Weird Reason for Tesla Earnings Beat

Jon Markman

About those Tesla (TSLA) earnings.

The electric vehicle maker reported second quarter financial results after the close Thursday. They were way better than expectations, sending the stock up 7% in after-hours trade.

Tesla had sales of $6 billion and a legitimate profit of $104 million.

The non-GAAP earnings were even more impressive, if you go for that sort of non-generally accepted accounting principles sort of thing. That number, wait for it, was $451 million in profits during the quarter.

In a letter to shareholders, Elon Musk explained how the firm reached profitability during a pandemic, with factory closures, delayed deliveries and a slowdown in orders:

“Our operating profit improved in Q2 despite challenging circumstances. Positive impacts included lower operating costs due to a temporary reduction in employee compensation expense, a sequential increase in regulatory credit revenue and deferred revenue recognition of $48M related to a Full Self Driving (FSD) feature release. These positive contributions were offset by significant costs related to factory shutdowns, as well as a sequential increase in non-cash SBC expense primarily attributable to $101M related to 2018 CEO award milestones.”

That’s not exactly making money the old fashioned way.

There are a lot of moving parts. For most car companies, not paying employees to not make cars is not a net positive. Then again, most car companies can’t sell expensive self-driving software after the fact. And they also can’t sell regulatory credits to other car companies.

The regulatory credit revenue stream is interesting. Some automakers make too many gas guzzling SUVs to meet government imposed emission regulations. So they buy credits in the open market to reach compliance. Tesla happens to earn of lot of these credits because it only produces EVs. The company earned $428 million worth of these credits last quarter, a big jump over the $354 million earned in the first quarter of this year.

It’s not entirely clear what companies ultimately bought these credits. However, Bloomberg noted last year that General Motors (GM) and Fiat Chrysler (FCAU) have been voracious consumers of these offsets in the past.

The sale of regulatory credits helped balloon non-GAAP profits to $451 million.

That’s a nice little business.