The Truth About Cars » Results The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. Sat, 19 Apr 2014 20:13:26 +0000 en-US hourly 1 The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars no The Truth About Cars (The Truth About Cars) 2006-2009 The Truth About Cars The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars » Results Analysis: Tesla Q1 2013 Results Thu, 09 May 2013 20:29:29 +0000 Tesla-Model-S. Photo courtesy

Tesla Motors, Inc. released its first quarter financial results yesterday, which featured a number of milestones for the auto maker. Among them, Tesla’s revenue rose 83% from the last quarter to $562 million, a record high for the company.

Tesla also posted the first ever profitable quarter in its history, with a net income of $11 million, or $0.10 on a per share basis. This large growth in revenue was largely aided by the fact that Tesla was able to recognize revenue on 4,900 out of the 5,000 Model S vehicles it managed to produce in the quarter. It is worth noting that $68 million, or 12% of Tesla’s revenue was earned through the sale of Zero Emission Vehicle (ZEV) credits to other automakers. Tesla notes in its letter to shareholders that they expect the sale of ZEV credits to decline in the future, and expect the amount to reach $0 by Q4 2013. Tesla’s move away from the sale these credits and towards growing the sale of their automobiles demonstrates their confidence in projected global demand of 30,000+ units annually. An improvement in their gross margin, which has moved up from 8% to 17%, is also an extremely important factor in their profitability.

One would expect that Tesla has settled down and is beginning to ramp up their production of the Model S while continuing to lower its costs through managing its supply chain and reaching economies of scale. After all, management reaffirmed its guidance of a gross margin of 25% for Q4 2013. In the Outlook section of the letter, Tesla explains that it expects increases in operating, research and development (R&D), and selling general and administrative expenses (SG&A).

Some of these costs may naturally rise in proportion to sales volumes. However, as Tesla fights an uphill battle to expand their gross margin, it cannot lose sight of controlling its fixed costs. Total Operating Expenses currently amount to 18% of sales. Any increase to this amount threatens to eat up any profitability that Tesla might achieve through an increase in gross margin. From a profitability standpoint, the ideal situation would be one in which Tesla could achieve its margin of 25% on its vehicles, while simultaneously taking advantage of its increase in production to achieve economies of scale and decrease operating expenses.

The most interesting line item on Tesla’s quarterly income statement is “Other Income.” Upon examining the statement solely on an operations level, one would notice that Tesla has posted a loss from operations of -$5.5 million. How could Tesla post a net income, yet be posting a deficit through its operations? One need only take a look at the line item “Other Income”, for a better picture. Other Income has a balance of $17 million, $11 million of which is from the elimination of a common stock warrant liability to the Department of Energy, and the remainder is from favorable foreign currency exchange impacts. Both of these items are irregular, specifically the liability elimination, in the fact that they will not likely happen year to year, and are not generated through the company’s regular operations. The liability elimination is also a non-cash item. To get a real sense of how Tesla performed, Other Income can be removed from the income statement (see Figure 1). The result is a net loss of $5.7 million for the quarter. It’s clear that there is still much work to be done before Tesla is truly profitable based on its operations. These types of irregular items cannot be relied upon to achieve profitability every quarter.


Figure 1(in millions)


Perhaps a more relevant dataset is Tesla’s non-GAAP figures. The non-GAAP figures, which are intend to be used by management for internal purposes, can sometimes more accurately reflect a company’s performance on the interim, without being hindered by stringent accounting regulations. Figure 2 displays Tesla’s reconciliation of Net Income from GAAP to non-GAAP.

Figure 2 (in millions)


The non-GAAP measure of Net Income is slightly higher than the GAAP reporting, at approximately $15 million. Non-GAAP starts with the GAAP reported income of $11 million. Notice how almost $11 million is subtracted from net income in “Change in fair value of warrant liability.” This represents the Department of Energy liability elimination mentioned earlier. What Tesla is doing here is effectively removing this amount from its GAAP net income, not unlike the similar calculation done above. Tesla has management has realized that this liability is a large contributor to its profits, and has removed it to create a figure more representative of its operational profitability.

