CEO Elon Musk To Tesla CFO: “Cash Is King” In 2016

2 years ago by Jay Cole 40

Tesla Will Use An Asset-Backed Line Of Credit To Preserve Cash Levels In 2016

Tesla Will Use An Asset-Backed Line Of Credit To Preserve Cash Levels In 2016

After the most recent quarterly report (Q4 2015 – details/recap), a new air of conservatism is in the air at Tesla Motors.

In the last quarter of the year, Tesla reported a loss of $320 million dollars and $889 million lost for the year, which lessened the company’s cash on hand to about ~$1.2 billion dollars.

Construction Of Tesla's Gigafactory Will Consume Part Of An Estimated $1.5 Billion Worth Of New Investments In 2016

Construction Of Tesla’s Gigafactory Will Consume Part Of An Estimated $1.5 Billion Worth Of New Investments In 2016

Truth be told, going through money fast is nothing new for the company.  The cash goes down pretty much every quarter, but thanks to its standing with investors and the market at large, raising new capital has never been any issue at all.

However more recently Tesla’s financial image, and market cap, has taken a bit of a hit indicating it might not always be so easy to acquire capital.

Not to say a $21.8 billion valuation (as of Thursday’s close) is anything to sneeze at; and there is still plenty of options on the table to raise additional funds today, but the fact the market cap was at $37.5 billion just last summer, means that the company now needs to protect both its image, and its cash on hand, to a much greater extent.

So it was little surprise that Tesla’s new CFO Jason Wheeler stressed better cash-flow management on the conference call after the report last week.

Wheeler said that the cash situation would improve in 2016, even as Tesla invests a further estimated $1.5 billion into its infrastructure.

“My mandate from Elon is clear,” said Wheeler, “Cash is king.”

A good bulk of the conservation on Tesla’s cash pile (and the conservation of it) is still predicated on the company selling between 80,000 and 90,000 Model S and X vehicles, and at a margin of up to 30% and 25% respectively.

A Major Point In Tesla's Plan For Profitability In 2016 Is The Sales Of 80,000+ Electric Vehicles

A Major Point In Tesla’s Plan For Profitability In 2016 Is The Sales Of 80,000+ Electric Vehicles

Wheeler described a “nice comfort level” for cash around $1 billion, and in the short term in order to maintain that level the company will draw on a revolving credit line (backed by company assets), as it waits on deeper sales at higher margins.

Tesla noted in its 2015 report that the company will turn a profit in 2016 based on non-GAAP accounting, but also based on generally accepted accounting principles by the 4th quarter as well.  Basically, Tesla is going to keep burning at a decent pace for another 6-7 months, and then hopes to be more self sufficient.

Besides gearing up for Model 3 production in 2016, the company will continue to pour money into completing construction on this phase of its Gigafactory project in Nevada. Additionally, the company will open 80 more boutique stores and 300 further Supercharger stations.

Automotive News

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40 responses to "CEO Elon Musk To Tesla CFO: “Cash Is King” In 2016"

  1. Brian says:

    Maybe this was a reason the CPO cars available went from 400+ to about 100 in the last couple days? Sell off in bulk with no CPO tag on them to wholesale and not have the trade-in money sitting around doing nothing besides going down in price.

    1. Tech01x says:

      it looks like they pulled a slew to be service loaners instead.

    2. Nix says:

      I doubt they wholesaled them off, if they did we would see 300+ increase in the number of units on cars.com and/or ebay.com

      What is more likely is a repeat of the Roadster sell-off phenomenon when the Model S got a ton of buzz. Roadster prices had been dropping, and Tesla had a number of units on their Roadster CPO site. Then Tesla started getting serious about the Model S, and Roadsters started disappearing off of cars dot com website and ebay, and the Roadster CPO site eventually went away. Now prices on used Roadsters are higher than what they were before the Model S went on sale.

      I said months ago that the best time to buy a CPO Model S would be between Christmas and tax season, before the Model 3 release.

