2017 Investor Roundtable:General Discussion

[esk8mw]

I agree with your comment 100%. Thank you for following up.

Also, since you seem to have at least a few years of practical accounting experience, could you please enlighten us on the following:

I spent some time in accounting, but that was years ago and the rules may have changed. Would you expect Tesla's R&D expense to show a step-change increase as revenue ramps up (i.e. because of GAAP), or would the increase be more correlated with how many engineers Tesla hires as part of an ongoing usual ramp in R&D expense? In other words, just like depreciation will be somewhat correlated with cars produced as Tesla uses units of production method of depreciation (i.e. depreciation will show a step-change up in 1H18), is R&D expense also correlated at all with number of cars produced solely because of GAAP (i.e. are any R&D costs capitalized for revenue matching)?

I suspect the answer is no, but I wanted to confirm.

Thank you in advance.

Unfortunately (fortunately?) I'm not an accountant - just a lawyer - so my GAAP knowledge is limited. I agree with your hypothesis but can't give a definitive answer. I'd expect (obviously) more equity grants as the R&D team grows - Tesla seems to grant awards quite deep into the organization whereas many other companies only do, e.g., VP and above - but I don't know enough about accounting rules to understand how this is allocated between G&A/R&D, etc. I think it's technically R&D as stock-based compensation line item (but not 100% positive), meaning that R&D expenses would grow, but I'd expect this to be a small drop in the bucket compared to "real" R&D costs. Shouldn't scale linearly at all.

 

[dalalsid]

then are you suggesting the expectations for Tesla are now declining?

View attachment 239290

better lines:

 

[ValueAnalyst]

Unfortunately (fortunately?) I'm not an accountant - just a lawyer - so my GAAP knowledge is limited. I agree with your hypothesis but can't give a definitive answer. I'd expect (obviously) more equity grants as the R&D team grows - Tesla seems to grant awards quite deep into the organization whereas many other companies only do, e.g., VP and above - but I don't know enough about accounting rules to understand how this is allocated between G&A/R&D, etc. I think it's technically R&D as stock-based compensation line item (but not 100% positive), meaning that R&D expenses would grow, but I'd expect this to be a small drop in the bucket compared to "real" R&D costs. Shouldn't scale linearly at all.

Thank you; that's helpful. And I note that you are not an expert on GAAP.

Also, I'm pretty sure if the salary of the individual is in SG&A (executive management, in-house lawyers and accountants etc.) then their stock-based compensation would also be in SG&A. If the salary of an engineer or a VP, for example, is in R&D, then their stock-based compensation expense would also be booked into R&D.

One more thing: I think this is a commonly missed point: just because Tesla issued, say 100 stock options to an engineer five years ago when the stock price was at $30, doesn't mean they will continue to issue 100 stock options when the stock is at $300 or more. I would expect dilution due to employee stock options as a percentage of market cap to decline as the stock price rises.

 

[Reciprocity]

then are you suggesting the expectations for Tesla are now declining?

View attachment 239290

Looks like BMW is doomed, Tesla is positive for the day. If you could make money just buy drawing silly lines on a chart, then you wouldn't be on this forum spreading disinformation. I am still waiting for my 30 year line.

 

[esk8mw]

Thank you; that's helpful. And I note that you are not an expert on GAAP.

Also, I'm pretty sure if the salary of the individual is in SG&A (executive management, in-house lawyers and accountants etc.) then their stock-based compensation would also be in SG&A. If the salary of an engineer or a VP, for example, is in R&D, then their stock-based compensation expense would also be booked into R&D.

One more thing: I think this is a commonly missed point: just because Tesla issued, say 100 stock options to an engineer five years ago when the stock price was at $30, doesn't mean they will continue to issue 100 stock options when the stock is at $300 or more. I would expect dilution due to employee stock options as a percentage of market cap to decline as the stock price rises.

I have direct knowledge on the latter point. Just about every single company denotes equity grants in terms of dollars, e.g., Employee X earned a $100,000 restricted stock grant this year. $100,000 / share price on grant date = number of shares issued to that employee, subject to vesting conditions (passage of time and possibly performance conditions).

