Monday, October 1, 2018

The last day of the quarter (Tesla edition)

Hedge fund managers who actively trade to produce profit specifically on the last day of the quarter should be treated with scorn. They are marking their book and that is bullshit.

It doesn't mean that it doesn't happen. Just treat it with the contempt it deserves.

Companies that do things to produce results on the last day of the quarter should be treated with similar scorn. Channel stuffing, shifting expenses into the next quarter and other forms of abuse lay there.

I am completely staggered by an SEC filing by Tesla today detailing an email by Elon Musk to staff. I will quote in full:

EX-99.1 2 tsla-ex991_6.htm EX-99.1
Exhibit 99.1 
The following e-mail was sent by Elon Musk to all employees of Tesla, Inc. on September 30, 2018.

We are very close to achieving profitability and proving the naysayers wrong, but, to be certain, we must execute really well tomorrow (Sunday).

If we go all out tomorrow, we will achieve an epic victory beyond all expectations.

Go Tesla!!!

Thanks for all your hard work,

If this were a drug company I would call fraud. Channel stuffing is just too easy.

But this is a car company and channel stuffing doesn't work so well.

I am wondering (comments please) on just what Tesla could possibly be doing on a Sunday, the last day of the month, to produce the result Elon desires?


and hat-tip to Jaguar Analytics for pointing out the filing...


Anonymous said...

There is nothing they can do on the last day to help the quarter. It's all just a narrative. Elon will set the stage for a victorious quarter by doing 'x' amount of deliveries in a day which extrapolates to a staggering quarterly number. His flock doesn't know any better, and running a business this way without enough capital will ultimately just shorten the company's life.

Anonymous said...

Could it not be the case that with the SEC settlement behind him, he's just trying to motivate his people? It would be exhausting working somewhere that is constantly being roasted by outspoken critics. What's wrong with an internal high five?

Or it's stuffing

Lyall Taylor said...

If it's a production target that's different from a sales target. Channel stuffing is around sales. People are monitoring Telsa's ability to ramp M3 production as much as they are sales.

Not saying I disagree TSLA is a sell.

Anonymous said...

We've seen this all before:

Stretch payables, ZEV credits, he fired a bunch of people so they'll call the severance "one time" and exclude it from adjusted bullshit numbers.

He also changes his definition of profitability: it can mean net income, it can mean adjusted net income, it can mean cash from operations, and it can mean free cash flow. Of course, only one of those actually matters, but the Teslalemmings don't know that.

Bob Schriver said...

His fatal flaw (if it proves fatal - Spacex is worth more than most of us will ever contemplate) is an unconstrained sense of urgency - If he'd taken down $10 B instead of $5 B last round and just played out his hand quietly he might be OK now. Known a few of those guys - might be better off myself if I were one of them.

Anonymous said...

Not sure if any accounting software would allow it.
- Make a customer pay for a car. Receive 50k USD - the 3k deposit / configuration in cash
- Inform the customer there is a logistical error. Delivery hell. Car will be available next week.
- Not book any deferred revenue liability.

Hence they'd own the cash and inventory.

Anonymous said...

Sounds like pulling all the stops to get cars to Factory-Gate status (even if they subsequently need returning for customisation/rectification)
This allows them to hit the only number anyone is looking at for Tesla which is Quarterly/monthly production numbers without any need for channel stuffing.

Final sales is a very vague number with direct sale car companies like this anyway since confirmed deposits on are generally recorded as final sales in the numbers (though revenue is deferred until it comes in it allows you to meet the top-line number)

Delorean had a good line in playing with the 'sales' number when needed 40 years ago and I doubt much has changed

Anonymous said...

To take away attention from missing their production target (6K a week) and from likely missing their positive earnings goal they are going to pump a new metric of deliveries in 1 day, or deliveries in 1 week and extrapolate it out to a year.

Meanwhile, production and new orders for the model 3 are running around 3k a week which would mean that next quarter they will have a sequential revenue decline putting a stake in the demand thesis.

Troy who has a good track record has the Tesla demand figures.

obelix said...

As a manager, I see nothing wrong with setting an arbitrary goal and then rallying the troops to meet that arbitrary goal. Human beings want to accomplish things together and feel that they are part of something bigger and have purpose.

Anonymous said...

