TSLA Tesla Inc

By Tim Higgins 

Tesla Inc. reported a surprise first-quarter profit Wednesday while Chief Executive Elon Musk highlighted uncertainty and risk ahead, citing the forced shutdown of businesses including its lone U.S. assembly plant--a government action he equated with fascism.

The company eked out a third consecutive quarterly profit, fueled by the sale of regulatory credits and strong demand for its Model 3 compact car, despite the idling of its factory outside San Francisco for about the last week of the quarter. Local governments ordered nonessential business to close as part of the effort to stop the spread of the novel coronavirus.

Early this year, Mr. Musk said the risk of panic over the coronavirus exceeded the risk from the virus itself. Tesla fought to keep the Fremont, Calif., factory open even after local authorities said it wasn't essential and called for its workers to shelter at home. Caving to pressure, the company stopped production on March 23. It had planned to reopen on May 4, a day after the order was scheduled to lift--but Monday the Bay Area governments extended the shutdown through May.

"If somebody wants to stay in their house, that's great. They should be allowed to stay in their house and they should not be compelled to leave, " Mr. Musk told analysts on Wednesday. "But to say that they cannot leave their house, and they will be arrested if they do, this is fascist. This is not democratic. This is not freedom. Give people back their goddamn freedom."

Alameda County, where the factory is located, allows people to leave home for essential activities such as grocery shopping, as long as social-distancing rules are observed. Violation of the order can result in a fine or arrest. Three citations have been issued out of 2,000 complaints in the county, according to the local sheriff's office. A spokeswoman for the county health department didn't respond to a request for comment.

Tesla on Wednesday didn't reiterate its previous guidance that it plans to increase deliveries this year by more than 36%. Instead, the electric-car maker said it was too soon to say how the rest of the year might be affected.

"It is difficult to predict how quickly vehicle manufacturing and its global supply chain will return to prior levels," the company said. "Due to the wide range of potential outcomes, near-term guidance of net income and free cash flow would likely be inaccurate. We will again revisit our 2020 guidance in our Q2 update."

Mr. Musk, who has a history of taking emotional detours during calls with Wall Street analysts--typically staid affairs--largely avoided the topic of Covid-19 until a little more than 30 minutes into the hourlong call late Wednesday, though late Tuesday night he had tweeted, "FREE AMERICA NOW."

For the early part of the call, he and Tesla finance chief Zach Kirkhorn had instead focused on opportunities ahead. "While many other companies are cutting back on investment, we are doing the opposite," Mr. Musk said. "We'll absolutely pedal to the metal on new products and expanding the company."

Mr. Kirkhorn said Tesla deliveries had been on pace for a record quarter before the abrupt stop. Tesla's adjusted profit of $1.24 a share marked the first time in its 16-year history that it has recorded three consecutive quarters of profitability. The result also defied industry analysts, who on average had expected an adjusted loss of 28 cents a share.

The closely tracked earnings metric excludes stock-based compensation. On a net basis, the company reported a profit of $16 million attributable to common shareholders.

A year earlier, the company had posted a net loss of $702 million as it struggled to export the Model 3 for the first time, and demand in the U.S. eroded.

The latest quarter was helped by an uptick in the sale of regulatory tax credits that Tesla receives for selling electric vehicles. Revenue from those sales to competitors--essentially pure profit--rose to $354 million from $216 million a year earlier.

The company's shares climbed more than 8% in after-hours trading.

Mr. Musk spent last year setting up Tesla for continued growth in 2020 with the opening of a new factory in China and the introduction of a Model Y compact sport-utility vehicle.

They were expected to fuel the auto maker's first full-year profit, but the pandemic lockdowns around the world are casting doubt on the growth prospects.

After raising more than $2 billion in cash in February, the car maker ended the first quarter with $8.1 billion on hand. It said in March the cash cushion was enough to weather the economic uncertainty.

"While near-term cash flow guidance is currently on hold, we are continuing to significantly invest in our product road map and long-term capacity-expansion plans as we have sufficient liquidity," Tesla said Wednesday.

The company's free cash flow turned negative after a positive final quarter of 2019. The first quarter's rate of burn was nearly $1 billion, close to double the $516 million expected by analysts surveyed by FactSet.

Tesla attributed the swing primarily to the interruption of operations at the end of the quarter as the coronavirus crisis exploded in the U.S. Bringing Model Y production online in Fremont and continued work on the new China factory also added to spending.

Vehicle deliveries were up 40% from a year earlier, to nearly 88,500, helping boost revenue to $5.99 billion from $4.5 billion. That was short of analysts' prediction of $6.1 billion; the company cited "by limitations on our ability to deliver vehicles towards the end of the quarter."

Despite the pandemic, Tesla said it plans to continue increasing production of the Model Y in Fremont and Model 3 in Shanghai this quarter, and that it remains on track next year to start delivering Model Y's made in Shanghai and in a Berlin factory under construction. The company is further delaying the start of deliveries of its Semi truck, to 2021 from the end of this year.

Tesla's sales in the quarter showed less impact from the economic slowdown than those of much of the automotive industry. Lucky timing played a part, as the opening of its new factory in Shanghai at the end of last year fed pent-up demand for China-made Model 3s that were eligible for subsidies and tax breaks.

The Shanghai factory was down briefly to counter the outbreak, but has resumed production. Tesla's first-quarter deliveries in China were up 63% from a year earlier, according to LMC Automotive, while the overall market collapsed, falling 42%.

The Model Y became available in the U.S. in March. Registrations were small, according to researcher Dominion's Cross-Sell report, which counted seven vehicles in California, but Mr. Musk has said it could outsell the Model 3--which has already transformed the auto maker from a niche luxury brand into a more mainstream player.

Prior to the pandemic, Mr. Musk's vehicle-delivery target for the year exceeded 500,000, up more than 36% from 2019. The average forecast from analysts surveyed by FactSet Tuesday was 455,000, down from 510,000 in late February.

Analysts still expect the company to post a profit for the full year--but not in the second quarter, when they predict a loss along with a 21% drop in deliveries from a year earlier, to 75,000.

The first quarter is often Tesla's hardest. Like many auto makers, it tends to suffer a dramatic sales drop in January after the year-end push of December. Mr. Musk had said as far back as July that the first three months of the year would be "tough," and as China wrestled with the coronavirus in January, Mr. Kirkhorn warned of a possible impact.

Mr. Musk has plenty of personal incentive to keep investors excited. He is on the verge of vesting the first stock options of a compensation package that could ultimately top $50 billion.

The milestones for unlocking the first tranche of shares have been met, including Tesla reaching a market value of $100 billion. The company's valuation, which hit that mark for the first time in January, has to remain at that level for on average six months and 30 days for the tranche to vest. Given the performance of the stock, analysts expect that to occur soon.

The first tranche of 1.69 million stock options under the arrangement nominally would net more than $760 million if immediately sold at today's price, though Mr. Musk is required to keep the shares for five years after exercising the options.

Write to Tim Higgins at Tim.Higgins@WSJ.com

(END) Dow Jones Newswires

April 30, 2020 00:11 ET (04:11 GMT)

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