Business

This Is Why Tesla Should Answer Boring Questions

Nuggets in the carmaker’s 10-Q speak to some key issues.

A Tesla Model S car is displayed at a Tesla showroom.

Photographer: Justin Sullivan/Getty Images North America

Exhibit A as to why Elon Musk should find it within himself to endure the “boring, bonehead questions” of analysts: Tesla Inc.’s own quarterly filing with the SEC.

The report dropped Monday morning, five days after the earnings webcast in which CEO Musk cut off analysts for being all analyst-y about margins and spending and stuff. It had some interesting nuggets (if you find this sort of thing interesting, obviously).

A big mystery for me when earnings came out last week was why Tesla’s gross margin on its vehicle sales was so strong in the first quarter. I had previously argued the big drop in sales of high-priced Model S and X vehicles, combined with the dismal progress on making the Model 3, would cause margins to drop even lower than they were in the fourth quarter. I was wrong:

Head Scratcher

Despite a big drop in sales of Tesla's more expensive vehicles and its problems with the Model 3, the gross profit margin on vehicles sales went up in the first quarter

Source: The company

Monday’s filing added a bit of extra color, though.

One big factor was a change in how Tesla accounts for vehicles it leases. Whereas previously many of these would have been accounted for as operating leases, with much of the revenue deferred, they are now effectively accounted for as sales, but with a right of return.

Tesla cited this as a factor in last week’s release, but without details. The numbers in the 10-Q filing show that, stripping it out, the like-for-like automotive sales margin drops from the headline 18.4 percent to 17.1 percent. Underlying growth in sales was 11.2 percent, rather than the 25.9 percent the headline revenue figure suggested.

Then there’s the issue of regulatory credits. Tesla gets these for selling electric vehicles and then sells them to other carmakers that manufacture traditional cars. The pattern of revenue from these credits is unpredictable; although, as I laid out here, they have proved crucial at various points to helping Tesla limit losses or beat analyst forecasts.

In the first quarter, Tesla generated $50 million of revenue from selling zero-emission vehicle, or ZEV, credits. Assuming a 95 percent gross margin from these sales, and then backing it out, the underlying margin for car sales drops further, to 15.4 percent.

But there’s more.

ZEVs aren’t the only type of regulatory credit Tesla gets in the course of selling cars. And while that is the figure that gets reported in the earnings announcement, the SEC filing shows Tesla sold another $30.3 million of regulatory credits in the first quarter. Under my assumptions, that was worth another 1.1 percentage points of gross margin on automotive sales.

This is an important number to follow. Take 2017, for example. Read the four shareholder letters for that year and you see Tesla made about $280 million of revenue from selling ZEV credits. Read the annual SEC filing, however, and you see that sales of all automotive regulatory credits, including ZEVs, added up to $360.3 million. The increments matter because of their outsize impact on gross margins.

It’s tough to work out the quarterly figures, as Tesla tends to report the change in sales of regulatory credits, other than ZEVs, in its quarterly filings, rather than just the actual number. However, it did so for the latest quarter, which allows us to deduce that it sold $17.4 million of regulatory credits in the first quarter of 2017 — a period when Tesla reported zero ZEV revenue.

Assuming the rest of the non-ZEV credits were distributed evenly in the other three quarters of 2017, the implied underlying margin on vehicle sales looks more like this:

Under The Hood

Tesla's gross margin on automotive sales did recover a lot of lost ground in the first quarter, but the underlying figure looks far weaker once adjustments and credits are stripped out

Source: Company filings, Bloomberg Opinion analysis

Note: Gross profit margin on automotive sales. Assumes balance of non-ZEV regulatory credit revenue of $62.9 million distributed evenly across 2Q2017 - 4Q2017. Data for 2018 are adjusted for the change in lease accounting.

So margins on automotive sales, ex-leasing, did increase in the first quarter, even when all the adjustments are made. This likely reflects selling higher-spec versions of the Models S and X. Still, the underlying figure of 14.3 percent is markedly lower than the headline one and is in line with last year’s weak third quarter, when the Model 3 began production and margins took a big step down.

There were other interesting nuggets in Monday’s filing: 

  • Roughly a third of Tesla’s $2.67 billion of cash at the end of March appears to be held overseas (mostly in Chinese yuan, euros and Norwegian kroner).
  • Tesla amended an existing credit agreement on May 3 — the day after reporting earnings — enabling it to potentially pledge its Fremont plant, where the cars are built.
  • Also, Lyndon Rive, Musk’s cousin and the former CEO of SolarCity Corp., got paid out on his $17.5 million of promissory notes when they matured in February. These used to be “Solar Bonds” (a story in themselves), a debt Tesla took on when it bought the company.

To summarize: Sorry to have bored you.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Liam Denning at ldenning1@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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