An aerial view of the Tesla Fremont Factory on May 13, 2020 in Fremont, California.
Justin Sullivan | fake pictures
During a second-quarter earnings call on Wednesday, Tesla CEO Elon Musk and CFO Zachary Kirkhorn told investors they reached a significant milestone: four consecutive quarters of GAAP profitability. The electric vehicle maker remained in the black, despite the effects of the Covid-19 pandemic, thanks to sales of regulatory credits.
According to its earnings report, Tesla’s total revenue reached $ 6.04 billion for the quarter, with approximately 7% of that, or $ 428 million, coming from sales of these loans. To put this in perspective, regulatory credit sales were greater than the company’s free cash flow and amounted to four times Tesla’s $ 104 million net profit for the quarter.
Here’s a way Tesla built up these loans over the past year, according to Mike Taylor, president of environmental credit consulting and brokerage firm Emission Advisors in Houston: selling them to other automakers who want to avoid big fines.
In California, and in at least 13 other states, any automaker who wants to sell their cars in that state must sell a certain number of electric vehicles, electric hybrids, or other zero-emission (or ZEV) vehicles. Automakers that don’t sell these vehicles yet, or don’t sell many of them anyway, will buy credits from someone who is responsible. Since Tesla only sells ZEV, you don’t need to keep the credits you earn, and you can sell them before they expire.
Most states with a ZEV program plan to increase their green car requirements for years to come, so Taylor expects demand for credit to remain strong in the short term. That, he warned, should change dramatically, as other automakers begin to produce their own green vehicles in high volumes.
ZEV prices and other types of regulatory credits, such as greenhouse gas emission credits, are generally not disclosed. And environmental regulatory credits are not limited to states, either.
Last year, Fiat Chrysler reached an agreement with Tesla to comply with new European environmental regulations that will come into play in 2021. In its most recent update for shareholders, FCA revealed that as of March 31, 2020, its agreements represent commitments. totals € 1.1 billion. FCA plans to use the loans it is buying from Tesla to meet until 2023, according to the document. The agreement was a blessing for Tesla. The Financial Times previously reported on the FCA deal with Tesla.
But the lack of transparency and pricing data around auto regulatory loans makes it difficult for shareholders to predict how sales of these will affect Tesla’s bottom line in a given quarter.
Zachary Kirkhorn, CFO, Tesla
Source: Tesla
In Wednesday’s earnings call, Tesla CFO Zachary Kirkhorn revealed that while Tesla expects to double its regulatory credit revenue in 2020 in the prior year, to above $ 1 billion, it expects sales of regulatory credits eventually decrease. In 2019, Tesla sold around $ 594 million in regulatory loans, up from $ 419 million in 2018.
In the call, AB Bernstein senior technical analyst Toni Sacconaghi noted that although Tesla reported 5% GAAP operating margins for the past 12 months, that number would drop below 1% without the sale of these loans.
The CFO replied: “We do not manage the business on the assumption that regulatory credits will contribute significantly to the future.” But at the same time, he added: “I expect our credit income to double in 2020 relative to 2019. And it will continue for a period of time. Eventually this will decrease.”
Musk later said the growing profits were not as important to him as making Tesla cars affordable and therefore accessible to a broader driver base.
“We need to not go bankrupt, obviously that is important because then we will fail in our mission,” Musk said during Wednesday’s earnings call. “But we’re also not trying to be super profitable, if profitability is 1% or 2%, it’s not crazy. Last quarter it was just 1 percent. So we want to be profitable, but we want to be slightly profitable and maximize growth and make cars as affordable as possible, that’s what we’re trying to achieve. ”
Towards that end, Tesla is working to reduce the cost of producing vehicles, especially batteries, and wants to make more money from the software over time, executives said, namely the total self-driving system that has yet to be completed. .
Although their comments acknowledge that regulatory credit revenue should decline in the not-too-distant future for Tesla, Musk and Kirkhorn are not saying, and may not know, how quickly that day will come.
.
