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Tesla: Q1 Credit Sales Fuel Beats

May 01, 2020 12:19 PM ETTesla, Inc. (TSLA)79 Comments
Bill Maurer profile picture
Bill Maurer


  • 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.

This article was written by

Bill Maurer profile picture
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.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (79)

Regulatory and subsidies...that is all that Tesla knows. They only sold 376,000 little electric cars but somehow recieve millions in regulatory credits and subsidies from our Democratic officials who think electricity comes from fairies.
Stilldazed profile picture
@Lewis Bagwell

"but somehow recieve millions in regulatory credits and subsidies from our Democratic officials who think electricity comes from fairies."

Yeah, everybody knows the power is from unicorns and rainbows. :-)
truwa profile picture
Tesla Shanghai : profitable already (last year this time it was a mud field).

Model Y : profitable from the beginning (it was announced last year this time).

Gross margin : 25% (everyone expected lower gross margin because of Model Y and Shanghai).

Everyone, and I mean everyone was way wrong in their estimates.

Wow... just wow.
Bill Maurer profile picture

And they just lowered Shanghai price by almost 10%.

Model Y - shares a lot with Model 3 - cheaper variants coming that have lower margins.

A lot of that gross margin was credit sales, which will likely diminish considerably in 2021.
truwa profile picture
@Bill Maurer

Gross margin excluding credit sales is 20%. Yeah, I agree with you. 20% is a very low number as far as the gross margins in auto sector is considered.

Shanghai ramp and Model Y ramp should lower that gross margin another 3 to 5 points down perhaps? You increase production, you optimize and your gross margin should come down, right?

They are lowering their shanghai price early in order to be eligible for incentives but they are ramping production much faster than expected. Shanghai gross margins will only go upwards from here as they scale and source more parts locally. It is incredible that a brand new car factory is profitable for the first quarter of its production. Nobody was expecting this.

I think that Shaghai made Model 3 and Model Y will have record gross margins in auto industry; more than 30% eventually.
CentralScrutinizer profile picture
@truwa LOL ... slayed.
truwa profile picture
Everyone knew that the deal between Tesla and FCA regarding regulatory credits purchase of $2 billion would be in effect in 2020 except Bill Maurer.

It was not a surprise for many. "Solving the Money Problem" youtube channel stated this fact a week before the earnings : www.youtube.com/...

Tesla's competitors will fully finance the Gigafactory Berlin.
Bill Maurer profile picture

I've been talking about the Fiat deal for months. But the street was expecting a lot less in credit sales.
truwa profile picture
@Bill Maurer "the street was expecting a lot less in credit sales".

Why expect less? $1.6 billion additional credit sales would come from FCA in 2020 and it was a known fact.

The bears should understand that "regulatory credits" is also a product of Tesla. They build "zero emission vehicles" and they earn regulatory credits. There might be quarterly fluctuations but the yearly credits revenue will only go up until 2025.
Bill Maurer profile picture

We don't know what Fiat is actually paying them - and it likely will be less than original thought given coronavirus.
Hey Bill. show your numbers on "easily surpass 500,000 production". I don't follow nearly as closely as you but if Shanghai does 3,000 per week for 24 weeks and 4,000 per week for 25 weeks and 3 weeks for shutdown that equals 175,000.
If Fremont does 7,000 per week for 46 weeks with 6 weeks shut down that equals 325,000
That comes to 500,000 and doesn't allow for lost production during ramp up and ramp down, and future interruptions or parts delay's. I guess Fremont was running stronger than 7,000 per week correct? Certainly doable but easily seems like a bit of a stretch.
Bill Maurer profile picture

Fremont did 104,000 or so in Q4 2019 alone. That's 8k total a week, and it wasn't with S/X anywhere near capacity and 3 a bit under and that had zero Model Y.

And the easily surpass was Tesla's number, not mine.
Why would anyone buy a car from this guy.
Because they are great cars - I owned three, 2013 with 115,000 miles, just sold it for $30,000, looked like a new car - bought a new S and my wife owns an X - best cars ever
FlagFootballSaint profile picture

Well I guess based on the high praise the owners have for those cars I guess you could give it a try
Tesla hate shorts need to realize as well as those who don't trade or can't that this stock is here to stay, it's an easy traditional trading vehicle that's loved on the street, the stock is a straight money maker I don't give a care for any number ninja games it just don't matter even in a pandemic this beast will continue to make traders in the know tons of money.....
Guy Whitehead profile picture
Bill, excellent article. Do you have a breakdown on the credits between Fiat in Europe and GHG and ZEV in the US? Thanks.
Bill Maurer profile picture
@Guy Whitehead

