Debunking Tesla's Earnings Myths

Editors Note: Article previously stated analyst expected earnings were $0.20 per share; value corrected to negative $0.17 per share. The Motley Fool apologizes for and regrets this error. 

Unexpected profitability from the electric-vehicle maker, Tesla Motors (NASDAQ: TSLA  ) seemed to be a major driver behind most of the optimistic headlines following the company's second-quarter earnings release on Wednesday. Though the company certainly beat expectations, many investors and analysts are questioning the way the company chooses to report earnings. Is Tesla fudging the numbers?

Let's stop playing guesswork and take a closer look for ourselves.

Tesla earnings 101
Though in absolute terms Tesla's non-GAAP second-quarter earnings were very small -- especially in relation to the company's now $150 plus share price -- the $0.20 per share it reported was a nice lead over the negative $0.17 per share loss analysts expected.

But that's non-GAAP earnings. Tesla's emphasis on a non-GAAP profitable quarter in light of its GAAP net income loss of $30.5 million is causing some frustration among critics.

There are three major problems investors and analysts often highlight with the way Tesla reports earnings. Fortunately, however, there are three easy answers.

1. Leasing revenue 
Tesla's non-GAAP revenue acknowledges leasing revenue upfront. Why?

GAAP requires Tesla spread the recognition of lease sales over a period of about three years -- but Tesla does collect 100% of the payment for the cars upfront. It leaves the leasing to its banking partners. So adjusting for this revenue is definitely fair; it paints a clearer picture of the company's real revenue.

2. ZEV credits 
Tesla's GAAP and non-GAAP revenue both account for sales of zero-emission vehicle credits, or ZEVs, which are not sustainable revenue sources over the long haul. Not cool, right?

Right. But to Tesla's credit, the company is very open about the impacts of ZEVs on both GAAP and non-GAAP earnings, taking the time to adjust profitability goals to exclude the benefits of ZEVs. Furthermore, its ZEVs are becoming less meaningful to results, down to just 9.3% of non-GAAP revenue. Though I'd prefer the company didn't include ZEVs in non-GAAP results, at least management adjusts for it when describing future profitability targets.

3. Other regulatory credits 
The company does not exclude the benefits of what it refers to as "other regulatory credits" when it is projecting its trajectory of improving profitability. This goes against the company's practice of excluding the benefits of ZEVs when highlighting gross margin targets. Is this fair?

Management justifies the inclusion of "other regulatory credits" because they say they have good visibility of them due to their long-term contracts. Even so, Tesla can't count on these credits to be around forever. And this is precisely why the practice raises some eyebrows.

I'm not a huge fan of this practice, but I at least understand managements' reasoning. And at least investors can rest assured that these credits only accounted or about 3.2% of revenues in the company's second quarter.

A tipping point
Tesla's accounting gimmicks aren't really as bad as they look. They just get a lot of attention because the company is at a point in its history when it is borderline profitable.

But Tesla shareholders should rest assured; the company is financially stronger than ever before. With $747 million in cash on the balance sheet and guidance for positive cash flow, critics who still think Tesla is borderline bankrupt aren't doing their homework.

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Read/Post Comments (8) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 09, 2013, at 10:32 AM, middlenamefrank wrote:

    I hear a lot of people accusing Tesla of "cooking" their books. Book "cooking" refers to ILLEGAL practices, designed to throw off investigators searching for people and companies that are breaking the law.

    At worst, Tesla is maybe "fudging" their books, and the reason is very clear -- so they can claim that they're turning a profit. It makes their company look better and raises peoples' confidence level, which in turn raises their sales levels.

  • Report this Comment On August 09, 2013, at 10:41 AM, pondee619 wrote:

    "-- the $0.20 per share it reported was a nice lead over the $0.20 per share analysts expected"

    Isn't the $0.20 reported the same as the $0.20 analysts expected per your story?

    Riddle me this, Batman: When isn't 20 cents reported equal to 20 cents expected?

    When it is part of a fool article.

  • Report this Comment On August 09, 2013, at 11:32 AM, pondee619 wrote:

    "-- the $0.20 per share it reported was a nice lead over the $0.20 per share analysts expected"

    How can the $0.20 per share it reported be a "nice lead" over the $0.20 per share expected?

    Riddle me this, Batman: When isn't 20 cents equal to 20 cents?

    When it is mentioned i a fool article.

  • Report this Comment On August 09, 2013, at 11:33 AM, pondee619 wrote:

    NOW they both show up.

  • Report this Comment On August 09, 2013, at 12:14 PM, TMFBos wrote:


    Sorry about the error on analyst estimates, it should have read -$0.17 per share. We've since corrected it. Thanks for catching that faux pas.


    Blake Bos

    Motley Fool Industrial's Analyst

  • Report this Comment On August 09, 2013, at 12:26 PM, jamesdan567 wrote:

    You can' fudge cash flow. You can't fudge that Tesla boosted production from 4500 deliveries to 5150 (14%).

    You can't fudge that Tesla is delivering into Europe now, and China and Japan later this year.

    I am sure Tesla's books are just fine. No one outside the company has any basis to throw darts at numbers they simply don't have access to.

    The people who want to bash Tesla never mention this simple fact:

    Tesla S model is EPA rated 95mpg vs 22mpg for other cars in its price range. 400% more efficient is the silver bullet.

  • Report this Comment On August 09, 2013, at 12:38 PM, ristak2 wrote:

    It would be good to remember the case of SEC v Bally Total Fitness. Bally had a practice of collecting three years of monthly dues from members up front and recognizing the total amount at payment time. But the amount represented services that Bally still had to provide over three years and the expenses related to those services was recognized over three years. By GAAP, the revenue should have been deferred and recognized as the services were provided over three years just like the expenses.

    Fast forward to Tesla's non-GAAP recognition of "leasing revenue" upfront which sounds like a similar situation. The guarantee of the resale value puts the liability on Tesla at resale time and as such, Tesla shouldn't recognize the entire revenue upfront.

    To Tesla's credit, they don't do this in their GAAP statements, but it's also misleading to suggest that there shouldn't be any liability to Tesla and that they should be able to recognize the entire revenue upfront.

  • Report this Comment On August 15, 2013, at 6:36 AM, JulianCox wrote:

    Debunking the Debunkers.

    There are two ways of looking at this GAAP / Non-GAAP thing that are really important.

    1. Tesla is the world’s smartest recipient of endless interest free loan-capital that is secured and serviced on a constant supply of vehicles and customers making normal car loan payments. (This is the GAAP perspective).

    2. Tesla is 100% a cash-up-front seller of vehicles that offers its customers a separate residual guarantee deal in a window of 3 months, 3 years after purchase (half way through their bank loan term). A deal that has a purely hypothetical rate of acceptance and a speculative rate of conversion to new car sales and returns for Tesla in the second user market and so should be viewed as transaction only if it occurs. This is the Non-GAAP perspective.

    There is a third perspective, the dishonest (or confused) one. In the dishonest (or confused) perspective commenters seek to persuade investors that the factual nature of the original sales transaction and the hypothetical nature of the residual transaction is reversed, and go on further to indicate that the residual transaction is a net loss instead of what it actually is: a fixed price limited window of opportunity trade for a vehicle. The dishonest (or confused) perspective is a veiled accusation that in its non-GAAP numbers Tesla is claiming to be doing better than it is. In fact the pure GAAP perspective (unlimited free working capital) is in some ways even more attractive.

    Here is the main source of the dishonest (or confused) perspective offered by a loss making investor in a technology that the author had hoped would have been competitive with Tesla’s lithium Ion batteries:

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