q1 2018 earnings estimates

[trentbridge]

I'm curious as to why the SG&A expenses for Solar City for Q1 ( $140,000) are the same as Q4 2017 and higher than Q1 2017. ($127,000)
There was a widespread layoff of Solar City employees in September 2017:

Sacrameto Bee: San Mateo-based SolarCity Corp. and its parent, Tesla Inc., plan to lay off more than 200 employees at their Roseville offices, part of continuing restructuring in the aftermath of Tesla’s acquisition of SolarCity last fall.

 

[Reality]

@luvb2b
Thanks for the great explanation on different cash flow scenarios! I am more interested in positive cash from ops. It is highly likely that Tesla achieves it in this quarter.

It is extremely unlikely this quarter because of the favorable changes to Working Capital they took last quarter. Unless they are just not paying suppliers at all, last quarter they burned inventory (positive CF) this year they produced more than they sold, CF from Operations should be around negative 500m give or take assuming they continue to drag out suppliers (which they will).

 

[luvb2b]

your methodology is similar to mine but the inputs are different.

we have very little information to know those inputs. i think broadly to say model 3 runs at deeply double digit negative gross margin (-10% to -40%) is a probably a reasonable assumption given what data we have. where you choose to end up within the range is up to you.

I am surprised at the Model 3 gross margins at -28%. All the cars sold - 8180 - of them are the LR versions at $53,000 each. That's implies a cost of $73,600. I don't see how Tesla expected to be "ops cash flow" positive on this vehicle..in the first quarter under that assumption.

If we assume an "overhead" of $200,000,000 per quarter and base costs of parts and labor at $38,000 per vehicle - it would give you a cost in Q4 for overhead of $129,000 plus $38,000 per Model 3 = $ ( -215% gross margin) - then in Q1 2018 this would become $200,000,000 divided by 8160 = $24,509 per vehicle. $o a total cost of $62,509 (gross margin -15%)

The machinery used on the production line is depreciated over the first million vehicles so that cost should be consistent with the number produced and sold. I'd expect the engineering and management overtime was very heavy in both periods as the bottlenecks were worked on.

 

[luvb2b]

It is extremely unlikely this quarter because of the favorable changes to Working Capital they took last quarter. Unless they are just not paying suppliers at all, last quarter they burned inventory (positive CF) this year they produced more than they sold, CF from Operations should be around negative 500m give or take assuming they continue to drag out suppliers (which they will).

if you have some details of how you got to -500m cash from ops for q1 2018 i would be interested to understand them.

my take: for q1 2018 cash from ops i start with net loss then subtract out non cash items, and add in changes in operating assets/liabilities.

assuming 800m net loss, my non-cash items net out to 750m or so (600m is just depreciation and stock based comp). they will of course push out 200m in suppliers, 100m or so probably collected but recorded in deferred revenue, some 50m increase in customer deposits on semi orders etc., releases of rvg's and other liabilities good for another 50m. that's 400m of favorable cash flow from ops items.

so far this will get us to +350m cash from ops but:
the big line item is the change in inventory and operating leases.

for inventory, they are still running below historical norms for cars in transit. and relatively low on new car inventory. so inventory will increase but not to historical averages i think. even accounting for an extra few hundred million, i am hard pressed to get higher than -580m for this line (which is the largest value of this line item in the last 4 quarters).

adding it all up should be around -200 to 250m cash from ops.

 

[luvb2b]

Thanks for the post.

One correction: "positive free cash flow" (cash from ops - CapEX), not "opex," but that's a crude shortcut to the actual definition.

thank you- that's a typo - it should read capex (not opex) as you noted.

 

[generalenthu]

are you sure it's that narrow?
in my further modeling i can see q3 and q4 numbers coming in very high, cash generated from ops at 600m-900m ranges. additional lease securitization can fill the gap and they could self-fund capex, at least to the end of the year. i feel something has to go very wrong for cash to get anywhere near 1b by end of year.

Thanks for your response. Yes, I missed factoring in the lease securitizations.

 

[Reality]

if you have some details of how you got to -500m cash from ops for q1 2018 i would be interested to understand them.

my take: for q1 2018 cash from ops i start with net loss then subtract out non cash items, and add in changes in operating assets/liabilities.

assuming 800m net loss, my non-cash items net out to 750m or so (600m is just depreciation and stock based comp). they will of course push out 200m in suppliers, 100m or so probably collected but recorded in deferred revenue, some 50m increase in customer deposits on semi orders etc., releases of rvg's and other liabilities good for another 50m. that's 400m of favorable cash flow from ops items.

so far this will get us to +350m cash from ops but:
the big line item is the change in inventory and operating leases.

for inventory, they are still running below historical norms for cars in transit. and relatively low on new car inventory. so inventory will increase but not to historical averages i think. even accounting for an extra few hundred million, i am hard pressed to get higher than -580m for this line (which is the largest value of this line item in the last 4 quarters).

adding it all up should be around -200 to 250m cash from ops.

