Sun, Feb 11, 2018 - Page 15 News List

Musk put a car in space, but how about in showrooms?

Tesla refrained from sharing information on the Model 3’s rate of production and set a sales target not different from last year’s while glossing over its cash flow problems

By Liam Denning  /  Bloomberg Gadfly

A dummy called Starman sits at the wheel of Elon Musk’s midnight cherry red Tesla Roadster as it passes by the Earth after it was carried into space by a SpaceX Falcon Heavy rocket on Tuesday.

Photo: AP

Let us be clear about one thing: That SpaceX rocket launch on Tuesday was incredible. Putting a Tesla Roadster into orbit atop it was a stroke of marketing genius; imagine the slogan: “A bazillion miles without a charge!”

Let us also be clear about another thing: This has nothing to do with Tesla Inc’s performance as a company, even if the stock market sometimes implies otherwise. On that front, 100,000 Tesla Model 3s idling on lots near Fremont, California, would be worth far more than one electric sportscar headed for the asteroid belt.

Alas, no such luck. A day after deserved jubilation in Cape Canaveral, Florida, it was back to the relatively mundane task of reporting Tesla’s quarterly results.

The big question was whether Tesla would shift its production target for the Model 3 back — again. It did not, thankfully.

However, as is often the case with the company, there are caveats.

“It is important to note that while these are the levels we are focused on hitting and we have plans in place to achieve them, our prior experience on the Model 3 ramp has demonstrated the difficulty of accurately forecasting specific production rates at specific points in time,” Tesla said.

In other words, Tesla’s ambitions for the Model 3 remain intact, but please bear in mind that such ambitions have proved, on prior occasions, somewhat overambitious. There was no update on the current production rate, despite repeated questions on Wednesday evening’s call, which is troubling.

A month earlier, Tesla claimed it had hit a pace that “extrapolates” to more than 1,000 vehicles per week. Whatever that meant exactly, it does not appear to have been sustained, at least according to sales estimates by InsideEVs: They put last month’s Model 3 deliveries at a little less than 1,900 overall.

Getting the Model 3 production line fixed is critical if this year is to be, as Tesla puts it with typical restraint, “a transformative year.”

All that installed capital producing a trickle of vehicles trashes Tesla’s gross profit margin. The 18.9 percent headline margin for the automotive business was weak. Yet even that owed a lot to Tesla selling the largest slug of zero-emission vehicle credits for any quarter ever.

Tesla is struggling with what every Silicon Valley company taking its moonshot must ultimately do: scale. It expects to sell 100,000 Model S and X vehicles this year, meaning zero growth on that front. And even as Tesla boasts of growth on every other front, there is precious little to show for it in terms of operating leverage.

For example, revenue jumped by 44 percent annually in the fourth quarter of last year. Yet the company’s gross profit increased by less than 1 percent and its net loss more than tripled to its worst ever.

What this ultimately comes back to is cash. On that front, Tesla actually came in much better than forecasts, with negative free cash flow just US$277 million against a consensus figure of US$901 million. But again: caveats, folks.

First of all, definitions: Tesla does not count spending on solar energy systems to be leased as capital expenditure. This is understandable up to a point, but they eat up significantly more than US$100 million per quarter and should be counted somewhere.

Second, Tesla counts customer deposits as operating cash flow, even though these are refundable and, in essence, zero-interest short-term loans.

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