Question

Questopn: Earlier this week, Elon Muskproposed that Tesla may go private. What would this mean for thecompany's cash flows?

Article:

Tesla Doubles Loss, but Burns Less Cash ThanExpected

Electric-car maker finished the second quarter with $2.2billion in cash

By Tim Higgins

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Tesla Inc. TSLA -4.83%▲ reassured investors it would achieve aprofit later this year, as a rush of Model 3 sales in the secondquarter helped the electric-car maker burn less cash thanexpected.

The results, which sent Tesla’s shares soaring in after-hourstrading Wednesday, should give Chief Executive Elon Musk somewiggle room to prove that a continued production rate of more than5,000 Model 3s a week during the third quarter can make the automaker cash-flow positive and profitable. He made that promiseearlier this year and reiterated it Wednesday in a letter toshareholders, though many analysts doubt it can be kept.

Tesla more than doubled its loss from last year’s second quarterto $717.5 million, its seventh consecutive quarterly loss during anperiod intensely focused on ramping up production of the Model 3.Tesla reached the long-delayed goal of making 5,000 Model 3 sedansin a single week during the final days of June. Now the test iswhether it can sustain that production to generate necessary cashand eventually prove it is no longer a niche luxury brand but onecapable of building millions of cars a year.

“It took 15 years to execute on our initial goal to produce anaffordable, long-range electric vehicle that can also be highlyprofitable,” Mr. Musk wrote in Wednesday’s shareholder letter. “Inthe second half of 2018, we expect, for the first time in ourhistory, to become both sustainably profitable and cash flowpositive.”

Later on a call with analysts, Mr. Musk said he expects Teslawill record a profit in all subsequent quarters—except perhaps ifthe economy collapses or the company pays back a big loan, hesaid.

If Mr. Musk begins to fulfill that promise, he could calminvestors and analysts concerned by Tesla’s dwindling cash pile.Mr. Musk has bristled at the idea of raising more cash, and onWednesday told analysts he doesn’t plan to issue new equity.

Instead, Mr. Musk said he plans to focus on paying down thecompany’s debt—not refinancing it. He expects a new factoryproposed for Shanghai will cost $2 billion and will be financedwith debt in China.

“Are we running low on money? The answer is no,” Mr. Musk saidon the call. His tone of the call differed greatly from the priorquarter when he sparred with analysts, sending shares plummeting.Mr. Musk apologized to those analysts on the call Wednesday andgenerally sounded upbeat—if tired.

Tesla finished the second quarter with $2.2 billion of cash. Itsnegative free cash flow of about $740 million was lower than what aconsensus of analysts expected. The company previously said itneeded to keep a minimum cash balance of $1 billion, and severalanalysts had said Tesla would need to raise more money.

The quarterly report, and Mr. Musk’s subsequent comments, sentTesla’s shares up nearly 9% to $327.70 in after-hours trading onWednesday. The shares were down more than 3% this year ahead ofTesla’s quarterly report.

“I was expecting more cash burn, possibly even a severe onebecause there were a lot of production costs at the end of thequarter to meet the 5,000/week target but many of those vehicleslikely were not delivered until Q3,” David Whiston, an analyst forMorningstar Research Services, wrote.

Mr. Musk remains optimistic that Tesla can make 1 millionvehicles in 2020, though he expressed new caution saying it “seemspretty likely” the company will make 700,000 to 800,000 that year.He said Tesla’s Fremont, Calif., assembly plant and Nevada batteryfactory should be able to produce about 600,000 a year plus 100,000to 200,000 at the new Shanghai facility, which is supposed to beginproduction that year.

The company had previously said it would begin China productionin 2020 while in Tesla’s shareholder letter the company said thefirst cars would roll off the line in about three years, whichwould put it at 2021.

Tesla reiterated it expects to produce 6,000 Model 3s sedans ina week by late August. The company said it plans to build 50,000 to55,000 of the sedans during the third quarter and that it remainson target to make a total of 100,000 Model S sedans and Model Xsport-utility vehicles for the year.

Mr. Musk has sought to cut costs in the pursuit ofprofitability. The company slashed 9% of its workforce in June, andMr. Musk promised a management reorganization after his engineeringchief stepped aside.

The company on Wednesday cut back further on planned capitalexpenditures as part of a strategy to focus building out itsexisting infrastructure for making the Model 3. It now plans tospend less than $2.5 billion this year, lower than a $3 billionprojection in May, which itself was down from the $3.4 billionpreviously announced and spent last year.

Revenue during the second quarter rose 44% to $4 billion. Teslasaid last month that total vehicle deliveries reached 40,740, adramatic increase from more than 22,000 vehicles a year earlierthanks to increased production of the Model 3 sedan. Tesla soldabout 18,440 Model 3s during the period.

Earlier in the day, Mr. Musk had a little fun with a prominentshort seller. David Einhorn, the president of hedge fund GreenlightCapital, criticized Tesla and its CEO in a letter to investorsTuesday and wrote that he “is happy that his Model S lease ended”and was “happy to switch to an electric Jaguar.”

Mr. Musk wrote on Twitter: “Tragic. Will send Einhorn a box ofshort shorts to comfort him through this difficult time.”