The next item is stock-based compensation expense. This amount was originally included in “Total cost of revenues.” For those of you who are unfamiliar with this concept, an article by Ian Gow, an assistant professor of accounting information and management at Northwestern’s Kellog School of Management, explains it as stock options that are granted to employees. Gow explains that recently accounting standards have required companies to disclose stock-based compensation expenses, as Tesla has done by including it in cost of revenue. The article continues to elaborate that stock-based compensation expense is an area for managers to manipulate accounting data in order for them to reach their targets or benchmarks. The accounting for this type of expense becomes increasingly tricky when considering that it is a non-cash expense. While it is harder for management to toy around with this expense due to revisions to GAAP, Tesla has elected to add this expense back to their net income in its non-GAAP reporting. This is not an attempt to discredit the integrity of Tesla’s management, rather to illustrate the importance that non-GAAP figure must be taken with a grain of salt.

Regardless, Tesla has made huge strides in its earnings. Just last quarter (Q4 2012) Tesla posted a net loss of almost $90 million. Accountants and analysts can debate the significance of line items for eternity, the larger point being that of an upward trend for Tesla. In Q2 it will be interesting to see is Tesla can build on its profitability, or fall back into the red without the help of irregular account balances.

All figures taken from Tesla’s SEC Filing

Graeme Kreindler is an HBA Candidate at the Richard Ivey School of Business at The University of Western Ontario. 

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Tesla’s Q4 Results Raise Questions About Long-Term Future Thu, 21 Feb 2013 14:34:00 +0000

Tesla Motors Inc. released its Fourth Quarter & Full Year 2012 Shareholder letter on Wednesday. While the letter provides a very positive outlook for Tesla’s future, there are some questions looming in the background once we dig deeper into Tesla’s balance sheet.

Despite supply chain issues, Tesla has apparently achieved their stated goal of producing 400 cars per week at their Fremont, California factory. Tesla hopes to capitalize on its new found production ability, an annualized rate of 20 000 units per year, to take the Model S into Europe and Asia. However, there is still no indication whether Tesla will be reporting their sales figures in the United States like other auto makers do.

When viewed in isolation, Q4 has undeniably been one of the most successful sales periods for Tesla. 74% of Tesla’s overall revenues were recognized in Q4 alone, and reported sales growth from Q3 to Q4 was over 500%. But Tesla’s broader financial health isn’t nearly as rosy. The firm’s Q4 loss is reported at almost $90 million or $0.79 on a per share basis. Tesla’s net loss this year is almost $400 million, or $3.69 per share. Despite the fact that Tesla has slowly been improving its operating margin, which currently is at 8%, Tesla has not been able to carve enough contribution out of its sales to help cover its staggering Research and Sales expenses.

These costs combined make up 103% of Tesla’s overall revenues. Despite the fact that Tesla estimates a 15% reduction in its R&D costs for 2013, it is still fighting an uphill battle. Expansion into Europe and Asia will also require more retail and marketing resources, which will only further add to Tesla’s profitability woes.

At this time, Tesla remains highly leveraged, with a debt to equity ratio of 3.62. With some $450 million in long term debt sitting on its books (and nearly $1 billion in total liabilities), and no earnings to repay it with, Tesla’s future stability is questionable. While it does have approximately $200 million cash on hand, between a negative cash conversion cycle of 46 days and interest payments on the debt, not to mention negative free cash flow of over $500 million, one can only wonder how long until the well runs dry. Despite Tesla’s stated “cash flow positive” status in Q1 2013, this is using non-GAAP figures.

Hope still remains for the zero emissions car manufacturer as it looks to achieve economies of scale and reduce its fixed costs through improved production efficiencies. The projected increase in volume will also help towards the bottom line.

N.B: GAAP Figures used

Graeme Kreindler is an HBA Candidate at the Richard Ivey School of Business at The University of Western Ontario. 


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Nissan Largest Japanese Carmaker. In Profits Fri, 11 May 2012 18:53:06 +0000

Nissan pulled off an even bigger miracle than Toyota and ended a (this time truly) catastrophic year with a big profit. Today in Yokohama, Nissan CEO Carlos Ghosn announced that Nissan delivered a pre-tax profit of 535.1 billion yen (US $6.76 billion) for the fiscal year that ended on March 31, “despite natural disasters and currency exchange headwinds.”

Japan’s second largest car company produced the largest profit, exceeding that of Toyota, which had announced a 432.9 billion yen ($5.4 billion) profit before taxes on Wednesday. At the end of last year it was already evident that Nissan had survived that truly catastrophic year best. Today, that fact was confirmed by a beauty of a balance sheet.

