Articles/megaposts by DaveT

[DaveT]

Impressions for 2014 Q2 Shareholder Letter

Tesla just released their 2014 Q2 Shareholder letter. Here are my thoughts.

I expect Tesla to meet their guidance for Q2, which was:
- "We expect to deliver about 7,500 Model S vehicles"
- "We also plan to produce 8,500 to 9,000 cars in the quarter"
- "we expect to only lease about 200 cars in Q2"
- "We expect non-GAAP automotive gross margin to increase slightly from Q1 to Q2"
- "Q2 operating expenses are expected to grow sequentially by about 30% for R&D and 15% for SG&A"
- "we expect to be marginally profitable in Q2 on a non- GAAP basis"

Overall, the big numbers are the "about 7500" vehicles delivered and being "marginally profitable" on a non-GAAP basis. We haven't heard of any production problems in Q2, so I'm expecting that Tesla was able to produce the 8,500-9,000 they were expecting and deliver the 7,500 cars they were expecting as well. I think it's possible they could deliver a few hundred more cars than 7,500, but it's also possible they delivered just around 7,500 cars as well in the event that they grew their pipeline (cars in transit) like they guided.

Overall, Tesla met their Q2 guidance they gave last quarter:

Guidance	Actual
7500 vehicles delivered	7579 vehicles delivered
8500-9000 vehicles produced	8763 vehicles produced
lease 200 vehicles	158 vehicles leased
non-GAAP gross margin increase slightly	26.8-26.9% gross margin
R&D expenses up 30%	R&D expenses up 37%
SGA expense up 15%	SGA expenses up 15%
marginally non-GAAP profitable	non-GAAP $16m income, $0.11 eps

The next biggest item for Q2 ER will be guidance for Q3 and Q4. We know Tesla will have to push deliveries in Q3 and Q4 in order to meet their 35,000 cars delivered guidance. If Tesla delivered 6457 cars in Q1 2014 and 7700(?) cars in Q2 2014, then they will need to deliver 20,843 cars in Q3 and Q4. I'm expecting Q3 guidance to be strong with guidance of at least 9,000 cars delivered (that would mean they would need to deliver about 11,000 in Q4).

Tesla has guided for 7800 vehicles delivered in Q3. This is a slightly disappointing as I was expecting guidance of at least 9000 vehicles delivered in Q3. However, Tesla balanced out this somewhat disappointing number by reiterating that they're still on target to deliver 35,000 vehicles in 2014. Let's figure out how many vehicles they will need to deliver in Q4.
Q1 actual - 6457
Q2 actual -7579
Q3 guidance - 7800
Q1-Q3 subtotal: 21,846

This means in Q4, they will need to deliver 13,154 vehicles. Wow, that's a lot of cars. But they seem confident or else they would have adjusted the 35,000 guidance but they reiterated it. So that's positive.

They also balanced the low Q3 guidance of 7800 by giving a glimpse into 2015 guidance by saying that they expect to be at an annual production run rate of 100,000 vehicles by the end of 2015. That's roughly 2000 cars per week. This gives long-term investors reassurance that Tesla is on the right track in ramping production and sees demand as growing. Tesla's actual statement in the letter was: "Provided that we execute well and there are no serious macroeconomic shocks, Tesla’s annualized delivery rate should exceed 100,000 units by the end of next year."

The other important items would be an update on Gigafactory (ie., site selection, Panasonic, etc) and also Model X.

Overall, I feel pretty good going into Q2 ER. The main question will be does Q2 ER strengthen the Tesla story (ie., faith in Tesla's ability to execute) or weaken it, since so much of Tesla's stock price is based on Tesla's ability to execute their plan over the next several years.

Tesla released a press release on the Gigafactory (agreement with Panasonic) earlier this morning. I view this as positive and a sign that GF plans are rolling out smoothly.

