By on August 8, 2009

Yes, yes: I’m a Tesla naysayer. Have been right from the start when the media went ape shit for a car that hadn’t been built, repeating performance claims as if they were written on Moses’ stone tablets. (Which were eventually modified.) But I did take them off the “Tesla Birth Watch” when the car deliveries began. And we haven’t posted a “Tesla Death Watch” entry since May 1, 2009. If true, this report from TechCrunch—claiming profitability for the EV maker—indicates that we should cancel the TDW altogether. Cynic that I am, I see some pretty major caveats here. “Silicon Valley’s electric car company, Tesla Motors, says that it hit profitability in July. The private company reports that it made ‘approximately $1 million of earnings’ on revenues of $20 million, and that it shipped 109 Roadsters, its $109,000 all-electric sports car. The revenues reflect GAAP accounting standards and are only for the month of July.” Given that GM used a predicted (but not realized) Department of Energy (DOE) loan in their financial projections, does Tesla’s half billion dollar-or-so DOE suckle have anything to do with this?

In June, Tesla was also awarded a $465 million loan from the Department of Energy, which will help it manufacture its more reasonably priced Modern S sedan.

The $20 million in revenues and $1 million in profits do not reflect any proceeds from that loan, the company tells us.

And we believe them, right? [thanks to shabatski for the link]

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17 Comments on “Tesla Claims Profitability: Do We Believe Them?...”


  • avatar
    Boff

    In this day and age you’d be pretty foolish to lie about your balance sheet. The truth probably lies in some accounting arcanery (as opposed to chicanery).

  • avatar
    John Horner

    Maybe they used the $465 M to fund a shadow hedge fund which made a profit toying with VW stock. Hey, it worked for Porsche, right?

  • avatar
    Pch101

    Receipts from loans aren’t booked as income. They do end up on the balance sheet, but they aren’t income, so Uncle’s cash wouldn’t be booked as profit.

    If there are interest payments due, those will go onto the income statement. That will reduce income.

    I haven’t seen the numbers, but assuming that this is accurate, I’m guessing that there could be an operating profit (they sell the cars for more than it costs to put them together and keep the lights on), but that they haven’t come close to recovering their R&D and other expenses.

    If the R&D and other launch costs were booked mostly as assets, as opposed to as operating expenses, then only a portion of those costs would go onto the income statement every year. The long-term question is whether they’ll sell enough cars for a long enough period of time to hurdle those. It may prove to be a long-term loser, generating a write off at the end of the day if they can’t hit those volumes.

  • avatar
    mdensch

    The principal amount of the loan isn’t booked as income but they won’t be spending the entire amount of the loan all at once so they will be earning interest on it while it sits in the bank. That can be reported as income.

    Furthermore, R&D expenses which would otherwise have come out of income from sales or investor dollars can now come out of the loan so that more of the income from July can be credited against expenses in July.

    A single month in which sales revenue exceeded production costs does not a profitable company make.

    Sure, I’m cynical. But I come by it honestly

  • avatar

    One month does not a profitable automaker make. Does this month’s operating statement include a pro-rated portion of amortization for plant, equipment, etc.? The physical costs of these assets need to be charged as expenses over time, because they do cost money to build. I assume R&D costs are being amortized too, or are they being outright expensed? I find it hard to believe they are being included in a single month’s statement.

    Give me a full year’s statements showing net profit and I’ll be impressed – but it’s pretty much nigh impossible for a new venture based on new technology to be generating a genuine profit inside of a few years.

  • avatar
    Justin Berkowitz

    Accountants,

    How would a deposit on a not-yet-built car be accounted for in the books? I assume they’re refundable but really don’t know.

  • avatar
    Pch101

    How would a deposit on a not-yet-built car be accounted for in the books?

    I am not an accountant, but a deposit would be an asset, offset by a corresponding liability, on the balance sheet until at some later point.

    I would think that the point at which the deposit becomes non-refundable would be the point at which it becomes revenue. I would suppose that point would likely be once the car has been built and is ready for delivery to the customer.

  • avatar
    holydonut

    Revenue recognition at a high-level usually need to satisfy these four rules:

    1) evidence of an arrangement / contract
    2) delivery of goods and services has occurred
    3) collect-ability of payment is reasonably assured
    4) fee for services/goods is fixed or determinable and cancellation/refund request will be unlikely

    Obviously every company and their business model varies, so interpreting these rules is something that will allow auditors and accountants to remain employed for years to come.

    Unfortunately, a non-refundable deposit for a future vehicle sale does not satisfy these four conditions. This is because a vehicle (or a reasonably valued completed portion of a vehicle) has not been delivered. Yes, payment was received on a clearly communicated contract, and the payment is not refundable. But no good or service has yet been completed on that contract. It doesn’t matter if the non-refundable deposit is $1 or $10,000 – there is no revenue to be recognized until either Tesla builds/ships the car or the customer decides to cancel and forego the deposit.

    The production time for an automobile is usually short enough that full revenue is not recognized until the completed vehicle title and risk of loss have been transferred (you have to consider at what point a change exists to the legal responsibilities of the vehicle). Large boats/airplanes/builings that are assembled over many months/years may allow the manufacturer to recognize revenue as the product is going through completion.