  2. pjwood1 says:

    True. But many will also look at those 80 extra stores, and 300 extra SC stations, and judge “operating” cash flow net of their 2016 effects.

    The pessimists need their fodder.

    1. Three Electrics says:

      Stores and superchargers don’t cost any money, really. Factories, tooling, and R&D costs are the big ticket items. I would estimate that payroll alone is roughly $500 million a quarter.

      1. Three Electrics says:

        That’s about $30K per car sold in payroll, if you assume 16K cars per quarter.

        1. jerryd says:

          3Electrics, if it is $30k/car labor someone is completely wrong.
          Unlikely to even be $10k labor/car. And only that because near everything is made in plant.
          Most car makers have less than 20 manhours building a car.

          1. zzzzzzzzzz says:

            Tesla is reported to have 12,000 employees and obviously not all of them work on minimum wage. They need to go into mass market to reach 20 manhours per car and become profitable. That is if you include everything, not just final building.

        2. EVguy says:

          I think you have an extra 0 in your math… 10,000 employees @ $40,000 USD per year (~$20/hr) -> $400M per year, or $100M per quarter. That is a high estimate imo, I doubt the average salary is $20/hr

    2. sven says:

      Have you even looked at the cash flow numbers net of capital expenditures? Tesla is burning through cash even when capital expenditures are not factored into cash flow.

      For the 4th quarter of 2015, cash from operations less capital expenditures was negative $440 million. For 2015 overall, Tesla burned through $2.16 billion of cash, more than double the cash it burned through in 2014, and more than double the “less than” $1 billion Tesla’s former CFO projected last year during the 4th quarter conference call.

      The analysis of cash flow in the Bloomberg article linked below is spot on. But one thing the author neglected to mention is the significant positive affect on cash flow for 2016 that the Model 3 deposits will provide; in essence the deposit’s are an interest-free loan to Tesla.

      Here is the analysis of cash flow from the Bloomberg article:

      “A big red flag is how Tesla measures cash flow. High up in the shareholder letter released Wednesday, the company touted ‘$179 million of positive cash flow from our core operations defined as cash flow consumed in operations of $30 million plus cash of $209 million received from vehicle sales to our leasing partners’ — a definition of positive cash flow that looks as engineered as those troublesome ‘Falcon Wing’ doors on the Model X.”

      “In response to a question on Wednesday evening’s call, Tesla confirmed this figure is flattered by the cash Tesla receives under an asset-backed facility to finance some vehicle deliveries — or ‘short-term borrowing,’ as most other people might call it.”

      “In reality, Tesla actually burned through less cash — when defined as cash from operations less capital expenditure — in the fourth quarter than in the third. Which makes it odd that the company chose this quarter to stop reporting free cash flow as a separate line in the shareholder letter. Perhaps it is because, even with the slower pace, the number was still negative to the tune of $441 million.”

      “Overall, Tesla burned through $2.16 billion of cash in 2015. That is more than double 2014’s amount and, since we are on the subject of guidance, also more than double the “less than” $1 billion Tesla’s former CFO projected this time last year.”

      “Over the course of 2015, long-term debt, net of cash, virtually tripled to $1.44 billion.”

      1. sven says:

        Bloomberg article link:

        http://bloom.bg/1Rt3pTT

        1. Big Solar says:

          haha, thats pretty Fuddy. Now lets look at GM….. uhhhh….

        2. Bill Howland says:

          Sven, please explain to the rest of us how Tesla can be short so much cash when they claim 25 or 30% profit margin ex Capex.

          1. DonC says:

            That’s gross profit on the car. IOW the variable cost of making the car. When you add in the other costs the margin goes negative. Plus there are the development costs and so forth.

            The other key is the use of the term “non GAAP”. GAAP is what most people think profit is. Non-GAAP is what you use when you’re not profitable but want to tell an alternative story. Companies with big capital investments will use EBITDA — earnings excluding interest, taxes, depreciation, and amortization — to emphasize cash flow.

