- Bobby Yip/Reuters
- Tesla is cutting its workforce by 3,000 employees.
- It comes ahead of a $920 million bond payment due in March.
- A lot will hang on Tesla’s Q4 earnings which – as Musk said in his letter announcing the layoffs – will likely come in lower than Q3’s.
Tesla announced it would lay off 7% of its workforce – about 3,000 workers – to turn its plan to create a $35,000 Model 3 into a reality in “all markets,” CEO Elon Musk said in a statement on Friday.
Musk spelled it all out in a message to employees, but what he didn’t mention was Tesla’s additional pressure of a $900 million bond payment coming due in March.
The electric-car company has been profitable for only three quarters of its 15 year history, one of those quarters being the third quarter of last year. In Q3 Tesla made a profit of $312 million (about 4%); however, that was with capital expenditures for the company hovering around $2 billion.
In Musk’s letter to employees, he mentioned that in Q4, “preliminary, unaudited results indicate that we again made a GAAP profit, but less than Q3.”
As of September 30, government filings showed that Tesla had $2.9 billion in cash or cash equivalents. About $905 million of that was in customer deposits, so Tesla was working with $2 billion in cash.
Filings also show that the company had current liabilities of $3.6 billion (with total current liabilities of $9.8 billion). Its assets came in at $7.9 billion.
In short, Tesla is still cash-strapped, as Musk said in his letter.
But, as we reported when we wrote about this payment in October, this is Wall Street, and numbers like that don’t necessarily mean a company is finished when it has a $50 billion market cap and an illustrious CEO.
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So now what?
In Q4, the company had to pay out $387 million in debt payments. That, plus saving up for this $920 million payment in March, would shrink Tesla’s cash pile to under $700 million. Given what Tesla has planned for 2019, that may put the company in a tricky situation.
It has big plans for the year, including building a factory in Shanghai, rolling out the more affordable version of the Model 3, and developing the Model Y, a crossover vehicle built on the Model 3’s platform.
You also have to remember those pressing liabilities.
In March, just after downgrading Tesla’s credit rating, Moody’s said the company would have to raise capital to continue operations and pay off debt. It estimated Tesla would blow through $2 billion in cash through the year and remain cash flow negative through 2019.
Tesla’s supporters know it’s going to be a hard road, too.
“The whole Tesla story boils down to the number of Model 3s sold and gross margins,” Gene Munster of investment firm Loup Ventures told Business Insider in October. “If you create a situation where the cash flow goes from negative to positive you can start servicing the debt.”
The Munster plan looks something like this (keep in mind that Tesla needs $1.5 billion in cash on hand to finance its operations):
- Model 3 sales hold, and gross margins hit 15% during Q3 2018. (We got that.)
- If that’s the case, the company stays cash flow neutral but shouldn’t have a problem with its $230 million and $157 million payments.
- The tricky part is Q4 2018, when Tesla would need to increase gross margins to 20% and sell more cars. (This is up in the air, and Musk said Q4 didn’t look as good as Q3 in his letter to employees on Friday.)
- But if it can do that then it can generate $1 billion in cash, according to Munster. Then it starts the new year with $3 billion – enough to pay off its debt.
After the layoffs were announced Tesla’s stock fell 10%. That’s weird on Wall Street, where cutting costs is considered cathartic for stock price, so it’s possible investors are taking note of Musk’s admission that profits came in thinner in Q4.
Now, none of this is to say that Tesla won’t get through. This debt payment is an illustration of the intense pressure Musk is under. He could negotiate a deal with creditors, handing them heavily discounted stock instead of cash – a pound of flesh instead of cold, hard cash.
That would take some sharp negotiating, though. As it stands now, creditors can exercise their option to take stock if the stock price is above about $360. Right now it’s hovering around $311, and if Musk’s comment about fourth-quarter earnings hold, Tesla will be hard pressed to get the stock up $50 between now and March.
- Read more:
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- Elon Musk says he’s firing more than 3,000 Tesla staff because of pressure on profits and Model 3 production challenges
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