Autos

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.

Pie, anyone?

Tesla Motors CEO Elon Musk put out the call a couple of months ago to "throw a pie in the face of all naysayers on Wall Street" -- and the company delivered.

On Wednesday evening, Tesla turned in positive earnings per share for the first time in a couple of years. It even reported positive free cash flow of $176 million, the first time that line's been in the black since the last quarter of 2013. Even vehicle deliveries were actually slightly higher than Tesla's preliminary figures. As you might imagine, the stock's many short sellers took a shellacking in after-hours trading.

Wipe the pie from your eyes, though, and some interesting details in the numbers make you wonder whether, even with another company-wide email from the boss, Tesla can sustain this.

Look at free cash flow. Start with the fact that Tesla even reported it as a separate line item in Wednesday's release, something it had stopped doing since the fourth quarter of 2015, when the trailing quarterly burn rate was about half-a-billion dollars.

Back in Black
Tesla swung to positive free cash flow in the third quarter
Source: Bloomberg, the company

The latest quarter's operating cash flow of $424 million was easily Tesla's best ever, which the company put down to higher vehicle sales and cost discipline.

There were likely some other things at play, though. One was a spike in revenue from the credits that Tesla earns for selling zero-emission vehicles to $139 million, up from virtually nothing in the second quarter and more than triple the level of a year ago. Barclays estimates the gross profit margin on these at 95 percent. Given net income overall of $21 million, revenue from selling those credits likely played a big part in getting to that positive GAAP earnings number, too.

Another was a spike in Tesla's payables and accrued liabilities, mostly trade payables the company owes but has yet to pay (in cash). Here's how they have moved around:

One of These Quarters is Not Like the Others
It looks like Tesla's suppliers had to wait a bit longer than usual to be paid in the third quarter
Source: Bloomberg, the company
Note: Data show quarter-on-quarter change in Tesla's accounts payable and accrued liabilities rather than absolute level outstanding.

Granted, Tesla's cost of goods sold is rising, so payables should go up. Still, these accrued liabilities were equal to 38 percent of Tesla's cost of goods sold in the three months, versus 15.5 percent for the prior four quarters combined, according to figures compiled by Bloomberg. That's a big shift.

Tesla also had an unusually good quarter in terms of cost management (as Musk demanded). Here are how two big cost items -- selling, general and administrative expenses and research and development -- have moved as a proportion of revenue:

Latest Squeeze
Overhead and R&D hit their lowest level as a proportion of revenue since the first quarter of 2013
Source: Bloomberg, the company

The final clue that free cash flow will turn negative again in the current quarter is less of a clue and more of a straight disclosure from Tesla. Capital expenditure for the third quarter was $248 million, about a third of the consensus estimate, according to figures compiled by Bloomberg. Yet Tesla's new, reduced guidance for the full year still implies it will spend north of $1 billion in the final three months of the year, or 58 percent of the annual target -- so the spending will be somewhat back-loaded, then.

Even if Tesla repeated the last quarter's blowout operating cash flow, that would imply it reporting its highest level of cash burn ever in the fourth quarter, at north of $600 million.

To be clear, better cost management, higher gross profit margins and getting better terms on payment from your suppliers are exactly what any company ought to be achieving. As Tesla's revenue grows -- and it almost doubled compared to the prior quarter -- it should show evidence of operating leverage. 

Yet does it really make sense to extrapolate from the exceptional numbers delivered in a quarter where the CEO specifically demanded herculean efforts ahead of potentially raising more capital?

On that front, Musk continued on Wednesday evening's call to take a will-we-won't-we stance on whether Tesla will come back to the market for more money, saying it currently isn't necessary. Given the impending launch of the Model 3 -- on which there was still no update for pre-order numbers -- and the likely impending merger with SolarCity, it is hard to see how further equity issuance can be avoided.

 So eat up your pie. There may not be another helping for a while.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net