            Basically when you don’t like reality you create an alternative reality. LOL Depending on the situation this might make sense. Or not.

      2. Tech01x says:

        In early 2017, the GAAP rules will change wrt lease accounting and so the deferred revenue handling will have a more favorable treatment.

        Expansion was recently completed, so naturally cash use was high in advance of higher revenues.

        The ABL makes a lot of sense, especially in comparison to other automakers where finished good inventory is moved off the balance sheet into dealership balance sheets at an earlier juncture than Tesla’s model. Quite a few people still have real trouble understanding the difference with Tesla’s business model than other automakers as well as the way cash is consumed or needed.

  3. SparkEV says:

    Hmm. Market cap is half of GM? That’s a scary thought. Also scary is that reserve would last 1.5 years at burn rate. If there’s any kind of downturn in economy, it’s going to be much scarier in raising money. I hope they make it. I want to drive Model 3 someday.

    1. Pushmi-Pullyu says:

      Is borrowing more money really going to cost Tesla that much, with the Fed setting interest rates at only 0.5%?

      That’s not a rhetorical question; I’m not a “finance guy” and I’d like to know the answer.

      Yes, I understand that if Tesla is perceived as not doing so well, it will become harder to borrow money, and so they’ll have to pay higher interest. What I don’t know is just how much impact this will have on its cash flow.

      Tesla has committed to ramping up production of the Model ≡ very steeply, to reach overall production of all its cars to 500,000 by 2020. Given Tesla’s history of delays, we can guess that might well be delayed to 2021 or even 2022.

      Tesla will require huge capital investments to get to that level of production. To get the money for that, my understanding is it will either have to borrow or issue more stock. The rate at which Tesla’s debt is increasing is already a concern to at least some analysts, and assuming Tesla continues its current plan, that’s going to get very much worse over the next 3-5 years.

      Now, that’s not to say that I think Tesla is in trouble. As I understand it, Amazon.com followed a similar path to become the world’s largest retailer, and I think most people will agree it is a huge success. So I think there is at least the possibility that Tesla can pull this off, growing its output to nearly 10 times last year’s level over 3-5 years.

      Tesla has succeeded multiple times at doing what the vast majority of financial analysts said they couldn’t, and now it seems to me (my opinion only) the consensus is that they likely can pull this off, altho perhaps not as quickly as Tesla plans for.

      Responses from anyone who is not a biased Tesla basher will be appreciated.

      1. Heisenberght says:

        As you probably already know I am biased in many ways 😉

        This time I agree with you that at an interest rate of 0.5% Tesla should in fact borrow as much money as they are allowed to and with that money increase:

        Most importantly supercharger growth rate. Having the best and biggest network worldwide will be a strong argument to base market strength on. I don’t know what currently limits growth rate of the supercharger network, but if they can somehow increase they should. In the worst case scenario this network could even be sold in order to survive… In the best case it will have a huge impact on the demand for all following models. Part of the money spent on the network should be regarded as marketing budget.

        Car output. Build yet another assembly line. While a third shift would also be possible I guess that this would reduce margin due to night payment… Added assembly line would also decrease risk of down times and allow for a test bed for increase of degree of automation.

        Increase degree of automation. Always good 😉

        Increase efforts on gf. However I don’t think that this is the most important. Model 3 is far enough in the future to first focus on the supercharger network. My advise – for 2016 fee investment into gigantic factory. Just enough to catch a big chunk of the stationary storage market. And maybe another cheap empty shell 😉 you know… marketing 😉

        If cash is king, they should do as much as possible to increase demand for model 3 as reservations will be free loan as you already stated.

