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A Peek Beneath Tesla's Non-GAAP Hood Reveals Nothing But Cockroaches

Tyler Durden's picture




 

Back in August, we joked that in the Tesla Q2 earnings press-release the one most often used word was Non-GAAP (43 times). Conveniently, we provided a word cloud of the company's Q2 release for the visual learners to grasp just this:

That TESLA's earnings were an epic non-GAAP adjustment joke was only further cemented by the fact that the company itself provided a bridge between its GAAP and Non-GAAP earnings. Needless to say, the bottom line number was not kind to GAAP resulting in a nearly $60 million Net Income swing depending on which set of numbers was used.

Of course, back then TSLA stock was merely the latest bubble frenzy so pointing out the obvious, namely that the realty behind the numbers presented for public consumption was far uglier than most expected, was utterly meaningless.

Now, the euphoria is over and the story is different, as not only has the company's self-reported and erroneous record of making the safest car in the world gone up in, well, flames but the momentum appears terminally broken and following today's most recent 11% drop, TSLA stock could soon be headed for double digit territory again.

More importantly, however, the end of the momentum story means that those who care about such anachronisms as fundamentals can once again look beneath the hood of TSLA to get the true story of what is really going.

There, with the help of Bloomberg's forensic accounting sleuth Jonathan Weil one uncovers nothing but cockroaches.

From Weil:

Most companies that play the non-GAAP game goose their numbers by excluding expenses. Tesla does this, too. It backs out stock-based compensation, for example. But the biggest kick to its non-GAAP earnings comes from an increase in top-line revenue.

 

The company reported third-quarter non-GAAP revenue of $602.6 million, which was about 40 percent more than its GAAP revenue. It achieved such a boost by transforming $171.2 million of liabilities into sales.

 

Here’s how it worked. In April, Tesla started a new financing program under which customers have the option to sell their vehicles back to the company after three years for guaranteed minimum amounts. The accounting rules say Tesla can’t recognize all of the revenue immediately in those instances and must account for such transactions as leases. So after Tesla takes customers’ cash, it records liabilities for “deferred revenue” and “resale value guarantee” on its balance sheet.

 

Mahoney noted two main problems with including so much of those amounts in non-GAAP revenue. Some customers wouldn’t have chosen Tesla cars were it not for the financing program. So the non-GAAP revenue isn’t comparable to Tesla’s sales before the program began, and it may overstate the true growth and demand. Plus, by adding back the resale-value guarantee, the company “assumes that nobody is going to return the vehicle, for purposes of the non-GAAP revenue,” he said.

 

Lots of companies use gimmicky benchmarks in their earnings releases. What makes Tesla special is that it behaves as if it doesn’t know the proper way to present its non-GAAP numbers. In an ironic twist, two attorneys at Wilson Sonsini Goodrich & Rosati, which helped take Tesla public in 2010, penned a lengthy article in 2008 explaining the legal requirements and best practices for earnings releases; it’s still on the law firm’s website.

 

“GAAP comparison numbers in an earnings release must be set forth with equal or greater prominence to the non-GAAP numbers,” attorneys Steven Bochner and Richard Cameron Blake wrote. “For instance, if an issuer announces GAAP and non-GAAP earnings per share in its press release, it should report the GAAP earnings per share prior to the non-GAAP earnings per share.”

 

The bigger concern here should be what some investors call the “cockroach theory": Where there is one problem, there probably are more. Tesla has disclosed compliance failures before. In March, its management concluded that Tesla’s ‘‘internal control over financial reporting was ineffective as of Dec. 31, 2012.’’ Its auditor, PricewaterhouseCoopers LLP, concurred. In a related matter, Tesla had to restate its cash-flow numbers for much of 2011 and 2012. In its latest quarterly report, filed last week, Tesla said its controls still weren’t effective as of Sept. 30. 

Because the only thing better than one flaming cockroach are many flaming cockroaches.

