Tesla: Q1 Credit Sales Fuel Beats (NASDAQ:TSLA)

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Summary

Company beats on top and bottom lines.
Major credit sales boosted the overall results.
Free cash burn approached $900 million.

After the bell on Wednesday, we received fiscal first-quarter results from electric vehicle maker Tesla (NASDAQ:TSLA). Despite the coronavirus shutting down auto plants around the globe, including the company's main one in California, shares of Tesla have been one of the year's biggest winners so far. Thanks to a boatload of regulatory credit sales, Tesla's results beat the Street, but by midday Thursday, the stock lost all of its $80 post-earnings gains.

Total revenues for the period came in at $5.985 billion. This number was a little ahead of Street estimates and came in between my base and bull cases provided in my earnings preview article. While Tesla Energy revenues were well below what I was looking for, it was automotive revenues that shined. The table below shows what the key here was.

(Source: Shareholder letter linked in opening)

Tesla said that the Model Y was able to achieve positive gross margin in Q1, mostly because it is selling the most expensive variants and it shares so much commonality with the Model 3. Interestingly enough, the company was also able to increase Model S/X margins despite production of those two vehicles going from 79.7% of annual run-rate capacity in Q4 to just 68.4% in Q1. This includes a likely currency headwind from a stronger dollar.

Given the Fiat (FCAU) deal, I was expecting more credit revenue than in Q4 2019, but this was a massive sequential jump, and these sales are basically pure profit. As the company detailed in the investor letter, automotive gross margins that were 25.5% on a GAAP basis would have been 20.0% without these credit sales. This is a company in the past that talked about being less dependent on these sales, but they made a huge difference in the quarter's results. Here's how those credit sales stack up per vehicle delivered.

Further down the income statement, Tesla was able to cut operating expenses to $951 million from $1,044 million in Q4 (excluding the restructuring gain). Strangely enough, despite the large capital raise and record cash position, interest income stayed flat at $10 million, which will lead to questions about intra-quarter cash balances. In the end, GAAP income came in at $16 million, or $0.08 per diluted share, while non-GAAP net income was $227 million, or $1.24 per basic share. Those numbers were well ahead of Street estimates, and padded tremendously by those credit sales. The table below summarizes Tesla's income statement against my three cases. Dollar values in millions.

*Diluted share count based on profit/loss scenario.

When we look at the balance sheet, cash increased overall primarily thanks to the quarter's major capital raise. As I had discussed in a previous article, inventories would be a major drag as production greatly outpaced deliveries, and that was the case. Thus, Tesla reported free cash flow of negative $895 million, finishing the period with just over $8 billion in unrestricted cash. Tesla also has almost $14 billion in total debt and finance leases.

The company also folded the Resale Value Guarantees ("RVGs") item into other categories, so we can't get a true one-to-one comparison when we look at the pure balance sheet changes from Q4 to Q1. It's also surprising that Accounts Receivable only declined $50 million sequentially given the large Q4 to Q1 revenue drop and the fact that many deliveries were halted at the end of the quarter. For a company that sells directly to consumers, this AR balance is extremely high.

In other news, Tesla is now looking for a 4,000 unit per week run rate by mid-2020 at the Shanghai factory. The company has plenty of installed capacity to reach its 500,000 delivery unit forecast for the year, but acknowledged that the uncertain timeline regarding Fremont reopening makes it tough to give an updated forecast. The company is also pushing back Tesla Semi deliveries to 2021, the second major delay for this product that was unveiled with the new Roadster back in 2017. We have no clue when the Roadster will actually make it to market. Tesla did not reveal a current production rate for Shanghai or what the Model Y rate was before Fremont's closure.

It was also a very wild conference call from Tesla management. Elon Musk went on an angry rant against US politicians for shelter in place orders, the same government that's been so very generous to his many companies. He probably lost a few followers with his multiple expletives and statements about fascists, claiming that US citizens would be arrested for leaving their homes. Of course, he did not echo these same thoughts about China's government during the coronavirus crisis over there, and in fact Elon Musk praised China for some things like infrastructure. Of course as everyone should know by now, Tesla's CEO has been downplaying the coronavirus from the start.

In the end, Tesla's top- and bottom-line beats sent the stock higher in the after-hours, but shares fell from those levels during Thursday's trading. I think the results were mostly as expected if you take out the credit sales, but the real story will be how quickly Fremont can reopen. It will also be interesting to see if Tesla needs to raise capital again during a tough Q2.

This article was written by

Bill Maurer

34.9K Followers

I am a market enthusiast and part-time trader. I started writing for Seeking Alpha in 2011, and it has been a tremendous opportunity and learning experience. I have been interested in the markets since elementary school, and hope to pursue a career in the investment management industry. I have been active in the markets for several years, and am primarily focused on long/short equities. I hold a Bachelor of Science Degree from Lehigh University, where I double majored in Finance and Accounting, with a minor in History. My major track focused on Investments and Financial Analysis. While at Lehigh, I was the Head Portfolio Manager of the Investment Management Group, a student group that manages three portfolios, one long/short and two long only. I have had two internships, one a summer internship at a large bank, and another helping to manage the Lehigh University Endowment for nearly a year. Disclaimer: Bill reminds investors to always do their own due diligence on any investment, and to consult their own financial adviser or representative when necessary. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.

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