No, Tesla has only given a total so far.
With eight billion in capital it's unlikely they will need another capital raise, though Elon's comments are certainly showing his stress, after getting through Freemonts production hell I'm sure he was hoping to relax a little rather than face another headwind that this outbreak has caused.
There does seem to be a lot of criticism about the Semi truck and Roadster delays, my thought is so what? Model Y is ahead of schedule by six months, nobody else has a long range electric Semi on the horizon, and who cares if the rich need to wait for the Roadster, right now there are higher priorities, and demand is still outpacing supply so ramping up production of existing vehicles is still a priority.
All things considered, I believe Tesla should come out of this in a fairly strong position, the rest of the auto sector I'm not so sure.
They do not have $8B in cash. It is smoke and mirrors. The Ponzi scheme doesnt work when the money coming in isnt larger than last time. Revenue was down versus last quarter.
Every article talks capacity. What about q2 revenues. Q2 will be down sharply from q1 in revenue driving a massive op loss

"What about q2 revenues. Q2 will be down sharply from q1 in revenue driving a massive op loss"

What of it?
We all know the—temporary—reason why.
It won't be long before restrictions are lifted and Tesla employees are back to work.
And Tesla is well positioned to ride the storm.
applyberry profile picture
They can't afford a one loss of 1 billion or more. Not at the 700 per share 130bllion market cap.
CentralScrutinizer profile picture
@applyberry of course they can afford to weather the storm.. they have 8 B in CASH and the ability to raise more at the drop of a hat./
Sunil Shah profile picture
@Bill Maurer

wow can you believe Tesla is worth 2-3 Volkswagens ,

i am amazed

do you have a profile over the last few quarters of ZEV credits booked to P/L BY quarter?I presume the ZEV profit coincides with cash received or is there a gap?

ARE ZEV the predominant credit or are there others.
if so please specify

@Bill Maurer pls get back to me RE ZEV as soon as you can
thanks in advance
Bill Maurer profile picture
@Sunil Shah

Tesla provides the credits by quarter in the letter. And as said on the call, they don't always receive the cash upfront.
Sunil Shah profile picture
@Bill Maurer

(which i thought you would do as you have written an article)

this is how they bumped the margin higher in 1q 2020
(iT did NOT make sense: higher model 3 in mix and only partly utilised new factory...

well they could if you booked a lot of ZEV credits!!
$354 M VERSUS $111 million in the three months ended June 30, 2019

page 38 10 q

For example, our revenue from regulatory credit sales in the three months ended June 30, 2019 was $111 million
while it was $354 million in the three months ended March 31, 2020.

As I wrote yesterday:
I am convinced, through my deep accountung knowledge that speaks to me, just like the observer collapses the wave function in a quantum wave.
dmce profile picture
@Sunil Shah - If you paid attention to what is going on at Tesla, and in the automotive industry, you would already have known that:

- the EU is levying massive fines in 2020 to manufacturers who don't reduce their emissions
- the EU allows for "pooling" between manufacturers when calculating those emissions
- Tesla struck an emissions pooling deal with FCA in 2019
- FCA has already disclosed the magnitude of their potential fines, and how they plan to mitigate them, include the Tesla pooling arrangement

No need to be surprised. AND NO NEED TO USE CAPS.
@Bill Maurer
>Given the Fiat (NYSE:FCAU) deal<

What deal?
The current (03 April 2020) list of Notified Pooling Agreements, indicates only FCA LLC are pooled with Tesla for 2020. circabc.europa.eu/...

"Manufacturers outside the EU:
Manufacturers that are based outside the EU, must, in accordance with Article 5(3) of Directive 2007/46/ECon Type-Approval, appoint a representative established in the European Union
to represent him before the approval authority". In the case of a pooling agreement, only the EU representative should be indicated in the joint declaration."

Can Tesla name that representative?

FCA group EU 2020 Q1 passenger cars sales (158,528) are down from 2019's (240,680).
In the US: "For the quarter, U.S. sales were 446,768 vehicles compared with 498,425 for the same period a year earlier"s.
With both markets down, I think it's unlikely Tesla would earn more credits.