Weil's conclusion:

None of these flubs has been especially damaging. Yet taken together, they suggest a company that lacks basic skills in accounting and disclosure, which could be a serious problem for a young manufacturer with a $17 billion stock-market value that loses money and trades for 9.5 times its revenue for the past four quarters. The next time Tesla messes up because of poor controls, the consequences could be worse.

 

As Tesla said in its latest annual report: ‘‘If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock.’’

Oh well, at least the fully spontaneously combusted Tesla Model S (because the safest car in the world is never expected do something as silly as run over a metal object while on the road) makes for a very handy, if slightly smoldering, paperweight.

 

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Mon, 11/18/2013 - 16:48 | 4166580 Shizzmoney
Shizzmoney's picture

Elon Musk is an asshat

Mon, 11/18/2013 - 17:05 | 4166675 slotmouth
slotmouth's picture

I've got a lot of green on my screen and most of it is a variety of Tesla and Solarcity puts.

Mon, 11/18/2013 - 17:06 | 4166682 Say What Again
Say What Again's picture

Since when do earnings and profits matter?

Look how much money folks are making with amazon & priceline

Mon, 11/18/2013 - 17:10 | 4166706 NotApplicable
NotApplicable's picture

LOL, I would've thought they'd use a different term rather than "extinquishment."

Mon, 11/18/2013 - 17:35 | 4166835 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

non-GAAP is CRAAP. Enough said.

Mon, 11/18/2013 - 20:07 | 4167532 knukles
knukles's picture

Those Earnings Are On Fire!

Mon, 11/18/2013 - 22:11 | 4167969 aVileRat
aVileRat's picture

As said in another thread about TSLA

You can always tell how confident the CEO is by the amount of stock he is 'file selling' while at the same time pumping to the momo's

Elon is USA's Batista.

- Propped up as a boy wunderkid

- Backdoor deals with the government to promote unsustainable and idiotic pork projects.

- Questionable pledges of equity collateral between allegedly 'independent' companies. Ever wonder how SpaceX, Solar City and Tesla all managed to keep solvent on less than 1x cash flow turnover ? Where was the SEC on this one ? No, seriously. You would have to have been "told" not to investigate Musk and Hoffman with the eye watering leverage & cash burn rates this guy pulled off over the last 4 years.

- over 300x promote for the government's friends & founders round. (Hi2U Madonna, Bono, Wintour, Corzine, Steyer... the President's list read like the DNC bundlers top 20).

- loony toons valuation and executive got his back up when people started to ask questions

- government stepped in on shorts and allowed Musk/Batista to harass shorts & journalists. Want to know the number 1 most short exempt stock for 2012 and 2013? Hint, it's named after a Croatian guy.

- Both used stupid amounts of debt to juice the valuation

- Bullied sellside analysts into juiced valuations using sketchy revenue booking practices. Insulting automotive and equity market professionals to deflect questions, a classy gimmick going back to Jeff Skilling at Enron (a drinking buddy of his and Reid  Hoffman's, go figure).

- backdated options scandal

- buying state of the art machinery for a Pokemptin village factory

- Questionable engineering practices and even more murky electronics engineering resignations. Caught actively manipulating revolving door comments on ex-employees. Forcing old employees into litigation silence (the first CFO).

- blowing cash like a colombian drug lord, or a money laundering south african gun runner. Pick your analogy with Elon. Over 45 million in stock sales and personal expenses made in the period of August to September 30th, including fresh sports cars, a tax shelter for his children pre-blackout period and a 25 million dollar house in bel air. Playboy party and celeb heavy jet trips. Does any of this sound familiar to you ? Hint: Enron's last days.

- Stating on your own conference call after blowing nearly 3 million shares out the door to retail MOMO's, that your stock is "overvalued". Convient after the whole 12 month paid media hype train and those programmed stock sales monetized over 300MM in cash, not counting all those DNC money honey's who blew out their load around 148/sh.

I dont hate the guy personally. Actually he's kind of fun, but as a business man ? He and the whole Paypal mafia needs a trip to the SEC 13F hot seat.