Regarding Model X, the shareholder letter said: "Development efforts remain on track for production of Model X in the spring of 2015. We anticipate having operational Alpha prototypes ready by next week in order to confirm design intent and Beta prototypes to be ready later this year."

Overall, I think Tesla's Q2 earnings was decent. They met their guidance. They were somewhat weak on Q3 guidance (only 7800 vehicles delivered) but reiterated 35,000 vehicles for 2014 and gave a glimpse into 2015 guidance (100k production run rate by end of year). GF and Model X seem to be coming along as well.

In terms of stock price, I think it's difficult for traders to figure out how to digest Q2 earnings (and that's why afterhour action has been volatile) since Q3 guidance was a bit weak but it was counter-balanced with reiterating 2014 guidance and a glimpse into 2015. For long-term investors, I think Q2 earnings is reassuring in that it shows Tesla is on the right long-term road track. I also think that the 100k annual production run rate by end of 2015 is an amazingly sexy goal Tesla has shared and gives TSLA a direction to head to (ie., one can calculate fairly easily the revenue/margin from selling 100k Model S/X vehicles).

Note: Tesla's conference call is coming up shortly and if any significant news is shared, I'll post more thoughts here.

 

[chickensevil]

So to add to Dave's post on the targets for Q3 and Q4 they specifically said on the earnings call that hitting a little over 1,000 a week for all of Q4 will make them meet their guidance. Since there are about 13 weeks in Q4 at a 1k a week run rate, that does indeed line up nicely for 13k deliveries for Q4. Course with them having a stated delay of 2 weeks in NA and and additional 3-4weeks international from finished product to delivery, this could get interesting. I anticipate them making a lot of NA customers happy in Nov and Dec by pushing all the cars they can to them in order to meet the 35k guidance. This is going to be interesting to watch.

 

[DaveT]

Q2 2014 Conference Call highlights

Here are my thoughts about the Q2 conference call that just ended, http://www.media-server.com/m/p/bbz2caea .

1. Tesla is on a roll.
It was quite obvious that Elon and team were feeling very confident in the call. Not only did they reiterate the 35,000 vehicle guidance for 2014 but they reiterated a 100,000 vehicle production run rate by end of 2015 shared in the shareholder letter. The 100,000 vehicle production run rate by end of 2015 is significant because it shows that Tesla will be doubling production in 2015 (from 50k annual production run rate at end of 2014 to 100k annual production run rate at end of 2015). For Tesla to come out and give this expectation, it shows that they are confident that they can secure enough battery cells and that they will have enough demand as well.

As investors look forward to Tesla selling at least 100,000 cars/year (if they begin 2016 at 100k production run rate then during that year they will sell at least 100k cars, but likely a lot more), then they gives the stock a decent foundation in value. If 100,000 cars are sold at an average selling price of $100,000, then that is $10 billion in revenue. Gross margin will likely be 30-35% at that time. And if hypothetically Tesla didn’t spend any on future growth, then they could have an impressive profit margin of maybe 15%. That would be $1.5 billion. Giving a conservative multiple of 20, gives a valuation of $30 billion. This is a simple way of calculating a kind of low valuation of TSLA if/when investors are expecting Tesla to sell 100k cars. Since selling 100k cars/year is no within 2 years reach and also because now Tesla has forecasted it, it now becomes something that investors can latch onto. And if investors believe Tesla will sell 100k cars in 2 years, then it become extremely difficult for Tesla to drop under $30 billion market cap (unless there are some macro/market downturn). On the flip side, Tesla selling 100k cars within 2 years also gives good room for the stock to run over the next 2 years as investors as 100k cars/year gives a solid foundation of $10 billion revenue (and 15% potential profit if they didn’t spend on growth), and as Model III becomes more visible (ie., prototype revealed, Gigafactory being built, etc) then investors can look toward the potential of Model III and what that means for future revenue and earnings.