When asked what risks are in front of Nissan, Ghosn answered: “The biggest risk is the strength of the yen.” Ghosn is the designated hitter of the Japanese auto industry when it comes to the Yen. He can say what Japanese colleagues would love, but don’t dare to say.

At each quarterly results conference, a reporter of the Nikkei needles Toyota with the question when the company would finally produce a profit at its factories in Japan, instead of offsetting homemade losses with foreign gains. Toyota usually gives a polite non-answer.

Ghosn doesn’t even wait for that question. Unasked and blunt, he says:

“We have healthy profits this year, but all the profits come from international operations. When you take a look to the non-consolidated results in Japan, they are negative. The reason they are negative is because of the strength of the yen. We are protecting ourselves by using as much international capacity as possible and by holding the exports from Japan to the minimum level.”

Just about every car that is exported from Japan is exported at a loss. Instead of paying taxes on income at home, Japanese carmakers pay the price for the abnormally strong yen, Nevertheless, Nissan expects for the new fiscal a pre-tax profit for 680 billion yen ($8.5 billion) on sales of 5.5 million units for Nissan only.

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Audi Overtakes Mercedes, Rolls In Money Thu, 01 Mar 2012 14:04:37 +0000

The European malaise seems to have selective impact on European automakers. Audi announced record results today. Audi reported an operating profit of €5.35 billion ($7.16 billion) in 2011, and wants to have even better results this year.

Don’t mention Audi when you talk to Mercedes managers. Audi sold 1.3 million cars last year, and now is the world’s second largest maker of premium cars, behind BMW. Mercedes-Benz was relegated to the #3 position.

Audi’s operating margin was a monstrous 12.1 percent last year. Mercedes-Benz used to be proud of their 9 percent. “These numbers turn Audi into one of the world’s most profitable car companies,” Audi CFO Axel Strotbeck told Automobilwoche [sub].

With 313.036 units sold (+37 percent,) China is Audi’s largest market, before Audi’s home market Germany (254.011 units, up 10.8 percent.) Audi chief Rupert Stadler is unimpressed by news that China might stop government purchases of foreign cars. Only 10 percent of Audi’s sales in China are government sales.


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What’s Wrong With This Picture: Follow The Incentives Edition Tue, 18 May 2010 01:45:47 +0000

Sadly, my internet came crashing around my ears just as GM’s Q1 results conference call was getting interesting. Typical Monday. I’ll rock myself to sleep tonight with a recording of the call and report back tomorrow, but at this point the big news is plainly visible on this single slide. Yes, GM finally got control of its incentives and wrestled them below the industry average… for a month. That month (March) also just happened to be the worst month this year for GM market-share wise. The next month (April), the incentives went back over the industry average, and market share increased once again. The lesson seems obvious: GM won’t gain market share on promises of high-quality cars and taxpayer payback alone.

Though GM’s executives seem to understand that “buying market share” isn’t worth the long-term downsides, they also don’t appear to have much choice. This, in a nutshell, is why GM is returning to captive lending: it has to buy the market share somehow, and risky loans are better than huge incentives. Problem is, this also proves why the bailout of GM was a foolhardy proposition. In order to sustainably grow their business, automakers need one commodity above all others: the trust and respect of consumers. Without that, you can screw bondholders, force worker concessions, cut dealerships, absolve debt and dump cash on the problem ’till the cows come home, but you’ll still end up with a chart like this.

When analysts say that GM’s new marketing wunderkind Joel Ewanick faces “the toughest job in marketing history,” this is exactly the problem they’re referring to. How he will be able to reverse GM’s spiff dependence, and get people to buy GM products because they want them more than anyone else’s vehicles isn’t the least bit clear at this point. And if he doesn’t make that change, GM will have no choice but to keep the incentives high and pile on the in-house financing giveaways. High stakes indeed, for a problem that Ewanick’s predecessor seemed to think could be solved with the tagline “Excellence For Everyone.”