A few clueless companies used to have director plans guaranteeing some set number of options/RSUs to grant to directors every year as their retainer. Very few remain since it's a pretty senseless policy and now denote retainers in dollars, meaning the grant figures increase in SP down years and decrease in SP up years.

 

[racer26]

I still think Project TIM is most likely Tesla and Panasonic.

Multiple news outlets describe project Tim as a "small group of companies" working together on "renewable energy" projects.

Also, its an enormous site, that would make it one of the top 5 factories in size worldwide, and yet it only speaks to having 800 FT jobs - Foxconn's WI factory, which is smaller, will make 3,000 jobs. This suggests that whatever project Tim is, its going to have a very high degree of automation. Also, project Tim describing itself in relation to River Rouge tips the cards a bit toward suggesting its some kind of automotive.

 

[RobStark]

Fundamentally, manufacturers will charge more if we are willing to pay more. It has been thus for all time. Even house paints cost more for added pigments and on occasion somebody argues that the differences are cost-based. Theoretically such arguments can be made, but they really are not the primary cause for higher prices of these colors.

If a customer doesn't believe a metallic paint or pearl paint is worth more then he shouldn't pay more for it.

BMW charges $700 for similar in 3 Series.

Buick charges $500 for similar in LaCrosse.

At some point I expect Tesla to reduce cost of options from Model S levels to that of direct competitors. When demand doesn't grossly outpace production.

 

[supernova]

supernova... the iphone 7 retails for $690... the Samsung GS8 retails for $850...

the Chevy Bolt ASP is expected to be FAR less than the M3...

how does this Apple analogy relate?

Owning an Apple product is as much about style as it is the technology. It's also about Tesla's potential to revolutionize the auto industry, like Apple did with the smartphone.

 

[supernova]

Owning an Apple product is as much about style as it is the technology. It's also about Tesla's potential to revolutionize the auto industry, like Apple did with the smartphone.[/QUOTE
Apple has done a remarkable job of making consumers "feel good" about owning their products. Tesla is doing the same. Cult following becomes mass market appeal.

 

[22522]

Can anyone explain why a non-black Model 3 is priced 1K more? Tesla is coming out with just 5 color options, one would think that cost for all would be the same?

I spoke to a person with more familiarity with both rich people and Dr. Seuss.

He explained that it was a social experiment where "You will never see a black Model 3."

Something about "A black model 3 will be like a non-star belly." "People who buy the black risk social exclusion. Nobody who can afford a Tesla will risk that exclusion. There will be no black model 3s."

To test that, we can look at the handover event...

I see about 5 or so black ones. I think he would assert that these are employees and not typical Tesla customers - they don't know the rules, yet.

He might be onto something.

 

[Mkorpal]

If a customer doesn't believe a metallic paint or pearl paint is worth more then he shouldn't pay more for it.

BMW charges $700 for similar in 3 Series.

Buick charges $500 for similar in LaCrosse.

At some point I expect Tesla to reduce cost of options from Model S levels to that of direct competitors. When demand doesn't grossly outpace production.

The market will set the price eventually. But we are a long way away from production catching up with production on the Model 3. Like, years away.

 

[schonelucht]

Yes, of course options can be granted to any employee in the company (and directors). You were suggesting that there may be other plans that aren't discussed in the Q and I was assuring you that is not the case.

I am suggesting that we don't know exactly all the milestones and schedules for all plans for all employees. We do know them for directors and Elon, but even factory workers receive stock based compensation with Tesla. So we don't know how much stock based expense will be counted as GAAP R&D for the next quarter. Nothing more nothing less. Maybe that's not true and you know exactly how high stock based compensation will be for R&D in the coming quarters. If so, I would certainly appreciate if you can tell me how I can deduce this from the filings. (Note, not just Elon and directors, but TOTAL compensation for ALL R&D employees in 17Q3, 17Q4, 18Q1 and 18Q2)

 

[Dynastar]

I spoke to a person with more familiarity with both rich people and Dr. Seuss.

He explained that it was a social experiment where "You will never see a black Model 3."

Something about "A black model 3 will be like a non-star belly." "People who buy the black risk social exclusion. Nobody who can afford a Tesla will risk that exclusion. There will be no black model 3s."

Just owning a Tesla makes you a star-belly. I suppose maybe some people want to be a star-bellied-star-belly. Then again, some people just like the color black.