I guess it depends on revenue recognition? They take a deposit, then a configuration deposit and the customer then pays the full amount and awaits delivery. It would appear they held back deliveries as that is what drives the tax credit threshold and now they are trying to deliveries out to customers. The production rates have dropped by all accounts and it seems the quarter end rush this time is to get cash in the door to support cash flow. There is discussion that they are taking credit card payments from customer to allow such. Is it legal/normal to have such discussion numbers internally within a PLC. Any company I worked for that would not have been allowed?

Anonymous said...

They can deliver cars to customers.
Apparently, delivery rather than assembly is now the limiting step for profitability.

I'd hate this a lot more if there wasn't so much absolutely garbage press on both sides, which focuses solely on quarterly numbers. Also the share pricing is absurd, and I'd really hate it if I worked there. The financial key should be looking at the growth rate in their demand, capacity, production, delivery, and ultimately cash flow.

Unknown said...

This is nothing more than a morale booster. You've got a whole lot of employees working hard on a Sunday, based on all the news they're not even sure if their employer is going to exist much longer. What email should Elon send as CEO?

Kien said...

I assume CEO Musk is just being a coach. I once worked for a CEO, who was well on track in exceeding targets, but he would warns us at management meetings that we are close and not to fall over as we approach the end of the financial year.

Anonymous said...

A good old fashoined stock pump to make those convertabiles worthe exercising.

Unknown said...

Total guess: maybe pushing through agreements with leasing partners?

Market Watch reported in May that changes to the accounting standard mean 'Sales with a resale value guarantee and cars leased through its leasing partners... now generally qualify to be accounted for as sales with a right of return, rather than operating leases.'


Unknown said...

Technically it's not channel stuffing. They already have deposits down for these cars (and all the production cars until 2020). If however, 'profitability' comes down to one day of grunt production and delivery in the quarter, it's not a pretty picture. What will be interesting is the next 3 quarters. Tesla has been delaying the production of the 'base' version of its model 3 which they pegged at US$35K, about $6K below the per unit production cost according to some industry analysts. They will never sell the car at that price in the next 3 years. They'll have to revise it up and it will cause an even bigger exodus of deposit holders than when musk called that cave diver a 'pedo' (which was a very interesting phenomenon). He should never have made this car about the price, it's a race to the bottom and marketing mistake 101.

HS said...

The cars have a contribution margin (before fixed costs). They recognize revenue upon delivery. If customers don’t get their cars, the can’t recognize the margin. So they need their sales people to get customer acceptance. That’s about the only thing that could be happening on a Sunday. Oh and maybe the sales people are punching in “delivered” on their terminals, when that hasn’t really happened...working hard on a Sunday. I can’t remember the last time aggressive incentives led to less than stellar let me go figure out why I needed all these Wells Fargo accounts!

Anonymous said...

Supplier issues are next inc, utility.

Anonymous said...

My model 3 was delivered to my house on a Sunday (the week before the last Sunday of the quarter) by a Tesla product manager. So although I totally agree that one day's effort isn't going to make much difference to a quarter, it is definitely the case that Tesla people are being asked to do (legitimate) stuff that most companies don't ask, and that sustained over weeks and months, it probably will make a difference to the numbers.

Anonymous said...

Mark Spiegel’s presentation back in 2016 told you all you need to know about this company.

CrocodileChuck said...

Anonymous said...


TSLA always tried to maximise deliveries and thus revenues in a quarter. For example, they ship cars destined for customers overseas in the first month of the quarter to ensure they get delivered in the quarter. In later months, they then ship cars for US customers.

This emphasis on short term numbers is therefore not a new development. What is a new development however is that they apparently are close to profitability (whether that is sustainable is another question).

But, with the SEC suit already resolved, and a good quarter announcement seemingly on the way, it does not appear to be a good time to be short.

Anonymous said...

It's probably pushing to get purchase documentation completed on vehicle sales so they can be counted as revenue in the Q. BTW, he does this pretty much every Q. If you were a shareholder (long), wouldn't you want your CEO to do everything humanly possible to complete sales as quickly as practicable? Most CEOs can't be bothered with this type of (legitimate) sales push - they are too lazy (and if they try to window dress, will instead to resort to channel stuffing, etc., just as you point out).

Eugene said...