Overall, it’s difficult to understate the significance of Tesla vocalizing their expectations to produce a 100k annual production run rate by the end of 2015 (likely 1000 units/week of Model S and 1000 units/week of Model X, according to Elon).

2. Tesla able to drive up demand at will.
Several times during the call Elon emphatically stated that “demand will not be an issue.” In fact, he went on to explain how they currently aren’t building many new stores and that if they wanted they could drive up demand at will. But currently, they’re not doing so since that would affect the customer experience in a negative way (i.e., longer wait times).

In other words, if Tesla wanted to drive up demand they could simply roll out new stores and the new stores would drive up demand. There are other ways to drive up demand as well, like advertising or even a more aggressive test drive campaign/events.

This reminds me when Facebook has in the 20s (stock price) and people were doubting if Facebook could make money in the future. Paul Graham (of Y Combinator) said that Facebook could turn on the revenue switch whenever they wanted and make a ton of money, but they weren’t focused on that, yet. When they do decide to make money, he predicted they would make a ton of it. In turns out he was correct.

In a similar way, Tesla isn’t focused on stirring up demand. But it’s got a switch and it can turn on that switch (stir-demand-switch) whenever they choose to, and the result will be a big increase in demand.

What we’re seeing currently is worldwide demand of at least 50,000 Model S and 50,000 Model X annually, and this is without Tesla focusing on demand generation. Impressive.

3. Weekly Product Excellence Meetings.
Elon mentioned that he holds a weekly Product Excellence meeting with representatives across departments in the company, so they can monitor and solve key product issues. He then went on to share a lot of details on the current issues with the drivetrain and how they are addressing things. He also shared how they have a mission to make their cars the most reliable on the road (10x better than anything else out there).

It’s super impressive to see Elon personally involved in details, however small, of the Model S and improving the car. He knows that the key is to constantly make improvements to the car, and if the car is stellar that the demand will follow.

The attitude is “what are the problems the car is having? how can we fix those problems?”

Further, Tesla owns it’s own service centers and can get quick feedback from customers/experiences and can quickly implement experiments and fixes. They can learn quickly and solve problems, even if it takes many various attempts at trying to figure out what the source of the problem is.

Any company that is super focused on making their product(s) constantly better is a definite force to be reckoned with.

4. Bullish on China and Asia-Pacific.
Elon mentioned how he sees Asia-Pacific making up to 40% of demand and he shared how they could have roughly 100 service centers in China by the end of 2015.

It appears that Tesla’s strategy is focused on supporting current demand by rolling out as many service centers as possible to areas of high demand. China being one of them. Worldwide, Elon mentioned they could have roughly 300 service centers by end of 2015.

It’s definitely impressive growth and the kind of goals that are needed to support the growth of Tesla.

5. Gigafactory and battery cost savings.
It appears that Tesla is incorporate next generation cathode/anode materials in their new cells (at the Gigafactory) as well as make geometric improvements (10% taller, 10% more diameter). The new cells will have 30% greater energy density.

Elon also mentioned that the projected cost savings of 30% were conservative and that they are shooting for a higher number.

One analyst asked if reaching a $100/kWh pack would be possible in 10 years, and Elon responded that he would be disappointed if they didn’t reach a $100/kWh pack in 10 years.

It’s too bad the analyst didn’t follow up on this. Rather, the analyst just seemed dumbfounded and moved on.

I want to know more details on Tesla’s projections and plans to reach a $100/kWh pack. I want to know if Elon means $100/kwh on the cell level or on the pack level.

If Tesla can reach $100/kWh on a pack level within 10 years, this would be quicker than what I was projecting. This would be truly a historical game-changer. It’s going to happen, but the question is when.

$100/kWh on the pack level means that Tesla could release a car with a 50kWh battery pack and the battery pack would only cost $5,000 and likely go over 200 miles! This will truly usher a tidal wave that will deem the ICE obsolete.

