An aerial view of the Tesla Fremont Factory on May 13, 2020 in Fremont, California.

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During a second quarter earnings call on Wednesday, Tesla CEO Elon Musk and CFO Zachary Kirkhorn told investors they hit an important milestone: four consecutive quarters of GAAP profitability. The electric vehicle maker stayed 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 hit $6.04 billion for the quarter, with about 7% of that, or $428 million, coming from sales of these credits.To put that in perspective, regulatory credit sales were greater than the company's free cash flow and amounted to four times Tesla's $104 million of net profit for the quarter.

Here's one way Tesla racked up these credits over the past year, according to Mike Taylor, president of the environmental credit brokerage and consulting firm Emission Advisors in Houston: selling them to other auto makers who want to avoid big fines.

In California, and at least 13 other states, any auto manufacturer who wants to sell their cars into that state must sell a certain amount of electric, hybrid electric or other zero emission vehicles (or ZEVs). Auto makers who are not selling these vehicles yet, or not selling many of them anyway, will buy credits from someone who is for compliance. Since Tesla only sells ZEVs, it doesn't need to keep the credits that it earns and can sell them before they expire.

Most states with a ZEV program in place plan to increase their requirements for eco-friendly cars for the next few years, so Taylor expects demand for credits to remain strong in the near-term. That should change dramatically, he cautioned, as other auto makers begin producing their own environmentally friendly vehicles in high volumes.

Prices for ZEV, and other types of regulatory credits, like greenhouse gas emission credits, are not typically disclosed. And environmental regulatory credits are not limited to the states, either.

Last year, Fiat Chrysler made adeal with Teslato comply with new European environmental regulations coming into play in 2021. In their most recentshareholderupdate, FCA disclosed that as of March 31, 2020, its agreements represent total commitments of 1.1 billion. FCA plans to use the credits it's buying from Tesla to stay in compliance through 2023, the filing said. The deal was a boon for Tesla. The Financial Times previously reported on FCA's deal with Tesla.

But a lack of transparency and pricing data around automotive regulatory credits makes it hard for shareholders to predict how sales of these will affect Tesla's bottom line in any given quarter.

Zachary Kirkhorn, CFO, Tesla

Source: Tesla

On Wednesday's earnings call,Tesla CFO ZacharyKirkhorn revealed that while Tesla expects to double its revenue from regulatory credits in 2020 over the previous year, bringing it above $1 billion, he expects regulatory credit sales to decline eventually. In 2019 Tesla sold around $594 million in regulatory credits, up from $419 million in 2018.

On the call, AB Bernstein's Senior Tech Analyst, Toni Sacconaghi, pointed out that even though Tesla reportedGAAP operatingmarginsof5%for the trailing 12 months, that number would fall below 1% without the sale of these credits.

The CFOresponded, "We don't manage the business with the assumption that regulatory credits will contribute significantly to the future." But in the same breath added, "I do expect for our credit revenue to double in 2020 relative to 2019. And it'll continue for some period of time. Eventually this will reduce."

Later, Musk said growing profits was not as important to him as making Tesla's cars affordable, and therefore accessible to a broader base of drivers.

"We need to not go bankrupt obviously that's important because then we will fail in our mission," Musk said during the earnings call Wednesday. "But we are not trying to besuperprofitableeither, if profitability is 1% or 2 %, it's not crazy. Last quarter it was only point one percent. So we want to beprofitable, but we want to be slightlyprofitableand maximize growth and make the cars as affordable as possible, that is what we are trying to achieve."

To that aim, Tesla is working to reduce the cost of vehicle production, especially batteries, and wants to make more money from software over time, executives said, namely the company's yet to be completed Full Self-Driving system.

Although their comments acknowledge regulatory credit revenue should decline in the not too distant future for Tesla, Musk and Kirkhorn are not saying -- and may not know -- just how fast that day will come.

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Tesla's sale of environmental credits help drive to profitability - CNBC