 

 

Mon, 11/18/2013 - 17:37 | 4166840 Herd Redirectio...
Herd Redirection Committee's picture

I didn't actually make the trade, but when TSLA first crossed $165 I told myself, "Keep your eyes on this one, and see how [shorting it] would have turned out."

It would have been a slightly nervy couple weeks, with the run up to $190, but all in all, it would have been a pretty good trade (and I'm not sure I would be closing it today, either)

 

Mon, 11/18/2013 - 17:14 | 4166721 slotmouth
slotmouth's picture

Priceline has earnings and doesn't belong in that category.  It is expensive, but not like the others.  Amazon is on my hitlist, but I am focusing on the low hanging fruit.  Earnings always mattered, people think that the fed can prop this shit up, and they can for a little while, but Benjamin Graham is going to bitch slap all these momo ass clowns.

Mon, 11/18/2013 - 17:14 | 4166727 Grinder74
Grinder74's picture

Do people still trade based on fundamentals and accounting?  That's like driving a car that still uses gasoline...

Mon, 11/18/2013 - 17:16 | 4166739 Freddie
Freddie's picture

Elon Musk is a friend of Obama and liberal Democrat - so he is a "genius."   The internet news sphere tells us that every second so it must be true.

Mon, 11/18/2013 - 17:36 | 4166838 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Go to a college campus and you hear the same spew at a higher level.

Mon, 11/18/2013 - 16:48 | 4166581 slaughterer
slaughterer's picture

Well taken points, ZH.  The TSLA bubble has now officially burst.  Next?

Mon, 11/18/2013 - 17:00 | 4166646 Rainman
Rainman's picture

TSLA needs to merge with GM ...they got the same accounting (fraud) going on.

http://www.forbes.com/sites/francinemckenna/2011/09/07/numbers-at-general-motors-just-dont-add-up/

Mon, 11/18/2013 - 17:03 | 4166662 Winston Churchill
Winston Churchill's picture

No provision for warranty claims in that balance sheet..

Believe  me,they will be epic when they start.I still remember looking at a mountain of

returned batteries on one ill fated venture of mine.That same problem has not been

cured by Tesla,tick tock..

Short this bitch all the way to Chapter 7.

Mon, 11/18/2013 - 17:17 | 4166748 Freddie
Freddie's picture

You have been calling this one (spot on) for a while my friend.

Mon, 11/18/2013 - 17:05 | 4166677 Mark_BC
Mark_BC's picture

"The TSLA bubble has now officially burst."

It's the #1 selling car in Norway.

Mon, 11/18/2013 - 17:09 | 4166702 BigMike
BigMike's picture

Um so what? Norwegian's feel guilty for being nigger rich off of oil. There's only 5 million people there anyway. 

Mon, 11/18/2013 - 18:49 | 4167193 Freddie
Freddie's picture

Gasoline, due to taxes, is about $10 a gallon or more.  The taxes are need to resettle Muslims who will destroy Norway.

Mon, 11/18/2013 - 20:09 | 4167540 knukles
knukles's picture

A Tesla for every Muslim and a Muslim in every Tesla

Tue, 11/19/2013 - 02:57 | 4168694 Freddie
Freddie's picture

The Tesla only needs minor modifications to be used as a WMD.

Mon, 11/18/2013 - 17:06 | 4166689 slotmouth
slotmouth's picture

Pandora, Linked In, Facebook, Zillow, Trulia, Yelp, Amazon, Netflix...I could go on all night.  Just find ridiculously out of the money puts and be patient.

Mon, 11/18/2013 - 17:40 | 4166852 Colonel Klink
Colonel Klink's picture

And now Google who started most of those companies you just mentioned.  I avoid or boycott as many of those as possible.

Mon, 11/18/2013 - 17:49 | 4166896 Rainman
Rainman's picture

WTF is a Yelp, anyway ..? a fraternity of stupid humans...??

Mon, 11/18/2013 - 18:03 | 4166957 FuzzyDunlop21
FuzzyDunlop21's picture

Tells you restaraunts in the area, just like a million other websites. 

Mon, 11/18/2013 - 17:23 | 4166784 Joeman34
Joeman34's picture

AMZN, wait until the sales tax arbitrage goes away...