    But I’m not sure if Tesla gets the same accounting treatment as the other car companies, so maybe they have to wait until an ever later point in time to recognize revenue.

    For vehicles sold in America, the major OEMs employ a “sell-in” method of revenue recognition where they book the revenue upon shipment. So, assuming a dealer actually ordered the car (and it doesn’t go to a sales bank), then all four major conditions of the revenue recognition are satisfied when the vehicle ships. Also at this time, automakers have to create an accrued liability for the incentives they expect to pay and anticipated warranty expense. The risk of return is low, as you saw in the recent bankruptcies. The lemon law buybacks happen so infrequently that they get to bake the expected buyback amount per vehicle shipped into the warranty expense.

    But some companies use a “sell through” approach for total revenue recognition. Basically a customer further down in the sales channel has to buy the product before the company recognizes revenue. Simply having goods exist in the wholesale network may not be sufficient for companies using “sell through” methodology. It really depends on what a company is able to pull past its auditors. For example, Palm usually reports a sell-through for recognizing revenue on their gadgets, but Apple reports sell-in for their revenue recognition.

    Think about the risks to the sell-in model. If Apple has 300K iPods sitting in store shelves and they launch a new, cheaper iPod (that has lots of the same functionality of the old one), then suddenly Apple needs to offer discounts/rebates in order for the customer to reasonably decide that buying the older iPod makes sense. These could either be factory to retailer dollars or printable coupons for the customer to use at Best Buy. How accurate was Apple’s accounts when they booked a reasonable expectation of incentives/discounts at the time they did the sell-in of the older iPod? Then again, Apple could have so much power that they decide it’s up to Best Buy to discount their old inventory. Either way, the old stock needs to eventually get sold to make way for new stock.

    The same goes for the automakers – when they unload model year closing incentives to move “old stock,” how accurate were they in estimating the average vehicle rebate amount when they shipped the vehicle?

    FYI, I’m not an accountant – so don’t take anything I’ve written here to be a GAAP-happy response. But I’ve worked enough with automakers and manufacturers to know how they generally work in the finance world.

  • avatar
    kahuna

    Every month they BLEED cash. Since they started, every single month. They will continue to bleed cash EVERY SINGLE MONTH. This is such a VAPORWARE company. One profitable month is an ANOMOLY and this is nowhere near a business model that works. So they shipped a whole bunch of cars (all promised a year ago) in one month. Big deal. They probably deferred a bunch of expenses into the next month to make the one month look great. SHINANEGANS! Show me what their performance will be in the next three months. I guarantee you it will look like a disaster.

    There is no way a $100,000 two seater will mediocre build quality will ever make sense. There is NO mass market on this thing. This is snake oil at its best.

    I can’t believe Diamler and the U.S. government is drinking this swill.

    Next headline…hey, Tesla was profitable on Tuesday, between 1pm and 4pm! Wow, amazing, let’s loan them more money!

    They have the best designer on the planet, yet management is a bunch of snake oil peddlers. Please Franz, move to a real company again. Your talent is wasted on these bozos.

  • avatar
    charly

    The loan is IIRC interest free and large compared with the gross of the company. I assume that they are now debt free outside this loan + money in the bank. That alone will deliver a ten+ million dollar on the bottom line.

  • avatar
    gslippy

    As a Tesla fan, I’m glad to hear the news. I suppose there is a way to show a profit under GAAP, and I doubt they’re cooking the books. Other accounting formulations probably still show them losing money.

    I will say this: They have a gazillion times better chance to show a profit than say… GM.

    And this ‘profit’ story supports by belief that Tesla is deserving of government loans, because they do have a snowball’s chance to repay them. They have the innovation and guts to create a really new product and company, both of which are exceptionally rare among the Big 3.

  • avatar
    Robert.Walter

    To those posters before me, that took the time to explain the technical details, I thank you for your efforts.

  • avatar

    Munk said, back in January at the NAIAS, that Tesla was already booking a profit on each car sold and that the company would reach profitability sometime this summer.

    I understand that for a while the roadsters were costing them about 20% more than the selling price.

  • avatar
    MikeInCanada

    The more complex the balance sheet becomes, the simpler the answer must be…. as my accounting teacher used to say.

    Basically, just about any number can fudged in one way or another – except cash.

    Profitable companies make cash; lot and lots of cash.

    When Tesla’s financial statements start looking like miniature versions of this or like this - then you can be certain they are in fact viable and profitable.

  • avatar
    charly

    Unprofitable companies can also make lots of cash and profitable companies don’t necessary make cash.

    ps. Berkshire Hathaway Inc. is a really bad example as it is more an investment fund than a company

  • avatar
    Canucknucklehead

    A buddy of mine is a total Tesla freak. He raves about hot it is the way of the future. He doesn’t even hear me when I mention that it is a Lotus with the gas motor tossed and a $94,000 price tag. A lot of money for a two seater.

  • avatar
    TokenGimp

    AS THE OLD SAYING GOES:

    “Two wrongs don’t make a right, but three lefts will you back on the freeway.”


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