Tesla: Attempt to Estimate Q4 2017 P&L

Tesla recently announced their Q3 2017 results. The results didn't excite as the stock dropped 6.8%.

I decided to do an exercise and see if I can predict how Tesla's P&L will look like for Q4 2017. The following is my best case scenario.



I'm making estimates based on what was provided in their statements in their 8-K and 10-Q. At the very bottom of this blog is the Q3 2017 actuals along with my Q4 2017 estimates.

Revenue Estimates and Gross Profit for Automotive

I assumed that they would deliver 27,059 Model S and X in Q4 based on this note:

About 100,000 Model S and X deliveries projected for 2017

The figure of 27,059 will get Tesla to 100,000 units for 2017. I assumed revenues of 90,000 per car. This is based on the fact that they had Q3 revenues of $2.4 billion on 26,137 delivered cars. So that get's me to around $2.4 billion.

For the Model 3, I did a goal seek based on the below comments and came up with an estimated shipment of 26,000 units at $50,000 per car based on this estimate:

Model S and Model X gross margin declined from Q2 primarily due to one-time price adjustments for discontinued trims and unfavorable trim mix. Numerous actions to improve Model S and Model X gross margin are underway. Consequently, we expect Model S and Model X gross margin to improve in upcoming quarters.

Due to a higher mix of temporarily lower margin Model 3 deliveries in Q4 compared to Q3, we expect non-GAAP automotive gross margin to temporarily decline slightly in Q4 to about 15% and then recover starting in Q1.

We expect Model 3 non-GAAP gross margin to reach breakeven by end of Q4, because of increased capacity utilization, and it should improve rapidly in 2018 to our target of 25%.

So how did the above help me come up with Model 3 deliveries of 26,000 units? I backed into this based on a gross margin.

First, they say the Model S and Model X gross margin decline in Q3 was a one-time issue and that the margin would improve "in upcoming quarters." In Q3, the margin was 18%. In Q2, the margin was 28%. My thought is take the middle and assume they improve to 23% in Q4. 

Second, they mention that they'll hit breakeven by end of Q4 for the Model 3. I assumed they'd be breakeven for the full quarter, which might be aggressive. 

Third, I adjusted the Model 3 delivery number until I got to their "we expect non-GAAP automotive gross margin to temporarily decline slightly in Q4 to about 15% . . . " Now my 15% is based on GAAP, but looking at their back-up info, at this point I'm not sure there's much of a margin percentage difference between GAAP and non-GAAP. So for Model 3, I'm assuming $1.3 billion.

So Model S and Model X is at $2.4 billion and Model 3 is at $1.3 billion for a total revenue of $3.7 billion.

The Model S and Model X revenues seem very likely. Having 27,000 in sales looks very much in line with prior quarters. The Model 3 target is probably way aggressive and where I could miss big time as history shows that Tesla over-promises. On the other hand, that's 2,000 units a week and they do promise a ramp up to 5,000 units a week by end of Q1. Since I'm assuming break-even margins on the Model 3, a miss in units shouldn't impact my bottom line too badly.

One thing I don't totally follow is the following quote:

Gross profit is expected to grow more than operating costs in Q4 compared to Q3, while operating costs are expected to be flat to up slightly in Q4.

This quote appears to be related to just automotive. They're saying they expect gross margins to decline from 18% to 15%. So I'm not sure how gross profit is expected to grow more than operating costs. To me, if margins are declining that means costs are rising faster than the profit. I'll have to think about that one more.

Revenue Estimates and Gross Profit Estimates for Energy and Services

For Energy generation and storage, I based revenue on the Q2 vs Q3 growth and then assumed the same profit margin.

For Services, I left things flat. There is actually a negative profit on this part of the business, so once again I'm being aggressive with their numbers.

Operating Expenses

I kept those flat. I didn't read anything in the various reports that R&D or SG&A would change.

Over-all

As the below P&L table indicates, I'm expecting a slight improvement in their net loss. Q3 was -$0.7 billion. I expect Q4 to come in at -$0.5 billion. Okay, to be exact, I'm at -$0.533 billion. Since there are always ranges given, I'd say that the biggest risk would be on the Model 3. As mentioned, I'm assuming a break-even gross profit. What if they miss that and come in with a -15% margin. So I'll give myself a range of -$0.533 billion to -$0.733 billion.

Cash Flow

One of the more interesting issues with Tesla is their cash flow. They ended Q3 with $3.5 billion in cash (due to financing activities) . I will attempt to make an estimate in the future -- if I can. I admit I'm struggling with getting to their "Changes in operating assets and liabilities" cash impact.

Tesla's goal appears to be to get to cash flow positive on operating activities. Actually, it seems doable. This quarter, they took a big hit in "Changes in operating assets and liabilities." They do mention that this area will improve in Q4.

Though they might improve in operating activities, they will have a big cash flow hit in investing activities as they mention the following:

Capital expenditures are expected to be approximately $1 billion in Q4, driven largely by milestone payments on Model 3 production equipment, as well as Gigafactory 1, and further expansion of stores, service centers, delivery hubs and the Supercharger network.

And in terms of going back to the markets to raise more cash via stock or debt, they do mention this:

We expect that our current sources of liquidity together with our projection of cash flows from operating activities will provide us with adequate liquidity over the next 12 months.

(in billions)	Sep 30, 2017	Dec 31, 2017
	Actual	Estimate
Revenues
Total automotive revenue	2.4	3.7
Energy generation and storage	0.3	0.4
Services and other	0.3	0.3
Total revenues	3.0	4.4
Cost of revenues
Automotive cost of revenues	1.9	3.2
Energy generation and storage	0.2	0.3
Services and other	0.4	0.4
Total cost of revenues	2.5	3.8
Gross profit	0.4	0.6
Operating expenses
Research and development	0.3	0.3
SG&A	0.7	0.7
Total operating expenses	1.0	1.0
(Loss) income from operations	-0.5	-0.4
Interest income	0.0	0.0
Interest expense	-0.1	-0.1
Other (expense) income, net	0.0	0.0
(Loss) income before income taxes	-0.7	-0.5
Provision for income taxes	0.0	0.0
Net (loss) income	-0.7	-0.5

Disclosure: I have no positions in Tesla and no plans to initiate any positions within the next 72 hours.

Also, sorry if the table looks horrible. It is my first time trying this out.