I definitely did it shorthand,

They had 500m positive in Q4 2017 on a 771m net loss

The ONLY reason that was positive was the net change in WC items of +497m (just over 200m was inventory drain)

You take 771m net loss, add 100 to it (so 871m net loss which is conservative), the WC HAS to swing back the other way, at least half of it assuming they don't totally not pay suppliers. So a +497m to say a (250m), which seems conservative because that 250m is likely the inventory change alone, so it means suppliers are still not catching up on bills..


So PQ is

+500m Net Op Cash
(750m) difference in WC (from +497 to (250m)
(100m) in additional losses


and I am at (350m) net loss and STILL have pushed suppliers out and not built up any inventory since end of Q3 2017 during a model 3 ramp which seems unlikely. So ya I think (500m) is probably in the neighborhood.

 

[ValueAnalyst]

thank you- that's a typo - it should read capex (not opex) as you noted.

sure thing! Also, forgot to include this chart that helps understand the cash cycle terminology:

Hope this helps.

 

[Reality]

@luvb2b I think we just disagree that you think they can keep laying off the suppliers, and ime that game doesnt work long-term, I would be very surprised if many were not threatening COD by now, especially considering the 500m lawsuit recently. These are not mom and pop companies that have no options when Tesla holds payment

 

[luvb2b]

thanks. this is very helpful.

i see one mistake from your comments: i was using net income to common vs. net income (which excludes nci). you have used the correct starting point and so i made the adjustment on my side.

on working capital changes, i think almost all the internal line items end up positive except the changes in inventory & operating leases. inventory i agree 250 or 300m build is likely.

i am trying to understand exactly how the operating lease changes are flowing through the cash flows as that's the other big part of the working capital changes.

payables i think you'll find continue to build. a lot of model 3 production was back-end loaded, and the tesla energy business is busy towards the back of the quarter as well, implying likely payments to suppliers will be outstanding. more s/x were in transit too which to me would mean more payments outstanding to suppliers.

deferred revenue is always a positive for them.

i think we close the gap between our views on the payables alone but i need more time to think through what i am doing.

I definitely did it shorthand,

They had 500m positive in Q4 2017 on a 771m net loss

The ONLY reason that was positive was the net change in WC items of +497m (just over 200m was inventory drain)

You take 771m net loss, add 100 to it (so 871m net loss which is conservative), the WC HAS to swing back the other way, at least half of it assuming they don't totally not pay suppliers. So a +497m to say a (250m), which seems conservative because that 250m is likely the inventory change alone, so it means suppliers are still not catching up on bills..


So PQ is

+500m Net Op Cash
(750m) difference in WC (from +497 to (250m)
(100m) in additional losses


and I am at (350m) net loss and STILL have pushed suppliers out and not built up any inventory since end of Q3 2017 during a model 3 ramp which seems unlikely. So ya I think (500m) is probably in the neighborhood.

 

[luvb2b]

i think you're right that the payables account for our differences. the lawsuit is for 500k not 500m. trying to think through the payables side more carefully now.

@luvb2b I think we just disagree that you think they can keep laying off the suppliers, and ime that game doesnt work long-term, I would be very surprised if many were not threatening COD by now, especially considering the 500m lawsuit recently. These are not mom and pop companies that have no options when Tesla holds payment

 

[GoTslaGo]

@luvb2b I think we just disagree that you think they can keep laying off the suppliers, and ime that game doesnt work long-term, I would be very surprised if many were not threatening COD by now, especially considering the 500m lawsuit recently. These are not mom and pop companies that have no options when Tesla holds payment

You do realize that the lawsuit has nothing to do with Model 3 suppliers (despite the misleading title in the article linking the two).

Twitter

 

[Reality]

i think you're right that the payables account for our differences. the lawsuit is for 500k not 500m. trying to think through the payables side more carefully now.

yes you are correct, I meant 500k, I meant it as a sign combined with credit downgrade etc etc. I just dont see a Payables going up QoQ, I guess it's possible but I would be surprised, a net zero change is probably best case scenario for Tesla CF wise.

 

[Reality]

You do realize that the lawsuit has nothing to do with Model 3 suppliers (despite the misleading title in the article linking the two).

Twitter

I think it's irrelevant. Someone is sitting at a desk managing receivables and his boss is seeing headlines that he has a large account 30 days past due and just got sued for payment and recently had a credit downgrade (admittedly near end of Q).

That situation becomes very toxic very fast if bills arent paid.

 

[ValueAnalyst]

@luvb2b I think we just disagree that you think they can keep laying off the suppliers, and ime that game doesnt work long-term, I would be very surprised if many were not threatening COD by now, especially considering the 500m lawsuit recently. These are not mom and pop companies that have no options when Tesla holds payment

Ok. Your intentions are clear, but I'll engage for a brief second.

