How In The Heavens Is Tesla Making Money?

Some Boring Bonehead Questions For The Most Exciting Company On Earth (or in Space?)

Finally last night, I managed to find some time to read a recently-released report that has generated a whole lot of excitement: the Tesla Q318 earnings report. I ended up with a headache, but it wasn’t the numbers that caused it. It was the lack of them.

Reading Tesla’s earnings and trying to understand how its vehicle sales and manufacturing productivity is faring is somewhat like reading the quarterly gross domestic product headline figures from countries all over the world in order to ascertain how abundant the crop seasons are for farmers. While vaguely possible at an educated stretch, a large part of the picture seems to be missing. This is not how an earnings report is supposed to look.

Let’s start with the obvious — the income statement:

It’s not particularly helpful the way that these are presented, first of all, with the 3-month and the 9-month numbers jammed together on one line. That may sound petty, but I always tend to perk up when I see confusing presentations of timelines — it suggests that someone is misdirecting your attention, however innocent it may be. Anyway, automotive sales, we are told, nearly doubled, from $3.12 billion to $5.9 billion over the past quarter. They did pretty much the same thing over the last nine months, too, rising from $6 billion for the previous 9-month period to $11.6 billion for the present 9-month period. As a result, auto sales costs were up roughly the same amount on the 3-month and 9-month periods, to $2.5 billion and $4.4 billion, respectively. It’s perfectly normal for manufacturing costs to rise when revenue rises — after all, to make more products, you have to buy more materials, and run more machines, and so forth. So far, so good, then.

There are other types of selling costs however. These are found under the Operating Expenses entry marked Gen., Administrative & Sales Costs. These are you standard fare of selling expenses, such as marketing budgets, commissions paid to sales guys, salaries for new sales assistants, investment in bigger, better-looking showrooms and so forth. With a doubling in 3-month and 9-month revenues it’s a fair bet that this process incurs some significant operating expense increases. For Tesla especially, which bills itself as the great “word of mouth” marketer, this sort of sales growth would, you might think, cost a fair amount in terms of personnel overhead and subliminal advertising.

(If you are under the impression Tesla does not pay for advertising then look here, here and here. These are TV commercials made for Prime Time TV slots. On top of that this sort of public relations, as well as this sort and this sort of thing also cost big bucks. You can find more on how this sort of thing works — with one of these very publications as it happens— in my post on play to pay in the ICO market here.)

Apparently not. Believe it or not, it cost Tesla less this past quarter in which it doubled revenue to make such a huge increase in sales as it did last quarter, landing in at just under $720 million vs. over $750 million in the previous quarter! For the 9-month period, there was in fact a marginal increase in these costs, to about $2.2 billion from $1.8 billion. That seems to make some sense — after all, we would expect to see the increase year-on-year as sales rise — but it’s still remarkably conservative given the huge leap in sales and apparent boasts the company has been making about record product deliveries (which at 70,000 units is very much in fringe market-share territory still). The 3-month figure is highly improbable, however. Tesla simply would be very unlikely to have sold so many more vehicles without spending a dime on marketing — by reducing marketing costs, however, this seems almost impossible.

Annoyingly, we don’t get much more clarity from the Cashflow Statement, either:

In fact, if I am completely honest, we get even more confusion here than with respect to the cost equations. Capital expenditures, such as investments in machinery, equipment, land and so forth, are once again, down on the quarter from $1.2 billion two quarters ago to just $560 million this quarter, and they are down also on the 9-months period too, from $2.7 billion last period to $1.7 billion this period. Once again, the probability that you could increase sales by such a huge margin in such a short space of time while having spent less on the heavy stuff that delivers the end product is, to say the least, low. Capital Expenditure for firms such as Tesla is extraordinarily intensive, and you would expect to see it displayed as such ordinarily.

Most weirdly of all is the entry for Net Cash Provided By (used in) operating activities. For those who are not accountants, this entry is marked for discontinued operations. For instance, when a conglomerate sells a company one particular quarter it might book cashflows that it received prior to the sale in that quarter’s cashflow statement. These would come under Net Cash Provided By (used in) operating activities (of discontinued operations). Tesla’s numbers here really stand out: from a previous-quarter loss of just over $100 billion, net cash increases are up to over a billion dollars this quarter, on the three-month stats. Equally bizarre, they are up from a net loss of $500 million on the last 9-month period to nearly a billion dollars in the black on the present 9-month period.

Meanwhile, net cash from operations was about $1 billion higher, to land at $250 million or so in the black. Even if we add up the strange discontinued operations cashflows, the net operating cashflows and take into account the huge comparative reduction in capital expenditures and general and administrative expenses however, we are still fairly hard-pressed to find that extra $3 billion of quarterly income represented here. At the very best, it looks like Tesla is:

a) outsourcing much of its manufacturing and sales expenses on a really, really sweet deal where it doesn’t have to pay a thing for increased sales growth totalling nearly 100% and/or

b) that it is receiving huge one-time income every quarter or so from sales of discontinued operations, effectively working like a venture capital fund or incubator

The only explanation that makes any sense is that a significant portion of this Financial Statement is not represented here but rather, in the SpaceX Financials which we are not privy to, since SpaceX is not a public company. There is one fact here that may pass for more than an item of curiosity: PriceWaterhouseCoopers, Tesla’s auditor, is the alma mater of SpaceX’s chief financial officer:

The problem is, if SpaceX is roaring towards Mars, then it’s frustrating not to know exactly where in the galaxy we can pinpoint Tesla. But that’s what happens when you have a chief executive of a rocket launcher and a battery car maker one of which is public and the other of which is private, neither of which are very clear cut in how they obtain, spend or make money at all.