At the moment, we don't know the state of Tesla's production ramp...specifically, when will the factory achieve high volume production (more than 1,000 a month). We should hopefully have some signs of this in September as the sightings of Model 3's with VIN numbers that are significantly beyond this initial group will be telling.
The biggest factor for 2017 is the Model 3 ramp. That's because there is a production level of Model 3's that gets Tesla to cash flow positive from operations for Q4 2017. There's another level that gets them to GAAP positive in Q4 2017. There's no way they are getting to free cash flow positive in 2017. But the first two are still in play. Getting to a positive gross margin within Q4 is a significant step... from the shareholder letter:
Therefore the ramp is everything. If they get a sufficient ramp, they can stay ahead of the capex costs and they don't need additional cash to fund the initial Model 3 ramp. Here's a telling piece of the Q2 earnings call:
==========
Ryan Brinkman - JPMorgan Securities LLC
Great. Thanks for taking my question. Just thinking about your liquidity position, while you're operating with more cash than you historically have, $3 billion, I see you're also guiding the $2 billion CapEx in the back half, and you've previously said $1 billion of gross cash is as low as you're comfortable operating at. So are you guiding to positive cash from operations in the back half, presumably on the Model 3 ramp in 4Q. But if it's only a little positive, then I guess you would be close to your target at cash level.
So the question is, can you help us size up how positive do you expect the cash from operations to be in the back half? And if that level of cash from operations plus whatever remains available to draw on your asset backed line, if that's sufficient cushion for you relative to your $1 billion target? Or whether it might make sense to do another equity raise?
Elon Reeve Musk - Tesla, Inc.
Yes. Deepak, do you want to...
Deepak Ahuja - Tesla, Inc.
Sure. Sure, Elon. So we expect our operating cash flows to be significantly better in the second half compared to the first half.
Elon Reeve Musk - Tesla, Inc.
Yes.
Deepak Ahuja - Tesla, Inc.
At the highest level, scaling generates cash.
Elon Reeve Musk - Tesla, Inc.
Yeah. Absolutely, it does.
Deepak Ahuja - Tesla, Inc.
And it's a better situation than S and X. And our cash conversion cycle, particularly for the next four quarters, is going be really great while we're shipping Model 3s in North America. And...
Elon Reeve Musk - Tesla, Inc.
Yes. And one thing perhaps we're trying to get to it is, is that with Model 3, with our suppliers we've been able to get – negotiate much better terms, payment terms. But the payment terms are significantly longer. So I think we're close to...
Deepak Ahuja - Tesla, Inc.
Close to 60, exactly.
Elon Reeve Musk - Tesla, Inc.
Close to 60 days.
Deepak Ahuja - Tesla, Inc.
Right.
Elon Reeve Musk - Tesla, Inc.
Payments to those of our suppliers (43:21). And we were also able to make the car a lot faster. So obviously, the Nirvana is that we can make the car and get paid for the car before we have to pay our suppliers, which then the faster you grow, the faster your cash position grows. Obviously, that's like the – that's the promised land right there. And that's how – it's what we've aimed for. And I think we'll achieve that maybe not immediately but pretty quickly.
And now that said, there may be some wisdom in having a cash cushion for unexpected events. You just never know if there's going be some significant force majeure events in the world. It could be an earthquake in California, for example. But we're not at this point considering an equity raise. We are thinking about debt, but we're not thinking about an equity raise.
==========
Also, anyone that watches the TSLA stock chart knows that we are likely to bounce around a lot within a month, much less 4 months.