Mon, 11/18/2013 - 17:26 | 4166796 Fidel Sarcastro
Fidel Sarcastro's picture

Waiting foor the AMZN bubble to burst...and waiting...and waiting. It will be a spectacular pop.

Mon, 11/18/2013 - 16:49 | 4166585 SandiaMan
SandiaMan's picture
Burn Baby Burn
Mon, 11/18/2013 - 16:51 | 4166603 bad craziness
bad craziness's picture

Where the fuck was Muddy Waters when you really need them?

Mon, 11/18/2013 - 16:56 | 4166628 JustObserving
JustObserving's picture

TSLA down 10% YELP down 8.77%  TWTR down 6.75%  FB down 6.35% LNKD down 4.09%  It is apocalypse time in the mo-mo stocks

Mon, 11/18/2013 - 16:59 | 4166640 buzzsaw99
buzzsaw99's picture

Don't worry about Elon, he got plenty.

Mon, 11/18/2013 - 17:00 | 4166651 Hulk
Hulk's picture

Gotta get my wife one of these carz...

Mon, 11/18/2013 - 17:01 | 4166653 Protokletos
Protokletos's picture

GAAP is GAAY!

Mon, 11/18/2013 - 17:01 | 4166658 NOTaREALmerican
NOTaREALmerican's picture

I wanna Tesla with a built in BitCoin wallet.

Mon, 11/18/2013 - 17:05 | 4166674 Mark_BC
Mark_BC's picture

"Now, the euphoria is over and the story is different, as not only has the company's self-reported and erroneous record of making the safest car in the world gone up in flames"

And why would that be? Because Zerohedge declares it so?

Actually, the Tesla Model S is indeed one of the safest cars in the world. The safest one is probably the one I own, the electric Nissan Leaf. But Tesla is right up there.

If you actually put in the effort to do the research and crunch the math, something Zerohedge only seems to do when the math supports ZH's politically driven prejudices, you find that the fire rate for the Tesla is about 10 times LESS than for a regular gasoline powered car.

Moreover, the fires are inevitably contained in the front battery compartment, allowing the driver ample opportunity to exit safely. Not so for gasoline fires which can have a tendency to blow up in great fireballs.

It's just that Zerohedge and most Americans in general are anti-innovation and make headline news out of every Tesla fire (all 2 or 3 of them), whereas no one cares about the 190,000 regular vehicle fires, because they see enough of those on A-Team reruns.

Mon, 11/18/2013 - 17:07 | 4166693 Hulk
Hulk's picture

In that case, make that a 76 pinto for the wife...

Mon, 11/18/2013 - 17:18 | 4166750 ZerOhead
ZerOhead's picture

Make sure to order the defective after-market seat belts that lack the 'release' button... that and a smallish childs toy to be left on the driveway placed just behind the gas tank...

Mon, 11/18/2013 - 17:26 | 4166794 Zero Point
Zero Point's picture

Bumper sticker on back of Pinto:

Hit me and we BOTH die.

 

Mon, 11/18/2013 - 17:14 | 4166729 hungrydweller
hungrydweller's picture

What is your source for the 190K fires.  Did you know that over 60% of the statistics you hear or read are made up on the spot?  Even so, the number of fires Tesla has experienced as a percentage of electric (not hybrid) cars on the road may well be much higher than that of gasoline/diesel cars.

Mon, 11/18/2013 - 17:26 | 4166793 Mark_BC
Mark_BC's picture

"What is your source for the 190K fires."

http://www.nfpa.org/safety-information/for-consumers/vehicles

They give a 152,000 average for 2006 to 2010 and I googled and found a 194,000 figure for last year. Adjust if you feel so inclined.

"the number of fires Tesla has experienced as a percentage of electric (not hybrid) cars on the road may well be much higher than that of gasoline/diesel cars."

No, it's much less. There are over 100,000 pure electric cars in Ameirca, probably closer to 150,000. I think about a quarter of those are Teslas. You can interpret the numbers in different ways depending on whether you include all the Teslas in the world or just in America, or if you include all EV's in the calculation, but still, the fire rate for electric cars is much less than for a regular car.