[GM’s Q1 Slideshow is available in PDF format here, Supplemental information in PDF format here, and Q1 SEC 10-Q filing in PDF format here

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GM Q1 Profit: $865m After Dividends Mon, 17 May 2010 14:02:42 +0000

Well, the suspense is over. General Motors announced its Q1 earnings this morning, and for the first time since 2007 the quarterly numbers are positive. GM’s net revenue jumped to nearly $31.5b on strong performances from its North American and GM International Operations (GMIO), and across-the-board sales improvement for the Chevy brand. General Motors Europe was The General’s sole unprofitable division for the quarter, losing half a billion dollars while it waits for a deal on financial assistance to clear. Operating cash flow was $1.75b, with about $755m of that going towards capital expenditures. That left just under a billion dollars in free cash flow, as GM finished the quarter with $35.7b in cash on hand. Net income attributable to shareholders was $1.068b, less $203m for cumulative dividends, for a total net profit of $865m [Full financial highlights in .doc format available here].

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2010 GM And Chrysler IPOs Looking More Likely Tue, 11 May 2010 17:11:50 +0000

Chrysler crowed over its 9.1 percent market share in its Q1 results conference call yesterday, and though CEO Sergio Marchionne refused to be pinned down on an exact time frame, an IPO this year looks more likely than ever. Similarly, BusinessWeek reports that GM’s Ed Whitacre has hinted that a Q1 profit is likely, as is an IPO in Q4 of this year or early next year. This improvement in both bailed-out automakers was underlined by former Presidential Auto Task Force head Steve Rattner, who said the two firms were “meeting expectations,” at a Detroit-area conference. But Rattner also put his expectations into some context by saying

When we did this restructuring we never expected a full recovery of our investment. If it ends up costing us $10 billion we should consider it a success. For about $10 billion we avoided economic and human calamities… I would suggest that that’s a pretty effective cost of government stimulus

That assessment is down considerably from Rattner’s last prediction, which expected a taxpayer profit on the auto bailout.

Current auto task force boss Ron Bloom echoed the IPO optimism, as the AP reports that Bloom is “hopeful” that GM will be able to swing an IPO by year’s end. However, as the Detroit Free Press reports, Bloom refused to make a concrete prediction, saying

We’re not putting a firm line in the sand; we’re hopeful they’ll be able to do it by the fourth quarter

Where exactly GM stands financially won’t be clear until Q1 results emerge later this month, but Chrysler’s performance was surprisingly strong given the challenges it is facing. Despite a reported 40 percent fleet sales mix in April, Chrysler’s Q1 results showed a $27,800 average transaction price, up considerably from Q1 2009′s $25,400 level. That growth is clearly tied to improved incentive discipline, with about $3,500 average incentive cost compared to $5,000 in Q1 2009. Average transaction prices were down from Q4 2009 levels however, when they reached $28,100.

Marchionne claimed that its guidance of $40b-$45b net revenue for 2010 and $0-$200m operating profit were “conservative,” saying that he expected the company to “blow the lid off” its current projections. The firm will re-visit guidance at the end of Q3. However, at $9.68b net revenue in Q1, revenues do seem to be a bit shy of where Marchionne wants them to be. Given both the fleet mix and reductions in much-ballyhooed Ram truck sales Chrysler saw in April, there’s certainly a chance that Q2 results are already behind the curve to meet those goals. Marchionne did say that fleet sales would continue to be an important part of Chrysler sales, saying its mix (at the end of Q1) was in line with its Detroit competitors.

Marchionne did say though that Chrysler was focused on an IPO, saying that it needed to be ready for a “plug-and-go” floating of Chrysler equity. To make that happen though, Chrysler needs to stick religiously to its numbers. Moving towards a late-2010 IPO will likely require an improvement in the revised guidance at the end of Q3, and an improved outlook for 2011. And with $2.3b of debt maturing in 2011, securing that improved outlook won’t necessarily be easy. But with most of Chrysler’s new products dropping all in the fourth quarter of this year, it looks like Marchionne is envisioning a blitzkrieg attack starting in October. By flooding the market with new and revised products, Marchionne will begin Chrysler’s move towards a public offering with a distinct break from its current PR radio silence.

In the meantime, Chrysler will keep its spending relatively low and will probably maintain a low profile. If it stays quiet and hits its numbers for three more quarters, there’s a chance that a late-2010 IPO is more than an impossible dream. But building up the confidence to launch an IPO is no guarantee of a successful IPO. Chrysler is clearly working with a cleaner balance sheet than ever before, but there’s still a lot of work to be done.

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