Deferred Revenue at Sept 2019 was $2.2bn. This is some $830m higher than at March 2018 and is worth 7% of Tesla's total balance sheet, so I figure deserves a closer look:
- Of the total today, about a third is accounted for by deferred revenue related to the Energy Business (rebates, fees, maintenance and monitoring obligations, VIEs), and vehicle sales made to leasing partners with a buyback option or resale value guarantee. This gets accrued to revenue over time (very slowly in the case of some of the energy components).
- The energy component has grown only very slightly in $ terms, given how curtailed this segment of Tesla's business has been (especially solar). The component related to auto sales to leasing partners has actually reduced by $140m since March 2018, as the structure of Tesla's auto sales model shifted with the arrival of Model 3.
So what makes up the important share and why has the amount grown so much?
- Much discussed was the $140m liability Tesla has held on its balance sheet since Q1 2019 for deferred regulatory credit revenue (to be realised within 1-3 years), which we presume is the Fiat Chrysler agreement.
- The remainder of Deferred Revenue is related to Auto Sales, which covers Tesla's future obligations for 1) supercharging, 2) internet connection of cars, 3) OTA software updates and 4) Autopilot / FSD features.
- This component has grown from 40% of the total amount in March 2018 to 60% in Sept 2019. An increase of $770m, now totalling $1.3bn.
Perhaps others have been smarter than me and been able to figure out exactly what amount of this increase relates to straightforward growth in the fleet requiring higher provisions for internet connection, lifetime supercharger access promotions etc...
But even without this information I find the disclosures very interesting. And that is because there's enough info provided to say that far from rigging its accounts to inflate its profit (TSLAQ's favourite claim this week for warranty provisions), in this area at least Tesla looks to have been quietly filling a lovely big cookie jar.
Each quarter Tesla tells us how much of the Auto Sales segment they expect to recognise as revenue in the next 12-months:
- Every quarter the amount they expect to recognise in the following 12-months has been rapidly increasing (by about 15-25%)
- But these estimates have been consistently over optimistic:
- Why are they doing this? It should be easy to forecast deferred revenue recognition for Supercharging, internet access and basic software update features, which would accrue on a straight line basis over the life of the car. But forecasting the Autopilot / FSD components, now that's lumpy and is timed according to Elon O'Clock.
- This quarter Tesla recognised a total of $64m of deferred auto sales revenues, higher than the steady state amount, with $30m being recognised from the rollout of Advanced Summon. Q2 was also a good period, coinciding with the release of Navigate on Autopilot:
- But to put this into context, if Tesla is to hit its Dec 2018 forecast for 2019, they'll need to recognise a whopping $150m of deferred revenue in Q4.
- To hit the most recent forecasts, they'd need to recognise $165m per quarter.
Now what we will likely see is another period pass in Q4 where the realised deferred revenue severely lags the forecast from a year ago. But at some point we will see convergence of these two numbers, with the benefit going straight to the bottom line.
Given that Tesla has already received the cash and this is only accounting treatment, why is this important? Well it's not just because it helps the effort to S&P 500 inclusion of getting a 12-month rolling period of GAAP profit, though that is important.
It's because there are large pools of money that won't give the benefit of the doubt to these cashflows until they are sure that they will be a) repeatable, b) Tesla's to keep. In short, they don't trust weird old Elon with his Cray-Cray Fully Self Driving progamme (just as they don't trust how capex can be below depreciation for a growth company).
So when the recognition comes, this is going to cause quite the surprise. And when it comes it will be even better than indicated above, given the FSD price is going up by another $1k this week and the ever increasing volume of deliveries to sell the feature to. Notwithstanding that this will add several percentage points to the gross margin of all future periods.
And what is the trigger for all this? To be clear, I don't think we are waiting for regulatory approved Robotaxis to claim this deferred revenue to P&L. By my estimation, what we're waiting for is "Feature Complete", with perhaps some residual amount to accrue as the interventions rate decreases (Elon's "Level 2" from this week's call) and/or to install HW3 computers. From this week's call:
Elon: There's the car being able to be autonomous, but requiring supervision and intervention at times. That's feature complete. And then, there's another level which is that we think it's -- that from a Tesla standpoint, we think the car is safe enough to be driven without supervision. Then the third level would be that regulators are also convinced that the car can be driven autonomously without supervision. Those are three different levels.
What do we need for "Feature Complete"?
- The roll-out of "advanced summon" and "navigate on auto pilot" in some international markets.
- "Recognition of stop signs and traffic lights",
- "Automatic driving on city streets"
Elon: while it's going to be tight, it still does appear that we will be at least in limited -- in early access release of a feature-complete Full Self-Driving feature this year. So, it's not for sure, but it appears to be on track for at least an early access release of a fully functional Full Self-Driving by the end of this year.
In short, our old friend Neroden might be perfectly right that Robotaxis won't happen for decades but this need not stop there being a spike in the share price because of the FSD programme in very short order.
Despite the run-up, I am freeing up some cash to buy more stock (and to buy a few trees as well
).