Hard to see how this could change the big picture; be it one day or one quarter, except reaching this milestone could be a big boost to morale. The writing is on the wall; my X and S are the most amazing cars I’ve ever had and other owners I know think the same. Apparently, a bunch of existing owners were happy to work for free this weekend to help deliver cars to new owners. Were they also part of channel stuffing conspiracy? Probably not, just want to see Tesla to succeed, just like Musk. Would you want to bet against that? Or he could be a master
manipulator who tricked us all.

dfdsfiol said...

Have a read of

Tesla may be manipulating non-cash charges to show earnings.

Anonymous said...

There are a number of "tells" with Tesla. One of which is the time spent abusing shorts. I dont remember Google or Amazon spending any time questioning the motives or behaviors of shorts. There are other tells - exceptional margins on mass produced cars are not explained etc. Its also strange to have senior accounting and finance recruits leave quite so early when they have what out to be an exceptional opportunity to make very good money.

None of this is proof but then comments on how nice the cars are is wide of the mark as well. I loved my ZX-80 and while it was junk it was a lot of fun. It didn't stop Sinclair from going bust.

My suspicion is that Elon is sneaking extra losses into loss making quarters. That way he can book the occasional blow out quarter once every 2 years, which gives the impression the company is turning the corner. This buys him more time to actually get the company to turn the corner.

If this theory is right, he will attempt to lock up more financing this quarter. Then the next quarter will be somewhat disappointing because of some exceptional items blah blah. Lets see if events support this hypothesis.

rallykeeper said...

Very late to the party on this one, but thought I'd add my two cents (with the benefit of hindsight now that we have results).

First off, it's not the same as channel stuffing. Recall that Tesla sells directly to customers -- they're not hiding the sales inside intermediaries inside the channel. They actually made all those sales.

Worse you could say that it is another kind of window dressing. The argument would be that they tried to fill every order they wanted to accelerate sales to quarter-end to imply a rate of sales beyond their run rate. However, this thesis is similarly bunk for a host of reasons:

1. You can really only pull this off one time if you're trying to mislead. Tesla has consistently sold more cars at quarter-end than its run rate in the quarter. (This is logical for a growing company). We can check back next quarter, but I'd eat my hat if they don't do the same thing again. Eventually, it's possible that quarter-over-quarter growth will go negative for non-seasonal reasons, but the company has been growing at +50% annually in revenue so it'll be a while.

2. As other comments noted, Tesla has a production problem (and a somewhat related delivery infrastructure problem), not a demand problem. They simply haven't been able to produce enough cars. Selling a lot of cars over the weekend doesn't really turn the Street's attention from the more important number of how many cars Tesla produced. Stated alternatively, Musk's statement isn't even window dressing since it's not talking about the problem (production) and only talking about deliveries.

3. The only other window dressing they could be engaged in is cash flow and profits.

a. Cash flow was never going to be a problem in 3Q (despite what the shorts said) -- they were selling way too many cars with positive margin.

b. Profits were definitely a little tighter since the entire SG&A infrastructure (and ongoing currently-expensed R&D spending) is scaled for higher sales. They needed to spread that cost out to really let operational leverage take hold.

We can actually test the thesis of whether they were trying to use the last weekend's sales to flip net income from red to black. We can see that accounts receivable increased over the prior quarter by about $600 million. Tesla has clarified that this related to the fact that sales were over the weekend and banks couldn't settle financed transactions.

Even if you somewhat crazily assume that some people paid in cash and it was a mad rush of sales -- the most revenue they could have booked over those 2 days would be $1 billion. (That's a laughably farcical number since total automotive revenues were $6.1 billion, but I'll grant it for sake of argument). Automotive margin was 26% (this is also overstated because of green credits, but again we're being conservative). As a result, the most excess profit they could have booked by accelerating weekend sales would be ~$260 million. They had net income of $311 million.

Simply put, they had positive net income by the time they had reached about $4.8 billion in sales. Nothing they could have done in the last weekend would have changed that.

All in all, Elon was simply cheerleading.

Was he targeting the artificial deadline of quarter-end? Of course!

Was it misleading or window dressing? Not really.

Did it indicate a potential financial problem in Tesla? Certainly not. Tesla had manufactured the cars -- that was the victory.


I really enjoy your blog and think your analysis is great. In particular, I like how you're able to reason through short seller thesis to test if they're valid.

Hope you keep up the Tesla discussion with thoughtful analysis. Tesla has been a consistently wrong short seller thesis -- yet it's highly shorted. That, in and of itself, is a very interesting story and could use some more thoughtful writing and thinking.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.