Cash Balance Rollfoward

[ValueAnalyst]

Tesla's cash balance has varied between $3.0B and $4.0B in 2017 vs. its self-imposed minimum of $1.0B. As of September 30, Tesla had $3.5B of Cash on Hand, which means the "excess cash" balance was $2.5B, or comfortably enough to cover its planned CapEx to bring Model 3 to 5,000 per week by March/April of 2018, and maybe even push it further to 10,000 per week by end-18, as per management guidance, this could be achieved with "almost no" CapEx:

"... some of our manufacturing areas we're actually seeing capabilities that we estimate in the 6,000 unit to 7,000 unit per week capability, well in excess of the 5,000 unit capability and we're optimistic with further optimization that many of our production processes will meet very little and in some cases no, so I'm not saying no, but almost no CapEx to reach something close to 10,000 units a week."

Having said that, Tesla has proven its capacity to raise growth capital, even at earlier stages of its evolution as a company, but significantly more so in recent months. As we know, Tesla's bond debut in 3Q17 was its first foray into non-dilutive debt capital markets, which has significant implications as I discussed here (tl;dr: lower discount rate); but more importantly, Tesla has the ability to raise billions of dollars in interest-free capital through product reveal events. You can see how the TMC community voted on deposit estimates here, here, and here, and my personal expectation for deposits by product line from October 2017 through December 2018 (15 months) are $1B in Roadster deposits, $2B in Semi deposits, and $2B in other (Model Y, pickup truck, TE, and other) deposits, for a total $5B+ in interest-free cash inflow throughout the 15-month period indicated.

In addition, Tesla's Total Asset balance has grown by $5B from $23B at December 31, 2016 to $28B at September 30, 2017, and the pace of growth will increase in 2018 due primarily to: (i) accelerated pace of CapEx adding to PP&E balance, (ii) "negative cash cycle" of the Model 3, which I explained here (tl;dr: Tesla collects receivables 30 days quicker than it pays suppliers, so growth leads to cash accumulation); and (iii) improving bottom-line and GAAP+ quarters in 2H18, which I discussed here (tl;dr: operating leverage inherent in auto manufacturing will lead to quicker revenue growth than expense growth throughout 1H18). All of these significantly increase Tesla's "capacity to borrow" non-dilutive debt capital.

Let's put all of this together: $3.5B Cash on Hand - $500M negative operating cash in 4Q17 - $1.0B in 4Q17 CapEx + $1B in Semi/Roadster/TE 4Q17 deposits + 500M 4Q17 securitization = $3.5B Cash on Hand at December 31, 2017 + $500m in 2018 net income primarily due to operating leverage + $4 billion in Model Y/Pickup and additional Semi/Roadster/Other deposits - $4B in 2018 CapEx + $4B non-cash depreciation and amortization add-back = $8.0B Cash on Hand at December 31, 2018, before additional borrowing. Even if Tesla triples its self-imposed minimum cash balance requirement to $3B in 2018, this could mean an excess cash balance of $5.0B at December 31, 2018.

These numbers are preliminary estimates based on management commentary and my estimates that I wanted to share in order to start off further discussion. I look forward to reading your input, thoughts, criticism, and grudges. Don't hold back!

 

[schonelucht]

Few quick remarks. $5B in deposits is too optimistic. I don't think we'll see a pick up truck and if we have the Y revealed, I expect deposits to be in the same order of magnitude as for the M3. Majority of deposits for the Semi and founder have already been received. Neither founder's series sold out yet. Additional deposits on those product lines after Q1 will more or less balance deposit draw down on the M3 (assuming delivery rate picks up as planned, but if not, we have bigger issues).

Don't forget planned $1B capex in Q4. $4B non cash-depreciation and amortization seems high but with the Gigafactory in full use, it might be plausible. $4B capex is also too high. Future gigafactories haven't yet been announced and capex spending seems to concentrate at the end of the construction cycle so 2019 at the earliest.

Is there already news about Q4 securitizations? What about resale value guarantees? I don't know really : they may be mouse nuts by the end of Q4.