The following is a graph of Mega Tech companies' both current assets and current liabilities growing as the company grows:

Growing liabilities are not necessarily a sign of trouble; and no, Tesla is not systematically "holding payment," they just had a dispute with a supplier, which all companies go through. Tesla's negative cash cycle will allow the company to generate cash while it grows.

 

[luvb2b]

on being past due, compared to the s/x they have much more favorable payment timelines for parts for the 3. so i doubt they are running "past due". there is also cash that's cycling through as cars are sold, so it's not as if suppliers aren't getting paid for some of the earlier deliveries.

i think payables going up is the plan.

if you assume s/x at steady state already, there's not likely much change in payables there.

on model 3, if you assume they keep 2-4 weeks of production worth of parts on hand, at the end of 2017 with all the production problems they would have needed maybe 2000 3's worth of parts. but this quarter they probably need more like 5000 3's worth of parts, assuming they're operating 2000-2500/wk. just that alone is probably a 100m increase in payables vs. last quarter not including any further delaying of payments.

this increase in payables continues as they production keeps climbing higher. next quarter imagine it would be 4000/wk production and they'd have maybe 9000-10000 3's worth of parts on hand (in payables).

for the solar roof product they are just now starting more installations, so likely there was some build there in payables with some offsetting inventory increase.

and tesla battery storage products seem to be moving faster than before too, so again inventory build with payables building.

there's also customer deposits which should be working in their favor due to all the semi orders.

taking a 100-200m payables build and 50m increase in customer deposits basically reconciles our difference of opinion.

the thing that really sinks the free cash flow is a billion dollars in capex.

yes you are correct, I meant 500k, I meant it as a sign combined with credit downgrade etc etc. I just dont see a Payables going up QoQ, I guess it's possible but I would be surprised, a net zero change is probably best case scenario for Tesla CF wise.

 

[luvb2b]

tesla doesn't give us this split. i use a figure based on the historical data that i have. it is most likely incorrect. probably better to think of the overall assumption that opex is relatively flat quarter over quarter for the whole company. even that is a sketchy assumption as the opex always seems to grow more.

I'm curious as to why the SG&A expenses for Solar City for Q1 ( $140,000) are the same as Q4 2017 and higher than Q1 2017. ($127,000)
There was a widespread layoff of Solar City employees in September 2017:

Sacrameto Bee: San Mateo-based SolarCity Corp. and its parent, Tesla Inc., plan to lay off more than 200 employees at their Roseville offices, part of continuing restructuring in the aftermath of Tesla’s acquisition of SolarCity last fall.

 

[kbM3]

are you sure it's that narrow?
in my further modeling i can see q3 and q4 numbers coming in very high, cash generated from ops at 600m-900m ranges. additional lease securitization can fill the gap and they could self-fund capex, at least to the end of the year. i feel something has to go very wrong for cash to get anywhere near 1b by end of year.

I would imagine Model 3 average selling price would increase in quarters three and four because of all wheel drive and performance versions. Do you agree and are you including this?

 

[luvb2b]

i agree in q3/q4 it's likely to get some uptick in asp.

i did not incorporate this in my cash discussion as i prefer to be a bit more conservative.

if asp does go up it makes it more likely we are free cash flow positive in q3/q4. q3 i think the company can make the turn to gaap profits, and those profits could sustain at least through q4 due to the effect you're describing.

I would imagine Model 3 average selling price would increase in quarters three and four because of all wheel drive and performance versions. Do you agree and are you including this?

 

[schonelucht]

Thanks for starting the thread! Here is my model (in million $)

ZEV	0​
SX sales	1,646​
3 sales	499​
Leasing sales	300​
Energy&storage sales	403​
Services&other sales	259​
Total revenu	3,058​
SX costs	1,399​
3 costs	502​
Leasing costs	208​
Energy&storage costs	371​
Services&other costs	339​
Total costs	2,820​
R&D	372​
SG&A	716​
Interest income	(6)​
Interest expense	155​
Other adjustments	(58)​
Loss	942​

Note of caution : I did not try to estimate the impact of the new leasing rules at all. I know too little about those. So that's a big difference with your where you have a lot of more lease revenu recognized up front. That is more than likely correct. The other main differences are in the growth trajectory for SG&A and R&D. I think both will grow sequentially by 5%. For R&D it's clear that Tesla is non-stop hiring, see report on all time open job offers. SG&A I think is growing due to getting the early 3 sales organisation on rails and additional effort in Tesla energy sales.

I also see you have a relative sharp decline in Tesla related interest expense. Why? There are several factors working against Tesla in the debt market. Some of their loans are LIBOR related which is rising sharply and the build up in production should make draws on the asset backed lines growing again.

All in all loss per share of $4 easily.