• Pivotal Capital

Tesla's Private Conference Call is a Sign of Bad Things to Come

Last Thursday, Tesla CEO Elon Musk hosted a private conference call to announce the arrival of the long-awaited "$35,000" Model 3, a car he has been promising since mid-2015. But that was not the biggest news announced on the call - Musk also announced that Tesla would be shifting to 100% online sales in an effort to cut costs, spelling the end for Tesla's retail stores (and consequently, hundreds of employees). Additionally, Musk said that he no longer expects the company to post a profit in Q1 2019. All of these changes beg the question: "What the hell is actually going on at Tesla?" Here's my take.

There is a lot going on here, so I will address these issues one by one.


"$35,000" Model 3


First off, I will give Musk a little credit: He finally committed to delivering the $35,000 Model 3 that he has been promising customers for nearly four years. Congrats.

Now for some reality: The $35,000 Model 3 touts a range of only 220 miles, but as Tesla owners have figured out the hard way, the car will only get near the full range for a short period of time before the battery degradation kicks in. And if you live in a cold weather area, that range will be significantly limited from the start (and your door handles may not work if it's cold enough to freeze). In addition, the interior of the car sounds comparable to that of a $15,000 Honda Civic, according to Car and Driver:


"The base Model 3 has manually adjustable seats and steering column, cloth upholstery, a stripped-out center console, and a more basic audio system. It still supposedly has a glass roof and the same huge central touchscreen display that dominates the dashboard."


I don't know about you, but if I'm paying $35,000 for a car I expect a much better interior than that. My $29,000 car (a 2015 Dodge Challenger) has leather, power seats, power steering wheel adjustments and a fully loaded center console and media center. And, as Car and Driver correctly points out, the car is actually $36,200 after the delivery fee. Oh, and if you want "Autopilot" it's going to cost you another $3,000.

Musk also announced the Model 3 Standard Range Plus for $38,200 - which is rumored to be a software limited version of the Mid-Range Model 3. If true, this would be a negative gross margin product for Tesla - a sign that the demand for Model 3s has fallen off sharply. The company also significantly marked down its other models, inciting anger among owners who just saw their car depreciate significantly overnight. Which brings us to Mr. Musk's next announcement on that secret call: store closings.


RIP, Tesla Retail


In what was the all around weirdest corporate call I've ever heard, the weirdest part was how Musk announced the end of Tesla's retail stores - About five minutes in to his statement, Musk says the following:


"I should say as well the standard plus, which is for a small amount more you can get basically a whole lot more, like, roughly 6% price increase gets you 10%... almost 10% range increase and a 6% power increase and mostly towards the premium interior. So firstly I'd recommend really getting standard plus, but we have the standard available as well. And then another key point is where we're moving all sales online. This is extremely extremely profound worldwide."


Oh, uh, that's kind of an important one, don't you think, Mr. Revolutionary Genius? Keep in mind that this call was not made available to the public, nor had Musk communicated this decision to his employees who would be laid off as a result of this decision. So, these employees got to learn their fate from the select group of reporters who were allowed on the call. As Bloomberg's Dana Hull reported, Tesla employees were blindsided by this announcement.


But aside from Musk's extreme lack of professionalism and empathy, which he has displayed repeatedly over the last 18 months or so, what does this decision mean for Tesla? Well, I have been in many Tesla stores over the years and I will say this: The stores were the best thing Tesla had going for it. I was always amazed by the passion shown by Tesla's retail employees. These people truly loved and believed in the brand, they were always friendly and loved to show off the cars they had in store. The stores were the public face of the brand, where new potential customers could come in and see the cars for themselves.

Tesla Store - Austin, TX

Last December, I took a trip to the Tesla Store at the Domain Mall in Austin, TX to test drive a Model 3 for myself. I was naturally skeptical having closely followed the chaos that was Tesla in 2018, but I did my best to keep an open mind. I came in and was immediately greeted by a very friendly associate who got me set up for my test drive. While we waited he stood and talked to me about the brand and how awesome it was: from the Tesla Semi to the Roaster 2, he covered it all with enthusiasm. After a short wait, another associate took me across the street to the parking garage, where a fully-loaded Model 3 Performance was waiting for us. We went on the test drive (yes, I did try out Autopilot) and it was fun, although I was not a fan of the bare interior of the Model 3. The test drive associate answered all of my questions, even some tougher ones about reliability, etc. She was just as friendly and enthusiastic as the first employee I spoke to. When we got back, the first guy greeted me instantly and asked how the test drive went. We spoke for a few more minutes before I thanked them for their time and walked out the door. I must say - even as a committed Tesla bear, I left the store with a more positive view of the company than I had going in. For the first time I actually understood why people buy Teslas and honestly, if I didn't know about all of the issues behind the scenes, I may have considered buying one. But now, Tesla's website will be the only place to take a look at the cars. There will be no friendly associates telling you about the brand. Nowhere to see the car in person and give it a test drive. Good luck with that, Mr. Musk.


