Racking my brain to somehow arrive at profitability for Tesla in the first quarter of 2013 has me coming up empty. Some numbers for you, accompanied by my explanations of where they came from.
[Update: Something interesting a bit of field research has come up with is that a decent amount of Model S reservation holders who've chosen the 60kW-hr battery pack with delivery dates in March are getting notifications that their deliveries will be delayed a few months to the April/May time frame. I suspect this is simply a switch to pull forward more 85kW-hr deliveries rather than production issues. I'd actually prefer it be production issues, but either way it could help them bring higher-margin sales forward and higher emissions credits as well. Interesting stuff but simply conjecture at this point.]
Explanations for calculations are as follows:
Credit Value per Delivered - indicates the average value of credits sold against each Model S produced by Tesla. As we can see, if we use this methodology (which doesn’t necessarily even follow with way these credits are handled; I have no experts in environmental auto regulation to talk to about it yet this feels like a best-case scenario) we arrive at a pretty big number, over $15K, which would mean they receive credits worth between 20-25% of the product sold. I have a hard time believing this, but let’s run with it.
Adjusted Gross Profit per Car - removes the effect on gross profit provided by regulatory credits. This is simply the sales price (which we estimate to be the midpoint of Model S sales at just under 70K) times the gross margin Tesla predicts in Q1 (“mid-teens”) and then subtracts the 100% gross margin credits attached to the sale. This number is still negative, a shade under -7%.
Estimated GP from Developmental – my estimate of gross profit derived from the development services TSLA provides to Toyota and Daimler. In the entirety of 2012 they took in about $27M in revenue and spit out about $15M in gross profit. Giving them $20M in GP for the first quarter alone is far and away the most exaggerated assumption I make in my numbers.
SG&A Costs – These costs came in at a non-GAAP value of $40M ($46 GAAP) and according to Tesla should “continue to rise moderately,” so a bump to $45M is pretty small considering they will be doubling their deliveries this quarter, ergo way more selling efforts than previous.
R&D Costs - Non-GAAP value of $62M for Q4 ($69M GAAP) are projected by Tesla to drop 15% as less developmental activities, design, and testing lower their costs. That 15% drop from $62M, plus a little bit extra for fun, got me to $52M in R&D spend for the quarter.
Even under these circumstances, which I find rather generous and conservative, Tesla would report a Q1 2013 loss of about $30M, or a little over $0.26 per share. This is on a non-GAAP basis using their accounting methods from 2012, so either something very different than Q4 is up Tesla’s sleeve or their non-GAAP accounting is about to change if they want to report a Q1 profit.
In their year-end letter to shareholders, Tesla says that they will achieve Q1 profitability on this non-GAAP basis and “near breakeven” on cash flow from operations through a combination of improved gross margin and lower R&D expenses. With their expectation that R&D will only drop 15%, equivalent to $9.3M, gross margin would have to make a very significant improvement, and the only place it could make one that large is in regulatory credits. Tesla lost $75M non-GAAP in 2012, with a $9.3M cost savings from R&D they would still need to make up almost $66M through gross margin improvements. For 4500 deliveries at an average price of $80K, that would mean boosting the gross margin from Q4′s level of 8% (7.3% in actuality) to over 26%. Doesn’t exactly jive with the mid-teens Tesla is forecasting… but as we said earlier, something else must be going on, but we can’t yet put a finger on what would have to happen.
To test this quickly, I went back through the makeshift model to plug and chug to see what different changes would do to our numbers:
Regulatory Credit Values can be sold for 25% more – $16M loss
20% Auto Gross Margin – $14M loss
20% Auto Gross Margin, Average Model S Price $78K - $7M loss
20% Auto Gross Margin, Average Model S Price $78K, Op. Expenses $90M - $0