By Tim Higgins
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 30, 2020).
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 02:47 ET (06:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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