More important, however, is the signal this sudden move sends to the market. Tesla didn't just announce that they would be winding down their retail operations. They actually began closing stores just three days later. At this rate, it is likely that Tesla will close all of their stores before bankrupt retailer Sears. This appears to be an emergency liquidation by Tesla, as the actual savings for the company will be extremely marginal after paying early termination fees on all of this retail space.


In Tesla's 2018 SEC Form 10-K, which was filed just 9 days prior to Mr. Musk's surprise announcement, they appear to have an extremely different plan for their retail space:

I have never seen a company change their business model in such an extreme way in less than two weeks. There is no possible way they could have considered all of the externalities related to this decision in that period of time. Musk didn't even bother telling the employees ahead of time - I would be willing to bet that he didn't tell his Board of Directors, either. To me, this move could mean only one thing: Tesla is in a state of extreme financial distress. The market appears to have come to the same conclusion: the stock has fallen 13.66% in just 4 trading days since the announcement.


Guidance


On Tesla's January 30th earnings call for Q4 2018, Musk provided the following guidance regarding the company's profitability:


"I would say at this point I'm optimistic about being profitable in Q1. Not by a lot, but I'm optimistic about being profitable in Q1 and for all quarters going forward."


Not only did he state that the company would be profitable in Q1 2019, but they would be profitable in perpetuity going forward. However, just four weeks later on his private "media call" Musk walked that guidance back, stating the following:


"Given that there is just a lot happening in Q1. And we're taking a lot of... sort of a lot of onetime charges and there's a lot of challenges getting cars to China and and Europe. We do not expect to be profitable in Q1."


So much for perpetual profitability, huh? Sorry Tesla fans, that dream of S&P 500 inclusion is going to have to wait (at least) another four quarters.


At least this guidance was honest - January and February sales data suggests that Q1 results will be abysmal. @TeslaCharts provided us with this visual showing what Tesla would need to do in March in order to hit Wall Street's consensus estimates - it's not pretty. (although TC's chart is):


On the topic of guidance, Musk also provided some guidance for production in 2019. He stated that Tesla would produce "between 420,000 and 600,000 cars in 2019." Bear in mind that, just days earlier, it was this same claim which caused the SEC to ask a federal Judge to hold Musk in contempt of his September 2018 securities fraud settlement stemming from his August 7th tweet stating that he was taking Tesla private at $420 per share, "funding secured" - a complete an utter lie and the most egregious case of market manipulation that I have ever seen. (anyone notice the pattern with these numbers?) His February 19th tweet was eventually corrected with the help of his (now former) General Counsel, Dane Butswinkas - who quit the following day.


Speaking of the SEC...


The SEC may take issue with this most recent guidance as well. Not only does it completely contradict Tesla's 10-K, the call itself was a blatant violation of Regulation FD (Fair Disclosure) which generally prohibits public companies from disclosing previously nonpublic, material information to certain parties unless the information is distributed to the public first or simultaneously. Since Tesla did not make the conference call publicly available and explicitly requested that those on the call "please do not publish the recording or transcripts of this call." it was a clear violation of Reg FD.


Luckily, "notorious" Tesla short seller Paul Huettner (@Paul_M_Huettner) managed to get a recording of the call, painstakingly transcribed it and posted it on Twitter for the World to see. I highly suggest giving Paul a follow and I want to personally thank him for publishing the transcript. You did God's work, Mr. Huettner.


This seemed to force Elon's hand and finally, on March 6th, a recording of the call was released by Tesla. Almost an entire week after the call took place. You can listen to it here. Elon, being the high character person that he is, blamed the "mistake" on Tesla Communications. Maybe the SEC will prosecute Tesla Comms for this one.

Mr. Musk will make his case to Judge Nathan on Monday, April 11th. However, after countless violations and essentially pissing on his SEC settlement at every possible opportunity, I believe she will hold him in contempt of the settlement - which could result in Musk being barred from being a Director or Officer of a public company - a punishment that is long overdue, in my opinion.


Conclusion


Elon Musk's closed-doors conference call on February 28th was expected to be full of good news regarding the release of the $35,000 Model 3. Instead, store closures, mass layoffs and negative guidance stole the spotlight. Additionally, the conference call itself could land Tesla and Musk in even more trouble with the SEC due to the violation of Reg FD, which the SEC takes seriously. It is more clear than ever that there are no adults left at this company to rein in Musk - and seriously, where is Tesla's Board of Directors? Well, at least I know where one of them is: preparing for "Plant a Seed Day"


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