 

[kenliles]

'iPhone 8' SmartCam may adjust lighting, focus based on AI recognition of object being photographed

"The latest HomePod firmware leak suggests that Apple is planning to introduce new machine learning capabilities that will allow the iPhone's camera to recognize objects and types of scenes in real time, and adjust settings accordingly for the best-possible photo."

sound familiar...?
including Augmented Reality, there are inummerable applications for Apple core (auto-pilot) AI R&D. They can justify these expenditures across nearly all of its objectives. Food for thought...

 

[ValueAnalyst]

I am suggesting that we don't know exactly all the milestones and schedules for all plans for all employees. We do know them for directors and Elon, but even factory workers receive stock based compensation with Tesla. So we don't know how much stock based expense will be counted as GAAP R&D for the next quarter. Nothing more nothing less. Maybe that's not true and you know exactly how high stock based compensation will be for R&D in the coming quarters. If so, I would certainly appreciate if you can tell me how I can deduce this from the filings. (Note, not just Elon and directors, but TOTAL compensation for ALL R&D employees in 17Q3, 17Q4, 18Q1 and 18Q2)

Employee equity option plan milestones are in the Form 10-Q. See page 23.

 

[schonelucht]

Employee equity option plan milestones are in the Form 10-Q. See page 23.

AGAIN, that is for Elon Musk and the Board of directors. It says NOTHING about regular employee equity option plans.

 

[Waiting4M3]

I spoke to a person with more familiarity with both rich people and Dr. Seuss.

He explained that it was a social experiment where "You will never see a black Model 3."

Something about "A black model 3 will be like a non-star belly." "People who buy the black risk social exclusion. Nobody who can afford a Tesla will risk that exclusion. There will be no black model 3s."

To test that, we can look at the handover event...
View attachment 239322

I see about 5 or so black ones. I think he would assert that these are employees and not typical Tesla customers - they don't know the rules, yet.

He might be onto something.

No black M3 huh? I guess Elon's never getting another party invitation after taking delivery of SN01

 

[esk8mw]

I am suggesting that we don't know exactly all the milestones and schedules for all plans for all employees. We do know them for directors and Elon, but even factory workers receive stock based compensation with Tesla. So we don't know how much stock based expense will be counted as GAAP R&D for the next quarter. Nothing more nothing less. Maybe that's not true and you know exactly how high stock based compensation will be for R&D in the coming quarters. If so, I would certainly appreciate if you can tell me how I can deduce this from the filings. (Note, not just Elon and directors, but TOTAL compensation for ALL R&D employees in 17Q3, 17Q4, 18Q1 and 18Q2)

No, I can't predict the future. All we know is that rank and file typically get options with 4 year vesting terms. Not sure if they are cliff vesting or graduated. Either way, they are expensed over the life of the vesting period (then added back if the employee quits and forfeits the award, which is very common). Thus, in a small way, these types of expenses scale with number of employees. In any event, these are super small potatoes. Nothing to obsess over.

If you want to obsess over SBC, look at VP and above comings and goings. That's where the money is. New hires get big inducement awards and fires typically forfeit all outstanding awards (subject to modification via severance agreements). For example, the $20 million option grant Wheeler got when he joined was a huge expense change, equivalent to probably 2000-4000 awards for rank and file workers. When he quit he probably forfeited the vast majority of it. Expense reversed. This stuff tends to wash out in the end and you can get a sense for the direction by monitoring executives, not rank and file.

 

[esk8mw]

Employee equity option plan milestones are in the Form 10-Q. See page 23.

schonelucht is correct, these most likely are not applicable to all grants to all employees (though there's no way to tell for sure). As I said before, it's very likely that rank and file grants have NO performance conditions. They likely just vest over time - a retention tool for top performers because it's a high turnover environment. Options, alone, are performance-based compensation. They are worthless unless SP increases. The fact that Elon and the executive team have performance conditions on top of options is actually quite extraordinary. They are heavily incentivized to outperform and their comp is (totally, in the case of Elon) dependent upon it.

 

[ValueAnalyst]

Targeting Model 3 margin of 25% in 2018.

This is extremely positive AND ABOVE MY EXPECTATION!

It almost seems like they wrote the bulleted items at the top of the investor letter after reading my article this morning.