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Why is not everyone satisfied with what Tesla Inc. reported as its third-quarter results?
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TSLA, -5.49%
It was delivered in 2016, and delivered to investors $ 271 million in pretax operating profit, its first profitable quarter in two years, and only its third ever.
But not everyone is cheering. Skeptics, especially prominent Jim Chanos, who tweets as @WallStCynic, and Rob Majteles, @treehcapital on Twitter, continue to express their opinions about the company and its numbers. DID.
Margins and cash accounting fraud tend not to disturb most, until later. But, when skank hits revenue recognition, it does not always have a lot to do with Tesla (changed rev Q1, awaits audit and K), everyone gets cranky.
(disclosure: short $ TSLA) https://t.co/ad1jylz5V8
– Rob Majteles (@treehcapital) November 3, 2018
(2) From the Recode interview. So despite the massive 3Q profitability swing highlighted in my spreadsheet, $ TSLA was "staring-death-in-the-face" in September ?! pic.twitter.com/N7U94oy9O7
– Diogenes (@WallStCynic) November 2, 2018
A spokesman for Tesla declined to comment.
It's important to make sure that the final transfer of control of the cars, including legal paperwork, occurred during the third quarter for all transactions recorded in the quarter. That's the accounting standard for determining the value of Tesla.
We have a post-earnings-report conference call on Oct. 24, CEO Elon Musk said, "The car is only counted as delivered. So it is the highest possible standard for the sale of revenue that has become effective Jan. 1, 2018.
Tesla reported $ 5.878 billion in automotive sales, 88.5% more than in the second quarter. That is a phenomenal accomplishment by any measure, but in particular for a company that has been admitted to its revenues as a result of a "rampant delivery and logistics" approach. gone through in the second quarter.
Making sure to confirm delivery volumes is also important from a cash-flow perspective. "We can only get the check when we give to the customer," Musk said during the conference call. In August, he said, two-thirds of the way through the quarter, "the average time in North America to get a customer to 30 days, which is embarrassingly long."
By the end of the quarter, Musk said the company had "reduced it to around 20 days."
Over time "we want to get a time from a factory to a customer under seven days worldwide," Musk said.
Multiplying the number of units for each model that is reported in the earnings by an estimated average sales price, it is apparent that the total revenue reported reflects the units Tesla said it delivered to customers during the third quarter. The company does not disclose the number of units sold in its 10Q, only in its earnings release.
| Third quarter | Automotive revenues (nonleasing) | Units delivered per earnings release | Estimated average sales price |
| Model 3 | $ 3.325 trillion | 56.065 | $ 57,000 |
| Model S and X and other, average | $ 2.016 billion | 27.710 | $ 72,750 |
| $ 5.251 billion | |||
| Regulatory credits | $ 189.5 million | ||
| Impact from new revenue standard | $ 437.7 million | ||
| $ 5.878 billion | |||
| GAAP revenue, per 10Q | $ 5.878 billion |
Source: MarketWatch analysis based on Tesla third quarter 10Q and earnings press release. GAAP is Generally Accepted Accounting Principles. Average price of a model based on an AWD and a Performance package. Model S price was $ 65,000 and Model X as $ 80,500.
Tesla's total automotive sales numbers are regulated by the new revenue recognition rules on revenues.
A manufacturer of zero-emission vehicles such as ZEV credits and ZEV credits, which may be applied to other creditors. Federal regulations that require compliance with greenhouse gas emissions, or GHG, are also earned by Tesla and other manufacturers.
Tesla sold some ZEV and GHG regulatory credits in the third quarter, at a total value of $ 189.5 million, inflating the automotive sales line; These were recorded at no cost, or at 100% gross margin. That compares with $ 54 million of ZEV credits sold in the second quarter. The Wall Street Journal noted that Tesla's earnings only $ 52 million in revenue from ZEV credits for the third quarter. Tesla's 10Q filing on Friday provided the total amount, but that was after the stock had risen nearly 20% on the record-revenue news.
The majority of Tesla's automotive sales is based on accounting standards. However, as a result of the adoption of the new revenue-recognition rules, Tesla recognized an additional $ 437.7 million for the third quarter for certain vehicle sales.
Read: The revenue-growth rate of the fueled Tesla's rally relied on an apples-to-oranges comparison
See also: New accounting rules trim Tesla deficit and promise faster future revenues
The logistical challenge of making a lot of deliveries to overcome, Musk explained during the conference call, via an expansion of "direct deliveries" to a Tesla employee delivers a car "wherever the customer would like," for example to the front door of a customer's house or office. This approach is better than both a cost and a customer-satisfaction perspective.
"Tesla had a great quarter," said Olga Usvyatsky, vice president of research for Audit Analytics. "The question is whether revenue growth is sustainable in the long term."
The Wall Street Journal also quoted Tesla put away $ 1872 per vehicle delivered, as compared with a second-quarter expense of $ 2,910 per car. Net income would have been about $ 56 million lower using the same figure.
Tesla reportedly reported the newspaper should be less than model 3, which was approximately 67 percent of the total delivered, up from 45 percent of the total delivered to customers in the second quarter.
