Tesla's Accounting About To Evolve Again

| About: Tesla, Inc. (TSLA)
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Difference between GAAP and non-GAAP net income (loss) has widened considerably.

Company forecast to return to non-GAAP profitability in Q2 2016.

Return to non-GAAP profitability brings mountain of shares back into picture.

When it comes to accounting matters, Tesla Motors (NASDAQ:TSLA) is one of the most complex companies to follow. In the Q4 shareholder letter, for example, the company gave six different figures for its quarterly gross margin percentage. As the company gets ready to reveal its Model 3 vehicle, we are close to another key event, which is about to change the accounting yet again.

Like many of the market's newest companies, Tesla reports a variety of GAAP and non-GAAP numbers. Most firms use non-GAAP to exclude stock-based compensation from their results, but Tesla goes a little further. The image below shows the section from the Q4 investor letter showing the non-GAAP to GAAP reconciliation, with dollar values in thousands.

The gap, or difference, between GAAP and non-GAAP net income has surged in the past couple of years. In Q1 2014, the difference between the two was around $67 million. As the company has delivered more vehicles, we've primarily seen a jump in the lease accounting deferral, along with a rise in stock-based compensation. In Q4 of 2015, the difference ballooned to over $206.5 million.

Wall Street analysts use non-GAAP numbers, and in 2015 the company lost $2.30 a share on that numerical basis. Thanks to the sizable difference between these two accounting methods, Tesla actually lost almost $7 per share on a GAAP basis. The gap between the two could increase further if the above mentioned items continue their recent trend.

So why am I making such a big deal about the differences in Tesla's accounting? Well, it is because the street currently expects the company to return to non-GAAP profitability in Q2 2016. A profit of a dime per share is expected, although that number has come down from $0.33 in the past 90 days, so perhaps another non-GAAP loss could be reported. In 2015, Tesla reported non-GAAP losses in each of its four quarters, with the size of the loss increasing sequentially from Q1 to Q4.

The actual quarter in which Tesla returns to non-GAAP profitability doesn't really matter for today's argument overall, it's just the fact that the event happens. When the company reports its numbers on a GAAP basis, like in its quarterly and yearly filings, it excludes a certain number of shares outstanding when they are antidilutive. But for non-GAAP calculations, these shares return when profitability is achieved. As seen in the table below, the number of these shares has grown in the past two years.

(Source: Page 59 of Tesla's 10-K filing)

As a point of reference, Tesla reported 131.1 million shares used to calculate its GAAP EPS figure in Q4 2015. The table above shows roughly 19 million shares excluded from that calculation. Once Tesla gets back to non-GAAP profitability, the non-GAAP share count could easily top 150 million. That will hurt the earnings per share number thanks to a much higher share count.

So for those who are already confused by Tesla's accounting, with a growing difference between GAAP and non-GAAP numbers, you might be in for more frustration soon. The company is forecast to return to non-GAAP profitability at some point this year, with analysts calling for it to happen in Q2. Once this event does occur, a huge amount of shares will be added to the share count, pressuring the non-GAAP EPS number.

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