Anyway, the more interesting number is cash in hand by end of Q1. If there is a cash problem by the end of 2018, then there is something wrong with the M3 big time and all this relatively unimportant. I think that's where we agree most : if M3 ramp up goes as planned, Tesla should have no trouble making a healthy call on the debt market.

 

[ValueAnalyst]

Few quick remarks. $5B in deposits is too optimistic. I don't think we'll see a pick up truck and if we have the Y revealed, I expect deposits to be in the same order of magnitude as for the M3. Majority of deposits for the Semi and founder have already been received. Neither founder's series sold out yet. Additional deposits on those product lines after Q1 will more or less balance deposit draw down on the M3 (assuming delivery rate picks up as planned, but if not, we have bigger issues).

Don't forget planned $1B capex in Q4. $4B non cash-depreciation and amortization seems high but with the Gigafactory in full use, it might be plausible. $4B capex is also too high. Future gigafactories haven't yet been announced and capex spending seems to concentrate at the end of the construction cycle so 2019 at the earliest.

Is there already news about Q4 securitizations? What about resale value guarantees? I don't know really : they may be mouse nuts by the end of Q4.

Anyway, the more interesting number is cash in hand by end of Q1. If there is a cash problem by the end of 2018, then there is something wrong with the M3 big time and all this relatively unimportant. I think that's where we agree most : if M3 ramp up goes as planned, Tesla should have no trouble making a healthy call on the debt market.

Thanks for the feedback! Quick responses:

1. I think Semi deposits will snowball throughout 2018 as Tesla executes on production milestones and commercial clients make reservation decisions more conservatively and slowly than consumers. Just 100,000 reservations, which approximates one-fifth of U.S. annual Class 8 truck sales and one-twentieth of global annual sales, would amount to $2 billion.
2. I expect Customer Deposits balance for Model 3 to remain stable throughout 2018 as Tesla ends anti-selling and as FSD demonstration draws further interest.
3. The planned CapEx of $1.0B for 4Q17 is in the rollforward.
4. I agree that $4B CapEx for 2018 is too high, but that was management guidance in the last call. EM said something around 2018 CapEx being similar to 2017. I agree with you that it's too high given the information that we have, so maybe it means there will be something we don't know... I agree with your 2019 timing estimate for increased CapEx for subsequent Gigafactories, so maybe accelerated expansion at GF1 and GF2? We'll see.
5. Yes; here's the news about 4Q securitization: Tesla Is Planning $340 Million Securitization With Solar Contracts
6. I agree that securitization will play a decreasing role going forward.

Thanks for the feedback.

 

[comanchepilot]

seems to me like with cash like that on hand they're worth more taken over and broken up and the business closed out. . . .essence of corporate raiding.

 

[ValueAnalyst]

seems to me like with cash like that on hand they're worth more taken over and broken up and the business closed out. . . .essence of corporate raiding.

I don't think Tesla's market capitalization would remain at $50 billion in 2018, if the math plays out as I laid out.

I'm guessing you lived/invested through the late 80's? Wall Street (1987 film) - Wikipedia interesting times...

 

[MitchJi]

esla's cash balance has varied between $3.0B and $4.0B in 2017 vs. its self-imposed minimum of $1.0B. As of September 30, Tesla had $3.5B of Cash on Hand, which means the "excess cash" balance was $2.5B, or comfortably enough to cover its planned CapEx to bring Model 3 to 5,000 per week by March/April of 2018, and maybe even push it further to 10,000 per week by end-18, as per management guidance, this could be achieved with "almost no" CapEx:

"... some of our manufacturing areas we're actually seeing capabilities that we estimate in the 6,000 unit to 7,000 unit per week capability, well in excess of the 5,000 unit capability and we're optimistic with further optimization that many of our production processes will meet very little and in some cases no, so I'm not saying no, but almost no CapEx to reach something close to 10,000 units a week."

They did not guide for almost no cap except in some production areas and Elon did not specify a percentage.

I believe it’s a valid but exaggerated point though because the market hasn’t figured that out correctly.

