s avg price $85000 x 5200 = $442 million (note: maybe low based on mix of p85/85/60 & options)
enviro credits $15000 x 5200 = $78 million (note: using $15k per car in credits, see above)
add development services = $5 million


total revenue = $525 million

on gross margin:
assuming they get automotive gross margin (excluding enviro credits) to +5%, which seems plausible given higher production. gross margins would be:
model s: $22.1m
enviro credits: $78m
dev services: $3m


total gross profit = $103.1 million

on operating expenses:
now figure $63m in r&d (declines from prior q as they projected) and $47m of sg&a (increase from prior q), gives you $110m in gaap expenses. take out the non-cash items, about $13m in stock based comp and $7m in depreciation and amortization... you got $90m in non-gaap expenses.

on ebitda:
implies ebitda of $13.1m, or about 11-12c per share. high estimate on the street has non-gaap eps at 2c. there's substantial upside to this if my delivery numbers end up being conservative, which based on the vin's i'm seeing is possible.

on incremental upside:
each additional 100 units would add $8.5m in revenue as follows:
revenue model s: 75000 x 100 = $7.5m (lower for 60kwh deliveries)
enviro credits: $10000 x 100 = $1m (lower for 60kwh deliveries)

assuming higher efficiency on later units, the gross margin impact of an additional 100 units may be $1.75m as follows:
10% gross margin on model s = 10% of $7.5m = $0.75m
enviro credits: $1m

total ebitda impact of additional 100 units: about 1.5c per share.

on reservations
if there's one worry i have it's here. the reservations seem to have fallen quite a bit in q1 vs. q4. it wouldn't surprise me if they got only 3k new reservations. if they ripped through 6k existing reservations, had another 1.5k cancellations, then the end of q1 reservation count will be: 15k (q4) - 6k (production) - 1.5k (cancels) + 3k (new) = 10.5k reservations remaining at the end of q1. if reservations don't pick up in q2 this will get the shorts blabbering again.

on future quarters
in light of the above, the comments on the call about future quarters start to make sense too. musk had said that the impact of enviro credits would decline, but margin would increase to compensate. so just hypothetically if you were to assume for q2:

5000 units x $82000 sale price = $410m sales plus
5000 units x $5000 enviro credits = $25m credits equals
$435 million total revenue

gross margin improve to 20% on automotive, then gross profit:
on model s: 20% x 410m = $82m plus
enviro credits: $25m equals
$107m gross profit
and once again you'd be talking about positive ebitda, maybe even 15c per share? incremental upside for each additional 100 units would be around 3c per share i'd guess.

and that's higher than the previous quarter even though the total revenues are $435m vs. $525m as estimated above.

summary
basically in summary, i am proposing that the shorts have far underestimated the value of the enviro credits, and that the production has scaled up faster than anyone expected.

thanks for your inputs.

 

[DonPedro]

CapitalistOpressor and luvb2b in particular: If I ever meet you in person, you get your free choice of:
1. Drinks on me all night
2. Luxury dinner
3. Heartfelt gratitude for sharing your analyses and insights

At second thought: You don't have to choose.

 

[Citizen-T]

I bought calls yesterday when we were trading around $55 based on this thread. So yeah, thanks. I definitely owe you guys a drink.

 

[avatar]

Now that we have a PE Ratio for TSLA (~660), I am wondering what is stopping this stock from trading at $300/share. If you extrapolate forward earnings of $.60/share for 2013 and the market continues to offer a 660 multiple you are looking at $300/share/ Could it really be that that shorts will squeeze this all the way to $300?

 

[Johan]

I bought calls yesterday when we were trading around $55 based on this thread. So yeah, thanks. I definitely owe you guys a drink.

Me too (bought calls that is). Couldn't agree more on the big thanks that go out to all contributors, especially CapOp and luvb2b! It kind of sounds like we are organizing a party ad-hoc right now

 

[DonPedro]

Now that we have a PE Ratio for TSLA (~660), I am wondering what is stopping this stock from trading at $300/share. If you extrapolate forward earnings of $.60/share for 2013 and the market continues to offer a 660 multiple you are looking at $300/share/ Could it really be that that shorts will squeeze this all the way to $300?

Forget P/E at this point.