I ended up emailing Tesla’s investor relations after the conference call and they confirmed that the $100/kWh was on the pack level. And currently Tesla has said that their current battery pack is at $200-300/kWh.

Anyway, a $100/kWh battery pack within 10 years is truly amazing/astonishing/incredible, if Tesla can make it happen.

6. There are things you don’t know about.
Elon mentioned that Tesla is no longer showing all their cards. He even said that capex and R&D numbers are better than they appear, because “there are things you don’t know about”.

Again, the analyst was dumbfounded and just moved on. Are you serious? Elon mentions that “there are things you don’t know about” and you don’t ask for more specifics? At least, ask in what field it is. Is Elon talking about autonomous driving? Stationary Storage? A new product line? Or what?

Anyway, again since the analysts on the conference call didn’t ask for specifics we’re left with a lot more questions.

Note to analysts: if Elon makes a crazy, bold statement like he’d be disappointed if they don’t reach $100/kWh battery pack in 10 years or that they capex will seem low because we don’t know something, please, please, please ask Elon for more specifics. If he refuses to share, at least ask him for a bone.

Summary
Overall, the conference call was excellent and I highly recommend listening to it if you haven’t. You can feel the confidence and enthusiasm from Elon, JB and Deepak.

I’m very glad that Tesla shared some guidance into 2015 (ie., 100k annual production rate by end of 2015) since it gives tangible evidence that Tesla is executing well on their mission to see the world’s transport move to electric.

I’ll be hosting a Google+ hangout tonight to discuss today’s Q2 earnings in more detail, Google+ video hangouts (TSLA other investments) - Page 15 .

 

[surfside]

6. There are things you don’t know about.
Elon mentioned that Tesla is no longer showing all their cards. He even said that capex and R&D numbers are better than they appear, because “there are things you don’t know about”.

Again, the analyst was dumbfounded and just moved on. Are you serious? Elon mentions that “there are things you don’t know about” and you don’t ask for more specifics? At least, ask in what field it is. Is Elon talking about autonomous driving? Stationary Storage? A new product line? Or what?

Anyway, again since the analysts on the conference call didn’t ask for specifics we’re left with a lot more questions.

Note to analysts: if Elon makes a crazy, bold statement like he’d be disappointed if they don’t reach $100/kWh battery pack in 10 years or that they capex will seem low because we don’t know something, please, please, please ask Elon for more specifics. If he refuses to share, at least ask him for a bone.

hi dave, thanks for your comments; i would tend to agree -- elon seemed super confident today. i'm not sure how to interpret the capex and R&D comment though -- when he said they are better than they appear, does he mean that you look at R&D as a percentage of sales, you shouldn't compare with other auto manufacturers because a significant portion aren't related to the core auto business (but actually something else)?

you said "they will seem low" -- that would imply the capex numbers and R&D numbers are actually higher but for some reason they aren't showing up in the financials -- that doesn't make much sense to me.

anyways, thanks for posting your summary; looking forward to hearing your thoughts.

surfside

 

[FredTMC]

hi dave, thanks for your comments; i would tend to agree -- elon seemed super confident today. i'm not sure how to interpret the capex and R&D comment though -- when he said they are better than they appear, does he mean that you look at R&D as a percentage of sales, you shouldn't compare with other auto manufacturers because a significant portion aren't related to the core auto business (but actually something else)?

you said "they will seem low" -- that would imply the capex numbers and R&D numbers are actually higher but for some reason they aren't showing up in the financials -- that doesn't make much sense to me.

anyways, thanks for posting your summary; looking forward to hearing your thoughts.

surfside

I loved that Elon is holding back some pearls. I'm surprised also that analyst didn't probe further but he already said "not going to tell you". I bet it's 1) autonomous driving (like on freeway) and 2) battery storage solutions and 3).

Sorry, I'm not telling what what #3 is...

