Thanks, NigelM, I look forward to it.
OK here goes; I have a background in large corporate management and leveraged financing but I'm going to keep this is as simple as possible (and apologies to anyone who thinks this is too simplistic)....
These are the Generally Accepted Accounting Principles (GAAP):
1. Revenue is the top line of your P&L and you subtract your costs until you have a net profit or loss.
2. Any business can easily sustain repeated paper losses so long as cash flow is sufficient to keep paying the bills. Sources of cash flow are many and include loans, deferring payment of expenses, cash from sales of course, and nice people who put down deposits against future purchases.
3. Deposits are not revenue as long as they are fully refundable. The company receiving the deposit hasn't provided any goods or services and has a liability to return the money if requested. However, as an interest free loan it is a nice additional source of cash flow.
Now in Tesla's case:
1. Q1 net loss of $79million (some of which may have been depreciation, taxes etc.), could simplistically be taken as Tesla burning through that much cash. Well, that's also not unusual in a company investing heavily in R&D (ever looked at Bio-Tech stocks?) as well as capital investments and short-term costs resulting from factory preparation.
2. However, Tesla finished the quarter with $387m cash available. So even if nothing changed and they didn't sell any Model S's they could carry on at the same rate for another 15 months or so. However, the R&D costs will decline significantly and the factory prep costs will fade; so even if the rate of Model S sales would be very slow and overheads weren't being amortized Tesla has enough cash to keep the business going for probably a couple of years.
3. Tesla does have a good deposit book and contracts for drive trains and other components as well as other sources of revenue, so suggesting that cash flow might be an issue is plain nonsense. It would be an issue if deposits were being reduced but revenue was not coming in.
The deposit scenario:
1. Tesla has $40k of my money as a deposit on a Model S. I now signed an MVPA for $100k and $10k of my money is now non-refundable. Tesla can take that $10k, book it as revenue and reduce the balance sheet liabilities (note that's important later on!).
2. Tesla delivers my car for $100k (minus the $10 already paid) and I pay them $60k plus the remaining $30k of my deposit. They can book the $90k as revenue and reduce their balance sheet liabilities by a further $30k.
3. Do this enough times and the P&L suddenly starts to look much healthier, losses are reduced. Do it on a ramped up scenario and they'll start to show profits.
Now how about those statements from JP and friends:
JP: The cash goes to the asset side of working capital and is offset by a short-term liability that's a good deal bigger than you assume. At March 31, the refundable reservation payments were $113.3 million. The biggest reason for the high number was that the reservation was $40,000 if you wanted one of the first thousand Signature Editions.
The reservation payments would not have impacted operating losses.
OK, thats fair enough. But then he says:
JP: They will, however, put a crimp into cash when a Signature Edition delivery creates $100,000 in revenue but only $60,000 in cash to pay the cost of building and delivering the car.
That's twisting things pretty ridiculously. Yes, they will book $100k in revenue, but they are receiving an
additional $60k in cash flow. JP suggests that Tesla only gets $60k towards the $75k cost of building the car but the reality is that the cost of the car includes fixed and variable overheads and Tesla has already used some of the $40k deposit to cover those costs. In P&L terms they are receiving $100k for the car and not $60k. Does it crimp cash flow? No because they have received an additional $60k! Depending on how Tesla actually accounts for all their overheads and fixed costs (this is where I don't want to get into too much irrelevant detail) they might end up reducing their currently available cash pile of $387m, but it's worth noting that holding too much cash is poor financial management, you really want to use it (invest in future business), pay down debt (give it back to DoE) or give it back to shareholders (dividends or stock re-purchases).
Then JP's sparring partner weighs in:
Poster: Simple math: the first 5000 vehicles they sell only net them $65 million, which isn't even enough to overcome the losses of a single quarter. Wow! That's worse than I thought.
Nonsense. Losses to date were driven by R&D...in other words a substantial amount of one-offs. Here's the note from
Tesla's Q1 shareholder letter:
Tesla: Research and development (R&D) expenses were $62.5 million on a non-GAAP basis. This 10% sequential increase in R&D expenses is due to our increasing investments in Model S manufacturing preparedness, process validation, prototype builds and extensive testing at both the car and component levels. Our manufacturing team has grown substantially in this quarter, in order to be well trained and prepared to produce high quality cars. Thus, a substantial portion of our R&D expenses are one-time investments in preparation for Model S production. We have consciously chosen to invest more when needed to reach our safety, quality and performance goals for Model S. This has enabled us to deliver our first customer cars ahead of the announced schedule.
A good point to note is that if Tesla continues such a high rate of R&D costs then they deserve to get beaten up; but you can read for yourself that many of the costs were incurred one-time. The post goes on:
Poster: I've always thought Tesla had a very small chance of making it, but I believed it wasn't as hopeless of a bet as some of the other DOE investments, merely because it was targetting a niche at the start... Now I'm not so sure that's true.
I had thought it ACTUALLY had roughly half of the working capital it claimed, as the other half was actually a debt based on reservation payments... but you're saying that essentially all of its working capital is reservation payments... Wow
Common sense says that if Tesla has $387 in cash at the end of Q1 and $113.3m in reservation deposits it's not actually possible that all of Tesla's working capital comes from reservation holders. Also, if your customers were giving you $100m as in interest-free loan wouldn't you use it as working capital? That's just smart business and Tesla has stated that they use deposits for working capital. That said, in reality it doesn't matter a fig where the working capital comes from so long as Tesla has liquidity. In their
spring 2012 investor presentation Tesla showed $493m of total liquidity.
You'd imagine that a reputable, financially savvy writer (journalist?) would correct those 2 pieces of nonsense that were posted in response to his article, right? Wrong:
JP: It's not going to be pretty. That's why I'm convinced they have to complete as stock offering this month. Come the end of June working capital and stockholders equity will both be under $100 million and the auditors will almost certainly force a *going concern* disclosure in the next Form 10-Q
At the end of Q1 Tesla Total Stockholders Equity was $154.8m; Q2 will probably not be pretty but JP ignores that costs will come down (see above on R&D and factory prep costs) and that as reservation payments become converted to revenue then liabilities will be reduced (remember back earlier in this post?), thereby improving the balance sheet. I very much doubt that Stockholders Equity will fall below $100m (as if it actually mattered BTW). Tesla had an end Q1 working capital of $123.2m but also noted in their Form 10-Q in May that:
Tesla: Net cash used in operating activities was $50.1 million during the three months ended March 31, 2012. The largest component of our cash used during this period related to our net loss of $89.9 million, which included non-cash charges of $10.7 million related to stock-based compensation expense, $4.2 million related to depreciation and amortization and $2.6 million related to inventory write-downs and adverse purchase commitments.
So does anyone other than JP care that working capital might fall below $100m? Tesla has plenty of room to play before anything gets critical.
Finally, JP's "going concern" comment is really scaremongering. Sure auditors must look at this especially in a company with heavy investment costs based on future revenue; but Tesla has enough cash in hand even if losses continued unabated for 12 months, and they have plenty of liquidity moving forward, plus they have a reservation list of some 11,000 people waiting to buy their cars as well as future contracts with Toyota and Mercedes. The only disclosures or risk warnings necessary will be those that are already in the public domain.
In short, Tesla has plenty of cash and liquidity even if losses continued at prior levels (which they shouldn't), they have a great potential income stream, and they have so much cash in hand it's not surprising it's been floated that they could start early repayment of the DoE loans. Is there risk in here? You bet, it's been heavy upfront investment and there are all sorts of things that could go wrong. Q2 might not be pretty, but just wait for Q3 and I suspect we'll all be smiling.