Tesla executives were pretty proud of their performance on automotive gross margin. Musk said that the company had "achieved a greater than 20% gross margin for Model 3," and Chief Financial Officer said Deppak Ahuja said that it was almost entirely down to the third quarter. In the earnings press release, the company boasted about the third quarter of the world, including customer vehicles in transit, test-drive vehicles, service loaners and engineering fleet majority "of inventory. The inventory balance "remains the lowest in the world," according to the company.
However, the number shown for inventory on the balance sheet of the third quarter also reflects a decrease of $ 117.1 million to reflect the impact of the new accounting rules.
Ahuja doubled down on the claim of lower prices and a lean inventory balance on the conference call. "We produced more volumes, so we had better fixed cost absorption. We have far less scrap. "
That's true about the scrap. Tesla recorded inventory write-downs for scrap, shrinkage and obsolescence of $ 12.4 million as compared with $ 26.2 million for the same period in 2017. $ 72.8 million out of finished-goods inventory , which increases the gross margins and reduces the inventory by the time of conversion. The cost to produce those cars is reclassified as an asset on the property-plant-and-equipment line of the balance sheet.
The largest increase in accounts receivable, from $ 569.9 million in the second quarter to nearly $ 1.2 billion at the end of the third quarter, also created an opportunity for speculation by critics. Some critics report that, as of September 30, 2018, one entity represents 10% of our total accounts receivable balance. As of December 31, 2017, no entity represented 10% of our total accounts receivable balance. "
This thread on "Entity" that represents over 10% of $ TSLA's A / R. Not "Customer". Good catch, @PlugInFUD https://t.co/ywpyO2vsUd
– Diogenes (@WallStCynic) November 2, 2018
Although the company is reported to be in the process of delivery, it is not expected to be receivable. As Musk said, the company gets its cash when it delivers the car.
Was this big customer an unreported fleet sale, which would not pay cash all at ounce, or perhaps a new receivable from a vendor? That would have been in the past.
Read: Tesla says it's not asking for cash back
Ahuja remarked offhandedly on the conference call on the accounts-receivable increase, even confusing it with accounts payable, which also logically increased, saying it was because of the quarter-end, on Sept. 30, landed on a weekend. The company will be in the fourth quarter, he said, referring to the last day of that quarter's falling on a Sunday.
What happened?
Increasing the chances of doing business with extraordinary effort made by "employees across the board, from sales, production, delivery, service, energy, engineering, finance and all of our G & A teams," said Musk on the conference call.
The Tesla CEO even thanked customers who, he said, had helped in the last minute push to make the quarter successful. "It's like, I've never heard of it, but it has happened before, but it has never heard of it, of a case where a company has time to help the company succeed, "said Musk.
If there was a big push to deliver cars to customers, offices or other locations all the way to the last day of the quarter, it is not surprising that the cash for those last days, especially for bank-financed cars, Tesla's bank by Friday, Sept. 28. A person with knowledge of the company's operations told MarketWatch that one bank, a customer finance partner, was unable to send the last of the funds quarter, more than $ 500 million, until after the weekend that ended Sept. 30.
Musk told analysts on Oct. 24 that he expects to "produce and sell even more" in the first quarter of the year.
"Why did Tesla focus in its earnings release on the 70,000 US total autos delivered rather than specifically mention the overall total delivered of 83,000?" Asked Tom Selling, a professor emeritus at the Thunderbird School of Global Management, and author of the Accounting Onion blog . The 10-Q disclosures do not even mention units delivered. There was a significant ramp up in production [the second quarter] and now deliveries in [the third quarter] It is more important to understand the future than it is in the past. This is only a report, but given Musk's promised it would be most interested in forward looking information about future sales. "
Tesla has always had high executive-rank employee turnover, but the exits on the accounting and finance side have accelerated in the past few months. On Sept. 4, Dave Morton resigned from his post of chief accounting officer after just a month on the job.
Last Thursday, the Department of Justice announced the criminal charges against a train Tesla employee in its global supply management group. Salil Parulekar allegedly diverted $ 9.3 million from one Tesla to another. The indictment alleges the payment of invoices, the authoring of fraudulent accounts, the payment of taxes, and the payment of taxes.
Paralekar forged the signature of his supervisor, identified only by the initials L.O. on documents. Liam O'Connor, vice president of the global supply management group, resigned from Tesla on Sept. 20.
On Wednesday the company announced Robyn Denholm, who joined the Tesla board in 2014, would take over the board of directors that position.
The SEC is not done with the company. Tesla disclosed in a recent filing that the regulator had subpoenaed it about disclosures regarding its Model 3 production numbers. There are also two Justice Department investigations open, one on the "funded secured" episode and the other looking at the Model 3 production disclosures.
Rob Majteles, a private investor with the firm Treehouse Capital, said he remains skeptical, and continues to be short Tesla. "At some point, the sheer volume of maneuvers, clarifications, caveats, and assumptions it takes to reconcile Tesla's numbers – even by experts – is itself damning," said Majteles.
"In addition, is not it interesting, in a bad way, that every single bit of finance and accounting confusion, always, somehow magically reconciled in Tesla's in which are presented, spun and pitched? One quarter of supposedly good results and the chronic turnover in the accounting department, the lawsuits, the excessive and egregious promotion that has always marred this company somehow … all gets washed away. "
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