All EU pool members are responsible for imposed fines. There is the possibility Tesla may have to pay out, too.
Phildo profile picture
I don't see how Tesla books more ZEV credits with less deliveries in Q1. Perhaps it's based on production? Investors should receive an explanation for the accounting, but this is Tesla. Add it to the list of unanswered questions such as the A/R balances, warranty reserves, GM improvement, etc.
dmce profile picture
@Phildo - The FCA deal with Tesla is additive in Q1. Tesla is saving FCA from big emissions fines in the EU.
johnny..cage profile picture
Looks like they're out of cash and need to raise. What a f-cked up way to go about it. Pump the stock for a 1B bonus and then screw all those investors to bring it down to raise. A 150B market cap stock swinging like a penny stock. And where is the SEC again? US stock market has zero credibility, fed puts to boost it back during a time of epic bankruptcy and this garbage. I look forward to Robbin hooders bidding up my puts now.
Yes, swinging on the high side while Ford and GM are almost down 50%.
I am an investor and I don't feel screwed, on the contrary.
Ford lost money, GM made money and is bullish on trucks. Is GM kidding? Of all markets in the world, they are betting on the US Midwest.
No wonder GM dropped from number 1 in the world over the years to number 4 behind Toyota, VW and freakin' Hyundai.
Please invest in Ford and GM...they have this 100-year experience.
johnny..cage profile picture
My statements aren’t about cars genius.
Tesla will never see plus 7 hundred again..
loughl profile picture
Trigalnorte profile picture
Its been already said zillions of times, but it bears repeating: its a high-technology company that happens to build cars. When the authors of Seekingalpha who hate this company will learn that , I wonder. Can you imagine Ford or Volkswagen giving the type of software support that Tesla drivers enjoy? Yeah, me neither.
I can. Nio alreasy does and it took them maybe 3 years to get up to mass production. That means any north American company can do it once the battery bottleneck is solved. Great company, but a moat i think not.
Bill Maurer profile picture

A technology company that can't run a functioning website.

That posted their recent earnings release with the header "Q3 2019 Update".

That lists a Chinese address as in the United States.

That lists Minneapolis as a state.
NIO produces nothing. They use a contract manufacturer.
I have invested in them and I am still down.
Also ask the Germans how easy it is to build cars with technology you have not been used to. Not that straight forward afterall.
Just listen to what the German car manufacturers say about Tesla.
Don't listen to the uninitiated that don't actual work in this field.
ckarabin profile picture
Why does nobody ask the question about the AR in the conference calls? Geez, Louise, lots of credit sales for a company that does not sell on credit or to dealers.
dmce profile picture
@ckarabin - Did you listen to the conference call? In his opening remarks, CFO Zach Kirkhorn addressed AR when commenting on the regulatory credits:

"And note that most of the credit revenue did not contribute to cash in Q1, and it's reflected in the accounts receivable on the balance sheet."

No need to ask the question when the answer has already been given.
ckarabin profile picture
@dmce The cash question has been resolved, they pump up cash right at the end of the quarter, but they earn little interest income for the entire quarter, so there really is not that much cash there, except at the end of the quarters
Bill Maurer profile picture

The problem is that Tesla's AR balance is extremely high for a company that sells directly to consumers.

In Q3 2018, it ballooned because of a weekend. Then multiple quarters ended on weekdays and it was still high. Then we were told it was because European checks didn't clear. Now it is credit sales, which would only represent a quarter of AR at most, and likely a bit less since they probably received some cash.

So why is AR still so high?
Sunil Shah profile picture
@Bill Maurer

'The company also folded the Resale Value Guarantees ("RVGs") item into other categories, so we can't get a true one-to-one comparison '
seekingalpha.com/... Maurer

'The company also folded the Resale Value Guarantees ("RVGs") item into other categories, so we can't get a true one-to-one comparison '

Incredible!!! More and more scope for accounting manipulation each qtr!!
pls read this why RVG movements were key to understanding change in subjective input of the value of the vehicle transferred back to tesla after customer takes buyback option and end off lease.
Sunil Shah profile picture
'The company also folded the Resale Value Guarantees ("RVGs") item into other categories, so we can't get a true one-to-one comparison '

re Regarding comment above see ARTICLE here why this RVG balance was key for Tesla in "managing profit" This was for 4q 19

"Tesla's Surprise Quarter: A Case Of Accounting Adjustments, Not Operational Improvements"

Basically Tesla has
"This article posits the results were far more a result of accounting revisions (reserves and used-vehicle values) rather than a genuine improvement in operating profitability. No Tesla bear needs reminding the share price reflected the earnings beat. The market's misinterpretation offers a valuable shorting opportunity."
Vangel profile picture
So what you are saying is that Tesla can report profits by giving loans to people that will never pay it back even as you give those people a great excuse to default by promising retention of value? Given the cash flow burn how long until Musk needs to go back to the market?
Joe Blast profile picture
Well they cut SG&A quite a bit. I guess they can cut it more if they don't need any staff.
How do I sue them for my lost puts
Value Investor90 profile picture
Elon is on fire @ Twitter, I like it.
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