        They should also anounce a preliminary buildout plan for the network. People who are interested in model 3 will want to know if a supercharger is planned in their region. A detailed – while preliminary – plan (covering the years till projected 3 release into the wild)would be cheap to produce 😉 maybe some fancy animation on the homepage… Think marketing…

      2. Heisenberght says:

        Just some additional thoughts on the SC network: maybe they can start to present the company on being bullish in respect to buildout. Something like: build as many 2 stall chargers as possible within a short time span – best before 3 reservation day – tough call he he he… I guess it takes longer to get permission to build… A lot of places marked as “in construction” really can impress people. Maybe there are ways to get fast permission in not so developed countries ;-)- and already prepare those locations for lots of additional stalls. Groundwork is not too expensive in comparison to SC hardware. This will show something like :”we are prepared to serve you!” and “we expect huge demand” and “we are also coming to your country” (maybe place some planned markers in India)

        Maybe they could also start to place some fancy illuminated Tesla logo on a high post at every SC location. That would increase brand awareness… (of course I personally prefer a simple red laser beam pointing straight into the sky integrated in each supercharger. …of course pulsed and thereby sending out a friendly message to ET )

        A huge demand for 3 can not be under estimated. The success of the “1-2-3 billion Tesla weeks” depends on it.

        Maybe they can even break the rule and do a one time 0.5 second TV spot. One day coordinated on many programs. Flash. Black screen. Tesla logo. “Model 3” (with dark toned voice) Flash. In 5years People will say: I saw the “Tesla flash. The only spot they ever sent”

        They should also announce an optional solar roof for the 3. (I know we disagree on that point…) that announcement will say nothing about the price nor the power rating. Regular People don’t care! There is no way Tesla will not be able to finally present some solution in 2018-2023. Even if that option will be very expensive and not worth the money. Such an announcement would surely attract some additional reservations – money! And it would further strengthen the positive image of Tesla. The more the people talk about Tesla before reservation launch the better. People will have even more of the “Tesla is the first to do it ” impression (no matter if true)

        Tesla should bite every way to get public attention before reservation launch!!!

        Regarding the “real life” supercharger situation Tesla should work hard on reducing the cost for the SC hardware. Automation?? Maybe still too few units… Maybe one engineer for partial auto. Heck they will find a way. Increase output. Need positive news…

        Maybe add more options (the more options – the better) wireless charging, “the snake?”, camera rear view (it’s the regulators fault we could not deliver…) ,something fancy, cool stuff, 33 colors, night vision, thermal camera, original kitt turbo boost, Tesla watch (with voice recognition “get me out of here kitt”), flux capacitor (of course I mean ultra capacitor), some gimmick for people who have pets… Heck there is so much to talk about… maybe it’s time to get more non techies into the discussion… I expect at least one tweet a day until launch. 😉 maybe someone could call on someone and later both shake hands or hug and cry (with tears) drama drama drama baby. Sex. Maybe the Pope can say something about ice. Time is running up! Drama! Old (deaf ) woman with kitten driving around a Tesla in the city for hours (because she can’t hear the sirens…) gets ticket for driving too slow…

        Non techie attention! Good night and goodbye.

      3. Heisenberght says:

        And here comes my favorite: “Elon Musk personally delivers a Model X to a jobless, homeless engineer just to say thank you for working in my marketing team at 3 a.m. and then he additionally sponsors some lousy 500000 bucks (or more) to make this poor long haired, bearded guy s dream come true to set up a business to build Tesla based caravans (WITH SOLAR ROOF) just because he – more or less accidently – read his comments on the best ever ev-related homepage on the arpternet.”

        Fairytale land here I come 😉

      4. zzzzzzzzzz says:

        As you understand, they don’t borrow at 0.5%. That 0.5% is just extra, and small part of risky business loan e.g. at 7%. The question is can they get regular business loan for further expansion at all. What collateral can they offer to the bank for the case company goes down? Sure they can get something for limited purpose, but not just for anything. Venture capital rates may be 10-50%. So you are left with further share selling – and they still can be sold at bubble price even if it went down somewhat with general market downturn.

        1. Pushmi-Pullyu says:

          You’re describing Tesla as a “bubble”? Last I looked, they were making a very popular, extremely highly rated product.

