Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.
Tesla Motors and SolarCity share a lot -- Elon Musk, a focus on new energy technologies, and racy valuations. As of this week, they are both also touting efforts to live more within their means. It is a sign of the times.
SolarCity actually got with the program a few months ago when it said it would scale back growth in order to rein in costs. Yet its latest results, released Tuesday, showed that, so far, there's been progress on the slowing down front but not much else: Cash burn hit a new record in the fourth quarter. The stock is more than 50 percent below where it was in late October.
Tesla, whose own stock has fallen by a mere 32 percent in that time, must hope it can do better. It reported results a day later and said it will be cash-flow positive for much of this year. "Cash is king," its chief financial officer -- recently installed, like SolarCity's -- declared on Wednesday's call. But so is growth: Tesla plans to deliver between 55 and 74 percent more vehicles this year, as well as tee up the hotly anticipated Model 3 car and, of course, crank up the Gigafactory in Nevada.
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. And Tesla now has $1.2 billion of cash, with CFO Jason Wheeler saying $1 billion is "a nice comfort level" in terms of the minimum needed to run the business. Tesla says it won't need to access more outside financing this year. Yet it expects capital expenditure to be $1.5 billion, down only slightly from last year's level, as it sticks to the growth promises that underpin its flagging stock as well as some of the wilder Wall Street analyst price targets.
Like SolarCity, Tesla projects a relatively slow first quarter, guiding for just 16,000 deliveries. And, again like SolarCity, that means some real acceleration will be required in order to hit the annual target. Even at the low end, deliveries will need to average more than 21,000 in each of the next three quarters, which is 22 percent higher than the fourth quarter's record total. That isn't ludicrous speed: The roughly 17,500 vehicles delivered in the final quarter of 2015 were about 50 percent higher than in each of prior year's other three quarters. And the new Model X is only just beginning to reach customers.
In very crude terms, an extra 30,000 to 40,000 vehicles should mean $2.5 to $3.5 billion of extra non-GAAP revenue -- which, as so often with Tesla, kindles hopes that genuine profitability is just around the corner. The problem is that there is such scant evidence to date of any operating leverage. Revenue last year jumped by almost half, but the gross margin fell by roughly 4 percentage points -- and that is on a non-GAAP basis.
Tesla says this year that it expects operating expenses to rise by only 20 percent, again implying that the turning point is at hand. Yet, as problems with the Model X launch have shown, stuff happens when you are trying to reinvent driving. In one of the more memorable exchanges from Wednesday evening's call, Musk had this to say about some fiddly seals:
Yeah, the seals have been a huge pain. I mean, essentially the seals had to be redesigned, and then the seals that we did have had to be reworked by hand in order to sort of fit correctly. Yeah. Seals are a bane.
Indeed. Such mundanities are also the bane of frothy forecasts and share prices. Just like SolarCity, Tesla's new mantra of high growth alongside stringent cash and cost management is itself a signal that we may have reached a turning point -- in the market's patience, at least.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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