Mon, 11/18/2013 - 17:18 | 4166756 NOTaREALmerican
NOTaREALmerican's picture

Re:  politically driven prejudices

I think you are being harsh on the ZH community.  Tesla is only despised because of the perception that it wouldn't exist without money gotten from the ponzi debt scam.   Now,  you are probably thinking to yourself:  well, that's true for all sports teams, and the players salaries, and the stadiums too.    And that's true for Starbucks 5 buck coffees.   And that's true for dumbasses driving around in automotive bling with oversized tires and tinted windows.

I think that's why so much of real life is despised on in the ZH community.  

Mon, 11/18/2013 - 17:20 | 4166764 Mark_BC
Mark_BC's picture

"that's true for all sports teams, and the players salaries, and the stadiums too.    And that's true for Starbucks 5 buck coffees."

And all the other American auromakers.

Mon, 11/18/2013 - 17:23 | 4166780 Freddie
Freddie's picture

Not so for gasoline fires which can have a tendency to blow up in great fireballs.

Ahh..only if your name is Hastings and you are a reporter actually doing your job.  

Mon, 11/18/2013 - 17:29 | 4166810 Tyler Durden
Tyler Durden's picture

Some more impartial perspective from Torquenews:

In the three years since its inception, Chevy has sold more than 50,000 Volts in the US. According to Pam Fletcher, GM's Electrified Vehicles Engineering Chief, that adds up to about 300 million miles driven. She was recently asked if Chevy could offer the folks at Tesla any help. Regardless of what metric one chooses, the Chevy has about 3 times the amount of cars or miles driven than does the Tesla. Yet, in all that time nobody has ever caught one with its battery packs burning in a crash, or in a spontaneous event. The Volt did make news after the battery pack caught fire after a crash test. However, it was literally weeks after the test while the destroyed vehicle was in storage. A government investigation, as well as internal GM investigation led to some strengthening of the battery support compartment.

Our in-house Nissan expert, Aaron Turpen was asked about the Leaf for this story. He could not recall any Leaf fires after crashes being reported. Nor could our own internet search bring up any examples. Some have been burned in wildfires in Colorado, but the battery packs were not burned. The Nissan Leaf has outsold the Tesla Model S by a factor of three or more as well.

Mon, 11/18/2013 - 18:01 | 4166947 Hulk
Hulk's picture

Going long arm and hammer is the adjacent counterplay here...

Mon, 11/18/2013 - 19:07 | 4167273 Freddie
Freddie's picture

Yes - Tylers.  I saw something after the second crash.  They interviewed or asked the guys at GM who worked on the Volt.  They said they really beefed up the protection of the batteries to avoid what Tesla has been seeing. I think these GM guys were suprised that Tesla missed it.

Genius Elon Musk and his gang are just lazy.  The Toyota Prius and Ford Fusion/Escape hybrids are far from perfect but they do not appear to have fires.  Ford also has plug-in hybrids and all electrics now. 

Mon, 11/18/2013 - 17:53 | 4166915 aerojet
aerojet's picture

In the immortal words of George Carlin:  "Learn to fucking drive, then go buy your goddamned safe car!"

Mon, 11/18/2013 - 19:10 | 4167292 Urban Redneck
Urban Redneck's picture

You should really stop trying to suck Elon's cock and regurgitating his marketing bitches' BS as facts.

Spend some time volunteering with your local Fire Department and might actually learn about vehicle fires (or even some more time on the NFPA website looking at the rest of the data and the training materials instead of trying to cherry pick points which support your misguided notions).

Cars with internal combustion engines do NOT have a tendency to blow up in great fireballs.

At the intersection of certain A/F ratios and other factors, yes, gasoline can explode, but this is a small percentage of car fires. Furthermore, in the majority of THOSE cases, a collision is involved and very often MORE THAN ONE CAR (and potentially fuel type) IS INVOLVED.