          This sort of rubbish is precisely why I indicated I did not want any replies from biased Tesla bashers like you. Your post merely distracts from meaningful discussion… which perhaps was your intent.

          1. PVH says:

            He is not writing that Tesla is a bubble, he is saying the stock price is. That is an opinion not at all uncommon amongst Tesla enthusiast who thinks a “bubble” situation is not making Tesla a favor as unrealistic expectations can lead to unnecessary sudden loss of confidence and that slower growth is fine as well as it often means stronger foundations. So if it happens it is just an opinion you do not share bullying is not needed.

            1. Pushmi-Pullyu says:

              You’re right; he did specify “further share selling”. I didn’t realize “share” meant “stock” the first time I read that.

              My apologies to zzzzzzzzzz for my comment above. His posts about Tesla are usually anti-Tesla basher posts, but not this time.

  4. Rebel44 says:

    Would it help, if they get many (200K) Model 3 deposits in 2016?

    1. Mike I says:

      It would help their cash situation but not their profitability. It’s not adding profit because it’s not revenue. The cash is offset by a liability to either offset future revenue or return deposits.

      Giving a deposit for a Model 3 is like giving Tesla an interest free loan of $1,000.

      I’m in.

      1. RexxSee says:

        +1000 more here!

    2. Alaa says:

      If only 200 k put a deposit of $1000 then I will be disappointed! I think that 1 million reservations world wide is a minimum. This will translate to 1 Billion dollars of an interest free loan.

      There is another big giant called storage that is just beginning to wake up. So yes Tesla will have a lot of cash; and very quickly too.

      1. Pushmi-Pullyu says:

        A million units would be appreciably higher sales than the world’s best-selling model of gasmobile. I don’t think that’s at all realistic.

        I’ll be surprised if Model ≡ reservations top out much in excess of 200,000.

    3. Pushmi-Pullyu says:

      A very large number of deposits will help Tesla borrow more money at a favorable rate, because that will help give the company a positive business outlook.

      As someone pointed out in a comment to an older article here, it will also help Tesla when negotiating with suppliers, in that it will help Tesla convince them that they really do need a high volume of parts. And with high volume comes lower per-unit cost, which will help Tesla negotiate a more favorable contract.

  5. Alan says:

    I would imagine that once the gigafactory starts churning out Powerwall’s (reportedly Q2 2016) this would have a positive impact on cash flow also as one must assume they will be selling these at a profit which will contribute (and yes, as a Chartered Accountant, I do know the difference between cash flow and revenue !).

    As someone pointed out above, the model 3 deposits will greatly help cash flow too.

    Watch the stock price climb later this year !

    1. ToMarsAndByond says:

      Powerwalls and packs are already produced at the Gigafactory.

  6. ffbj says:

    Memo:
    CFO to Elon: Urgent: No more unicorns dancing in the rainbow fountains in Tesla plaza, and sky diving clown team* musk go.

    *editor’s note:
    The clowns are named T-E-S-L-A.

    1. ffbj says:

      An e-mail just popped up indicating that the actual name of the team of talented sky-divers is the ‘Precision Sky-Diving Clown Team’.

      I wish to apologize to that bunch of clowns for my error.

  7. Get Real says:

    Whut? Have you been drinking ffbj?

    1. V. Bowman says:

      Brings back memories of Llamas in the opening credits for Monty Python’s ‘The Holy Grail.’

      1. Pushmi-Pullyu says:

        Beg pardon? None of my one-headed cousins were referenced in that movie!

        I think you mean moose, or “møøse” as they were described in the credits in question.

    2. ffbj says:

      j/k trying to be funny.

  8. Mister G says:

    Stop the worrying…Tesla will be fine and profitable in a few years, Tesla after all is a transformational company.

  9. Terry Kidd says:

    Undoubtedly the 1000 USD reservation fee for Model 3s, coming up end of March will be very heavily subscribed. This should help Tesla’s cash flow more than a little AND send a huge signal to the rest of the world, those not reading blogs like this, that the day of the e-car is at hand.