 

[ggr]

It appears that Tesla is incorporate next generation cathode/anode materials in their new cells (at the Gigafactory) as well as make geometric improvements (10% taller, 10% more diameter). The new cells will have 30% greater energy density.

I could be wrong, but what I thought I heard was that the cells would hold about 30% more energy, because they would be bigger. But because they are going to be bigger, the energy density of the cells won't (necessarily) be much better. Now, if they're slightly bigger, they might pack better, so the energy density of the battery might actually improve. And yes, new chemistry might also come into an improvement.

 

[DaveT]

I could be wrong, but what I thought I heard was that the cells would hold about 30% more energy, because they would be bigger. But because they are going to be bigger, the energy density of the cells won't (necessarily) be much better. Now, if they're slightly bigger, they might pack better, so the energy density of the battery might actually improve. And yes, new chemistry might also come into an improvement.

You could be right. I was going off of my rough notes I took from the call. Can anyone confirm what was said on the call? Or I guess we could wait for a transcript to come out on SeekingAlpha.

- - - Updated - - -

hi dave, thanks for your comments; i would tend to agree -- elon seemed super confident today. i'm not sure how to interpret the capex and R&D comment though -- when he said they are better than they appear, does he mean that you look at R&D as a percentage of sales, you shouldn't compare with other auto manufacturers because a significant portion aren't related to the core auto business (but actually something else)?

you said "they will seem low" -- that would imply the capex numbers and R&D numbers are actually higher but for some reason they aren't showing up in the financials -- that doesn't make much sense to me.

anyways, thanks for posting your summary; looking forward to hearing your thoughts.

surfside

Yeah, I'm not saying that certain capex/R&D expenses aren't showing up in the financials. I'm just interpreting what Elon said about capex/R&D numbers looking better after we find out what they're doing... so in other words, while capex/R&D might seem high right now it's because we don't know everything that Tesla is doing. But once we find out, the capex/R&D numbers will make sense (maybe I misworded it by saying "they will seem low").

 

[Zaxxon]

I could be wrong, but what I thought I heard was that the cells would hold about 30% more energy, because they would be bigger. But because they are going to be bigger, the energy density of the cells won't (necessarily) be much better. Now, if they're slightly bigger, they might pack better, so the energy density of the battery might actually improve. And yes, new chemistry might also come into an improvement.

At one point Elon did clarify that overall energy density would rise.

 

[FluxCap]

Fantastic summary as usual, Dave. See you on the Hangout.

 

[surfside]

You could be right. I was going off of my rough notes I took from the call. Can anyone confirm what was said on the call?

i'm pretty certain i heard them say that as a result of the better cell geometry, the energy to weight ratio would be improved.

also, something about how with the 10% increase in length and width would translate into a bigger increase than it would seem to imply? not sure about that part.

 

[chickensevil]

Here is what I had typed out on this comment regarding the batteries. They are looking at, in the lab, a 10-15% density improvement overall and the size difference comes out to another 30% density addition, but they are also larger so there will be less of them.

Is chemistry going to be the same for batteries? There are improvements to the chemistry and cell improvement. Will see energy density improvement and cost reduction. Seeing 10-15% improvements on the density itself and will be changing the cell shape and size to find the most optimal. Not a lot different from now but 10% more diameter and 10% more height, 30% more energy per cell because of size. Fundamentals of chemistry defines primary costs shape and size don't matter. Chemistry will continue to change to improve.

- - - Updated - - -

Seems to me like the size change is more about cost improvements, since they said later on that the chemicals was only a part of it, and JB even interjected to add the it wasn't even the biggest part. So the sizing likely has more to do with cost than density because the 30% is due to the volume change of the cell by making it wider and taller.

 

[ecarfan]

The details provided today about battery improvements give me some confidence that the X will launch with higher capacity battery options in the same physical size pack and at that time the S will also get the same batteries.