Quick remarks. $5B in deposits is too optimistic. I don't think we'll see a pick up truck and if we have the Y revealed, I expect deposits to be in the same order of magnitude as for the M3. Majority of deposits for the Semi and founder have already been received. Neither founder's series sold out yet. Additional deposits on those product lines after Q1 will more or less balance deposit draw down on the M3 (assuming delivery rate picks up as planned, but if not, we have bigger issues).

I agree that counting the MY and pickup is premature.

 

[30seconds]

I think Y comes out soon after 1. Model 3 above 3000/ week and 2. New GF announced. I think deposits will be greater than the 3.

Just one other item - the $1B minimum cash isn't exactly a self-imposed number. Its part of a "Going Concern" calculation done by the companies and external auditors, with the company having the goal of not being labeled a Going Concern by the auditors. This usually means you have sufficient cash on hand for the next 3 to 4 quarters.

 

[ValueAnalyst]

I think Y comes out soon after 1. Model 3 above 3000/ week and 2. New GF announced. I think deposits will be greater than the 3.

Just one other item - the $1B minimum cash isn't exactly a self-imposed number. Its part of a "Going Concern" calculation done by the companies and external auditors, with the company having the goal of not being labeled a Going Concern by the auditors. This usually means you have sufficient cash on hand for the next 3 to 4 quarters.

Thank you for sharing your views. I was an auditor at a Big Four firm ages ago, and I'm not aware of a minimum cash balance requirement for Going Concern determination. AFAIK, it's more of a qualitative determination than rules-based quantitative determination: AU 341 The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern

If anything, it would be debtors who would require the company to hold some cash, in addition to other positive or negative covenants, but I'm not aware of a minimum Cash and Cash Equivalents balance requirement for Tesla.

 

[30seconds]

Thank you for sharing your views. I was an auditor at a Big Four firm ages ago, and I'm not aware of a minimum cash balance requirement for Going Concern determination. AFAIK, it's more of a qualitative determination than rules-based quantitative determination: AU 341 The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern

If anything, it would be debtors who would require the company to hold some cash in addition to other covenants, but I'm not aware of a minimum Cash and Cash Equivalents balance for Tesla.

Its supposed to be a reasonable amount of time not to exceed one year. The large audit firms I have worked with have been consistent with their interpretation of 3 to 4 quarters while we were cash flow negative.

 

[ValueAnalyst]

I note that when I concluded my original post with...

"Even if Tesla triples its self-imposed minimum cash balance requirement to $3B in 2018, this could mean an excess cash balance of $5.0B at December 31, 2018."

... I had not included ABS as a source of cash. ABS will add several more billions to Tesla's cash balance at exit-18.

Tesla Slashes Yields on New Bonds as Buyers Can't Get Enough

14x oversubscribed. Think about that.

ValueAnalyst on Twitter

I do not wish any harm on TSLA bears, and I hope they come to their senses soon, but man do they make it difficult to wish them well.

 

[Reciprocity]

Tesla's cash balance has varied between $3.0B and $4.0B in 2017 vs. its self-imposed minimum of $1.0B. As of September 30, Tesla had $3.5B of Cash on Hand, which means the "excess cash" balance was $2.5B, or comfortably enough to cover its planned CapEx to bring Model 3 to 5,000 per week by March/April of 2018, and maybe even push it further to 10,000 per week by end-18, as per management guidance, this could be achieved with "almost no" CapEx:

"... some of our manufacturing areas we're actually seeing capabilities that we estimate in the 6,000 unit to 7,000 unit per week capability, well in excess of the 5,000 unit capability and we're optimistic with further optimization that many of our production processes will meet very little and in some cases no, so I'm not saying no, but almost no CapEx to reach something close to 10,000 units a week."

Having said that, Tesla has proven its capacity to raise growth capital, even at earlier stages of its evolution as a company, but significantly more so in recent months. As we know, Tesla's bond debut in 3Q17 was its first foray into non-dilutive debt capital markets, which has significant implications as I discussed here (tl;dr: lower discount rate); but more importantly, Tesla has the ability to raise billions of dollars in interest-free capital through product reveal events. You can see how the TMC community voted on deposit estimates here, here, and here, and my personal expectation for deposits by product line from October 2017 through December 2018 (15 months) are $1B in Roadster deposits, $2B in Semi deposits, and $2B in other (Model Y, pickup truck, TE, and other) deposits, for a total $5B+ in interest-free cash inflow throughout the 15-month period indicated.