As to fires in EV's they are NOT "inevitably contained" in the battery compartment and most of them do not even occur in the battery compartment, so this is utter BS. And not only is it BULLSHIT, but once an HV battery starts burning, SOP is to let it burn itself out and the car up unless there is a danger of a metrosexual marshmellow roast- because a water attack isn't effective against a sealed HV battery cell that is on fire.

The vast majority of fires in internal combustion engines are electrical/iCrap or engine fires (not exploding fuel tanks) and can often be effectively suppressed with a 2 lb fire extinguisher (Purple K is the MOST effective, but it does stain if you're more worried about color coordination than life saving capability, but normal ABC dry chem is better than nothing). Moreover, the exact same fire extinguisher will also extinguish the electrical and mechanical fires EVs unless and until the fire breaches (or originates in) the HV battery pack - at which point walk away and write it off...

Tue, 11/19/2013 - 01:17 | 4168575 Freddie
Freddie's picture

+1

LOL!  Fire contained in the battery compartment.  This is like if I was a Hollywood douchbag freebasing cocaine in the bathroom and a fire is started.  The fire will be "contained" in the bathroom.  Fires are always "contained" in certain areas if Elon Musk says so.

Mon, 11/18/2013 - 21:39 | 4167839 orangegeek
orangegeek's picture

wow - people like you really do exist

 

it's a car that runs on electricity for $100K that has a lot of marketing behind it

 

why the fuck people like you get all ginned up over this is beyond reason

Mon, 11/18/2013 - 17:06 | 4166681 Eastwood
Eastwood's picture

where is Arthur "Tony Montana" Levitt you need  him? he buried these cock-a-roaches with his non-GAAP, M16 M203 style Bic pen.

Mon, 11/18/2013 - 17:11 | 4166707 Fix-ItSilly
Fix-ItSilly's picture

Isn't continual financial reporting mistakes, and poor controls, a jailable offense under Sarbanes Oxley?  Give me AG Holder...

Mon, 11/18/2013 - 17:14 | 4166728 ebworthen
ebworthen's picture

I'm pretty sure the stock markets themselves are full of cockroaches; TSLA is just the current one visible when you turn on the lights at night to get a glass of water or pee.

Mon, 11/18/2013 - 17:23 | 4166777 youngman
youngman's picture

Everything I see now in the markets is MOMO trading...what is hot....fast money....is this the new market...you get the inside info or have the fastest computer to make money.....all the rest of us are suckers....or the Johns..the idiots whose money they steal...

Mon, 11/18/2013 - 17:40 | 4166857 NOTaREALmerican
NOTaREALmerican's picture

Re: the idiots whose money they steal...

The "survival of the fittest" society has existed for some time now.   Unfortunately, it took many of the "marks" a long time to realize it (which makes sense as the "marks" aren't the sharpest tools in the shed, by definition). 

Mon, 11/18/2013 - 23:38 | 4168322 dark pools of soros
dark pools of soros's picture

the sheep gotz to be sheared!

 

 

Mon, 11/18/2013 - 17:58 | 4166933 Herd Redirectio...
Herd Redirection Committee's picture

Exactly.  The run up from 165 to 190 was EXCLUSIVELY to burn any and all who dared short, before the appointed time.

Mon, 11/18/2013 - 17:28 | 4166807 CheapBastard
CheapBastard's picture

At least "P" for Pinto comes before "T" for Tesla when they go looking this stuff up.

Mon, 11/18/2013 - 23:37 | 4168307 dark pools of soros
dark pools of soros's picture

but wait if they start looking under here... will they look at all the others??

canary in the coal mine?

Tue, 11/19/2013 - 01:25 | 4168584 monad
monad's picture

Make them into drones and sell them to Barry. Looks better than using tanks and missiles.

Tue, 11/19/2013 - 02:26 | 4168672 ItsDanger
ItsDanger's picture

Speaking as an ex-auditor, I can safely say that any company which boosts its revenue on a non-GAAP basis by that amount (aside from its nature), should be an automatic short target.  Obviously recognizing 100% of that value is not reasonable. 

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