 

[clmason]

Hey DaveT,

On the call they discussed the powertrain fixes saying in the beginning they often replaced the whole system when the problem was an inexpensive part for the sake of a fast fix and have since dialed in the issues and now do the fix to the inexpensive part. Then Deepak chimed in and said they are not using as much of the reserves as they have accrued. My question to you and the experts here. Do we have visibility to how much cash has been reserved for warranty work?

I'm familiar with companies accruing reserves for R&A's and will release reserves once it's determined they are not needed. Those released reserves go straight to the bottom line. This could happen in q3 or q4. I'm not sure how material it is but I have to assume with a brand new car they had high reserves just in case of major issues.

And if you combine the above with Zev Credits (they are eventually going to sell some this year) there could be a not so insignificant amount of dollars that falls to the bottom line, enough to sway earnings per share by a substantial amount.

Any thoughts on this?

 

[techmaven]

The details provided today about battery improvements give me some confidence that the X will launch with higher capacity battery options in the same physical size pack and at that time the S will also get the same batteries.

They did not talk about specific timing. The discussion was really about Model 3, so it would be a stretch to think it is for the X.

 

[mrdoubleb]

They did not talk about specific timing. The discussion was really about Model 3, so it would be a stretch to think it is for the X.

Indeed, they were asked about if the cells produced in the GF will be the exact same as the ones shipped from Pana today.

still, it's hard to believe the cells today are the exact same as they were 4 years ago when the S was designed. I am hopeful when the X is announced for deliver, they will have a >85kwh option and the S sill get it too.

 

[chickensevil]

They did not talk about specific timing. The discussion was really about Model 3, so it would be a stretch to think it is for the X.

Yeah, the specifics of the 10-15% improvements were specifically "in the lab" so they aren't production cells yet.

 

[ecarfan]

Okay guys, burst my bubble. ;-) But I take your point.

 

[adiggs]

Listening to the Q2 webcast this afternoon, I was able to crystallize an idea that has been sort of ticking away at the back of my mind for awhile, but only now am able to articulate verbally (or at least in writing).

I don't care about the delivery number. I do care about the production number.

Disclaimer - I'm a long term investor and don't trade in and out (two purchase transactions, zero sales transactions, over the last ~2 years).

With this long term ownership perspective, as long as Tesla is supply constrained (everything we build is already sold), then deliveries become very important to short term owners of the stock, and are most like what people are accustomed to using to think about and value auto makers. But are really irrelevant to those of us holding the stock longer term. Production of vehicles is really the number to watch, and realize that deliveries will be lumpy relative to production, quarter to quarter. I sense a trading opportunity for those that are looking for that sort of thing - trade the stock to go down in quarters when deliveries will be "light", and trade the stock to go up in quarters when the deliveries are particularly intense.

I'll want to keep an eye out for the supply constraint easing, and the company shifting into a more typical business pattern. I just don't see that happening though for years.

 

[techmaven]

Listening to the Q2 webcast this afternoon, I was able to crystallize an idea that has been sort of ticking away at the back of my mind for awhile, but only now am able to articulate verbally (or at least in writing).

I don't care about the delivery number. I do care about the production number.

Yup... I've been arguing this for a while. Each car built is for a named customer except for a few demo/loaner cars. Therefore, it really doesn't matter as much if a few cars are on this side or the other side of a quarter demarcation because of delivery delays. It's not traditional inventory that is sitting around to find a customer. Each car that is built is already a sale outside of the demo/loaner cars so production numbers is what really matters.

 

[adiggs]

To add on - it sort of looks like Tesla has begun moving away from the quarter end crunch behavior we saw about a year ago. That makes me happy for the same fundamental reason - a hard push to deliver cars before the end of this quarter translates directly into fewer cars delivered next quarter, and adds long hours / burnout to the work environment. Let the cars get delivered when they get delivered - focus on the quality experience when it happens and building a quality product, and don't worry whether this quarter looks particularly good or bad; it'll all come out in the wash.