We discussed Tesla Motors Inc (NASDAQ:TSLA) and lease accounting in a prior article. We noted that because of those accounting rules, Tesla is under-reporting earnings. Some analysts seem to have finally gotten the cue.
Barclays is out with a new report lowering EPS estimates based on accounting methodology changes. In a new report the firm notes:
We have revised our Tesla Motors Inc (NASDAQ:TSLA) model (below), incorporating the lease accounting adjustments from TSLA’s loan/lease program. Because Tesla Motors Inc (NASDAQ:TSLA) retains the repurchase risk on the vehicles it delivers to a customer under the program, under GAAP the delivery of a vehicle to a purchaser will not qualify as a true sale.
Instead, 57% of the revenue will be recognized pro rata over the 39 months, with the remaining 43% of the revenue deferred and recognized when the put option expires at month 39. CoGS will likely be spread out in a similar fashion, thus leaving each quarter at roughly the same gross margin level (or a touch higher). Cash flow will not change, as TSLA still receives the selling price upfront. But with lower revenue, gross profit in $ falls, and with SG&A unchanged, operating income and hence EPS are lowered.
We had held off making these adjustments to EPS in the hope that Tesla Motors Inc (NASDAQ:TSLA) would adapt an adjusted non-GAAP EPS that would remove the distortion of lease accounting – but it appears that the company and consensus will use EPS based on the lowered revenue from lease accounting.
The net effect is that our 2Q revenue falls from $528mn to $422mn, and EPS from 3c to a loss of (13c). For the full year EPS falls from 87c to 27c. Within this, we have assumed 23% loan/lease penetration and a roughly 50bp gross margin improvement. Our assumptions assuming deliveries, pricing, regulatory credits and costs are largely unchanged from our prior model.
Why true economics haven’t changed for Tesla Motors Inc (NASDAQ:TSLA)
Let’s look at an illustrative $80,000 TSLA Model S sale. In a true sale, Tesla Motors Inc (NASDAQ:TSLA) records the full $80,000 sales price, as well as the associated CoGS, in the quarter in which the car is sold.
Under the new financing arrangement, however, in that first quarter Tesla Motors Inc (NASDAQ:TSLA) could only recognize revenue of $3,508, which is equal to the (sales price – residual guarantee)/13 quarters. In the final quarter, it would recognize that plus the final “true sale” at the residual guarantee. CoGS would be spread out in a similar fashion – preserving the original gross margin (TSLA indicated the gross margin may get a 100bp tailwind). While quarterly revenue and gross profit are less in quarters 1-12, the lifetime contribution remains the same. Moreover, on a cash flow basis, nothing has changed.