In addition, Tesla's Total Asset balance has grown by $5B from $23B at December 31, 2016 to $28B at September 30, 2017, and the pace of growth will increase in 2018 due primarily to: (i) accelerated pace of CapEx adding to PP&E balance, (ii) "negative cash cycle" of the Model 3, which I explained here (tl;dr: Tesla collects receivables 30 days quicker than it pays suppliers, so growth leads to cash accumulation); and (iii) improving bottom-line and GAAP+ quarters in 2H18, which I discussed here (tl;dr: operating leverage inherent in auto manufacturing will lead to quicker revenue growth than expense growth throughout 1H18). All of these significantly increase Tesla's "capacity to borrow" non-dilutive debt capital.

Let's put all of this together: $3.5B Cash on Hand - $500M negative operating cash in 4Q17 - $1.0B in 4Q17 CapEx + $1B in Semi/Roadster/TE 4Q17 deposits + 500M 4Q17 securitization = $3.5B Cash on Hand at December 31, 2017 + $500m in 2018 net income primarily due to operating leverage + $4 billion in Model Y/Pickup and additional Semi/Roadster/Other deposits - $4B in 2018 CapEx + $4B non-cash depreciation and amortization add-back = $8.0B Cash on Hand at December 31, 2018, before additional borrowing. Even if Tesla triples its self-imposed minimum cash balance requirement to $3B in 2018, this could mean an excess cash balance of $5.0B at December 31, 2018.

These numbers are preliminary estimates based on management commentary and my estimates that I wanted to share in order to start off further discussion. I look forward to reading your input, thoughts, criticism, and grudges. Don't hold back!

Hate to contradict VA, because I love her like a sista from another mister.. But the quote from the Q3 ER was not what you think it was..

And we have a clear path to that. We understand the bottlenecks. It's difficult to fully understand these things but we actually try to do them. And it's worth noting that some of our manufacturing areas we're actually seeing capabilities that we estimate in the 6,000 unit to 7,000 unit per week capability, well in excess of the 5,000 unit capability and we're optimistic with further optimization that many of our production processes will meet very little and in some cases no, so I'm not saying no, but almost no CapEx to reach something close to 10,000 units a week.

I can see how you thought it would take $0 or nearly zero capex to go from 5k/w to 10k/w but what I think they are actually saying is that SOME parts of the manufacturing process are seeing 6-7k/w and they think they can get those and others to 10k/w with little or no additional capex. This is not saying EVERY part of the process can do that, only specific processes. There will be sizable capex required to get to 10k/w BUT its not a straight up copy of the line and thus the capex requirements to get from 5k-10k, its more like 50%. Kuka robots and tooling are expensive. The nice thing is that it will cost 0 until its running and it should be running and ramp much faster because they will have settings and software from a line that is already fully functional. So in terms of cash flow, it should still have an impact similar to what you are alluding to.

I also think your reservations numbers are too high, but I aint mad at yah for being so optimistic. I will say there is a caveat to that statement in that if they do $2500 for the Y reservations, then your numbers are probably pretty accurate for the total. I also think we cannot underestimate how quickly the Y could go from final design to production as its based on the model 3, so many of the processes and ramp pain will be just adjustments for Y. Certainly it wont be simple and will take a long time to make the proper adjustments and there will be some production hell, but the capex for that initial process will be low because they can do it on the model 3 lines up to a certain point. When they are ready, they can bring in new hardware and configure it for the Model Y only lines or maybe they can speed up the first model 3 line to satisfy demand and build the Y on the second model 3 line with say 50% capex for those parts that run slower and are required to have duplication to keep up with the faster parts of the line. I dont want people to think that I believe this will be painless, but its much easier to build a car on an existing platform them from complete scratch, though its still production hell, just less risky.