Tesla Motors (TSLA) is expected to announce earnings next week on Wednesday, May 8, after the market closes. The company has already announced it will be profitable on both a GAAP and non-GAAP basis for the first time in its history. Analyst estimates are based on the non-GAAP numbers, and these have risen sharply over the last month to 3-4 cents a share in non-GAAP EPS and $492 million in revenue.
I have modeled my forecasts for the first quarter based on a variety of available data. If you want to follow the Tesla story in real time, I would direct you to the Tesla Motors Investor Board. Much of the data I used to build my model I piggybacked off of information provided by contributors there. Below is my forecast for Q1 2013:
|Cost of Revenues:|
|Total Cost of Revenues||422,400,000|
|Research and Development||58,500,000|
|Selling, General and Administrative||50,500,000|
|Total Operating Expenses||109,000,000|
|Income from Operations||1,850,000|
|Warrant Liability Reversal||10,692,000|
|Interest Inc., Interest Exp., Other||-|
|Net Income -- GAAP||12,542,000|
|Net Income -- GAAP||12,542,000|
|Less: Warrant Liability Reversal||(10,692,000)|
|Add: Stock Based Compensation||14,500,000|
|Non-GAAP Net Income||16,350,000|
Below are the assumptions I used in my model:
- There were 4,850 cars delivered in Q1. The company has stated publicly that they would deliver at least 4,750. From a variety of data points, including VIN numbers (with the latest buyers receiving VINs for delivery exceeding #10,000), it appears that Tesla may have produced well above 5,000 cars in Q1 (and remember they had around 450 cars in inventory at the end of the year). Some people think the delivery number will be higher than my number, but I have a feeling TSLA may have held some deliveries back once they knew they were profitable in Q1 in order to get a jump start on Q2. I believe it's important for CEO Elon Musk to be consistently profitable from here on out (for lots of reasons including the image of the company to assist in vehicle sales momentum). Therefore, sandbagging a little here to set up more earnings momentum in Q2 is a possibility.
- I used total revenue per vehicle sold of $105,000 (which would include any regulatory credits they sell in Q1). These credits are for delivery and placement into service of zero emission vehicles in the United States, TSLA has earned and will continue to earn various tradable regulatory credits that can be sold to other manufacturers (speculation is primarily to Daimler (OTCPK:DDAIF) and BMW (OTCPK:BAMXF), but they could be to other manufacturers like (GM) and Ford (F)). For an in-depth article on these credits, please click here.
- I assumed additional revenue of $12 million from powertrain sales, which would be the average of the last two quarters and $12 million of development services revenue. That is consistent with last quarter, though these two estimates are hard to come up with as they have bounced around quarter to quarter.
- So, overall I am coming up with a revenue estimate of $533 million vs. the Wall Street estimate of $492 million.
- I used a gross margin of 20% on all vehicle sales, which includes the credit sales (this 20% margin is a key variable that has the most impact on the bottom-line results) and a 20% gross margin on powertrain sales. I then used a 55% gross margin on development services revenue (which is the average of the last two years). In this analysis I assume vehicle sales margins, excluding the credit sales, are going to surprise analysts to the upside. I believe this because there is clear evidence that TSLA is producing at least 500 cars per week, which is higher than what they were producing at the beginning of the year. Elon Musk basically stated on the last conference call they would not ramp production higher until they improved operations/margins.
- For operating expenses I assumed R&D expenses dropped 15% quarter to quarter to $58.5 million (mentioned on last quarter's conference call). Selling, General and Administrative costs increased about 10% quarter over quarter to $50.5 million.
- You will see under the Income from Operations I have an Other category. Here you will see a Warrant Liability Reversal line. This is a one-time gain of $10.7 million arising from the reversal of a derivative warrant liability associated with the Department of Energy loan. Analysts are expecting this will reverse this quarter. I assumed interest income, interest expense, and other items netted to zero. I also assume no tax benefit or liability as this number has been immaterial in the past.
- This analysis gets me to 11 cents per share of GAAP earnings (using 115 million shares as the denominator). I would note that I have TSLA GAAP profitable before the warrant liability reversal benefit (analysts do not have this). However, analysts focus on the non-GAAP numbers. Therefore, I take the GAAP earnings, subtract the one-time warrant liability gain, and then add back the estimated stock-based compensation of $14.4 million -- which is consistent with last quarter's add back. When I do the math here I come up with 14 cents a share on a non-GAAP basis vs. estimates of 4 cents from The Street.
Therefore, I estimate that TSLA generated revenues of $533 million and non-GAAP EPS of 14 cents vs. the current estimates of $492 million and EPS of 4 cents. If that happens and TSLA projects similar or better results with strong production numbers in the next quarter, which I believe it will, then you will want to own this stock going into these blowout numbers next week.
My forecast is filled with estimates, but the ones I think are most likely to be at risk are:
- Margin on vehicles sales: I am above analysts here. This is probably my most aggressive assumption and will likely be the reason I am high here if I am.
- Revenue per vehicle sold: I feel comfortable I am within reason here, but we don't have a lot of quarters to work with on this.
- Operating expenses: Musk suggested R&D would go down and it makes sense that SG&A expenses would go up, but am I being aggressive here or conservative? That's hard to know.
Let's move on to all the talk (from myself included, here and here) about the high short interest in TSLA. That was a big component of what initially got me interested in TSLA stock. However, as I have spent more time researching TSLA, I came to understand that short squeeze or not this company has the chance to go much higher based on its underlying fundamentals if you look out just a few years.
However, lots of shorts are in this so I imagine their hope in downplaying TSLA earnings will come down to a few items, including the following:
- TSLA is only making its numbers because of regulatory credits and this is unsustainable. Again, if you believe this analysis, then that is an incorrect view by shorts and these revenues will continue. However, even if you think the credit sales will decline the CEO has projected 25% gross margins excluding regulatory credits by the end of 2013. My numbers above for the first quarter are not even half that margin on the vehicles excluding credits. So, I think either way shorts will lose this argument -- either the credits will prove longer lived than shorts think or vehicle margins will increase to offset the decline in credits, or they will lose because both margins improve and the credit sales continue at a significant rate.
- Reservation numbers: This is the one I imagine they will go after. Again, it is logical that the reservation numbers will go down as cars are delivered and production increases. How many other car manufacturers have 15,000-plus reservations for any one car? Also, Musk has stated he'd like to get the lead time from order to delivery down to one month as that would be more in line with what a customer would prefer. So it should be no surprise that reservations move lower as production ramps up. Musk has already said TSLA could close all of its stores right now worldwide and not have any product specialists or sales people, and TSLA would still sell out through this year (20,000-plus vehicles). Remember, TSLA has sold basically no vehicles in Europe or Asia. Therefore, I actually expect the reservation numbers to go down and then potentially stabilize at some level as international orders come in over the second half of the year.
- The warrant liability gain is the only reason TSLA was profitable. This is a weak argument because of the non-GAAP numbers that analysts are focusing on, and that benefit is removed in those numbers. Plus, it's the trajectory of the overall core results that are important for the future. And I think these are pointing up.
In conclusion, these are my estimates and thoughts on TSLA's earnings next week. I am excited to see what it posts and what TSLA has to say about the future, because it seems "electrifying."