Tesla on Wednesday reported its first quarterly profit in two years and its biggest ever. But for the electric-car maker and its unpredictable chief, the question is whether it can keep making money.
The company’s third-quarter earnings were helped by cost-cutting, spending less on future models, delaying payments to suppliers and, most important, rushing to sell as many cars as possible. It may not be able to do all those things quarter after quarter.
The company declared it a “historic quarter” and its chief executive, Elon Musk, promised that future would be brighter still, telling analysts on a conference call he expected Tesla to be profitable in the fourth quarter and in “all quarters going forward.” He was saying in effect that his company was no longer in start-up mode.
Tesla reported a $312 million profit for the three months that ended Sept. 30, thanks to a surge in production and sales of its Model 3 sedan. The company has long promised that the model would help make electric vehicles and Tesla itself a mass-market phenomenon.
The report is a milestone for Mr. Musk, whose leadership was cast in doubt in recent months as he faced a lawsuit by regulators over his musings on Twitter about taking the company private. He had also hurled insults against short-sellers and admonished analysts on a call for asking “boring, bonehead questions.” He agreed last month to step down as chairman of the company to settle a lawsuit in which the Securities and Exchange Commission accused him of misleading investors about his plans to take the company private.
On Wednesday, he was even-tempered on a conference call with analysts. He declined to answer a question about the makeup of the company’s board, saying he would discuss only operational issues. (In the agreement with the S.E.C., Tesla agreed to appoint two new independent directors to its board.)
In the 15 years since Mr. Musk and his partners founded Tesla, the company has never reported an annual profit. In previous quarters, the company’s costs increased as it made more cars. To finance its operations, Tesla, which also makes solar panels and batteries, has had to sell stock, take out loans and ask customers to make $1,000 refundable deposits for cars and energy products that they might not get for many months.
The profit the company reported in the third quarter will help stabilize Tesla’s finances and end a streak of quarters in which the automaker used close to $1 billion in cash. In the second quarter, the company reported a $718 million loss.
Tesla ended September with $3 billion in cash compared with $2.2 billion at the end of the previous quarter. The company generated $881 million in free cash flow — cash produced through operations less capital expenditures. “The cash-flow number is impressive,” said David Whiston, an auto analyst at Morningstar. “That’s a lot of cash for a company their size.”
But the company could face difficulties ahead. The increase in sales of the Model 3 could cause demand to soften in the fourth quarter.
The company, which until recently only sold tens of thousands of luxury cars a year, will need to find many more buyers for the Model 3, which sells for $46,000 to $64,000 before federal and state tax incentives. Mr. Musk said that the company expected sales to remain strong as it starts shipping the car to Europe in the first three months of next year and Asia after that.
Tesla produced more than 53,000 Model 3 cars from July to September, nearly twice as many as in the previous three months. Deliveries of the Model 3 totaled more than 56,000, about three times as many as in the previous quarter.
“As long as they keep producing more cars than the previous quarter, there’s a good chance they can keep profits going,” Mr. Whiston said.
In a sign that buyers are still interested in the car after months of waiting for it, Tesla said that of the 455,000 Model 3 reservations it reported having in August 2017, fewer than 20 percent had been canceled.
Tesla next year is supposed to start making a more affordable version of the Model 3 priced at $35,000, and Mr. Musk has said that Tesla would lose money on that model if the company produced it now. The cheaper Model 3 is important because the $7,500 federal tax credit available to buyers of Tesla cars will be cut by half on Jan. 1 and phased out entirely over the course of 2019, making the company’s cars more expensive.
Tesla recently began offering a Model 3 priced at $46,000 as an interim step before it can produce the $35,000 version. “We don’t really have the ability to get to $35,000 right away,” Mr. Musk said, but he said Tesla was “probably less than six months from that.”
Even though Tesla is finally hitting its stride in production, “the company isn’t out of the woods yet,” said Jeremy Acevedo, manager of industry analysis at Edmunds, a market researcher. “The $35,000 Model 3 remains a fantasy, and with the full tax credit for that car now off the table, it will be interesting to see how many buyers are willing to keep waiting for it to be a reality.”
The company is still struggling to deliver cars to customers, which Mr. Musk has described as “delivery logistics hell.” The quality of the Model 3 has also come under question as many customers have complained about receiving cars with scratched paint, cracked windows and other defects.
Consumer Reports on Wednesday lowered Tesla’s reliability ranking by six places, to 27th out of 29 automakers. The magazine said its members complained about the suspension in the company’s full-size Model S sedan.
If sales falter, the company could quickly find itself in a financial squeeze. It has to make bond payments of $230 million in November and $920 million in March. It can use stock for the second payment but only if its share price is above $360. At the same time, Tesla hopes to build a factory in China, which will require hundreds of millions of dollars in capital expenses.
As of Sept. 30, Tesla owed its suppliers $3.6 billion, up from $3 billion at the end of the second quarter. The company’s debt totaled more than $10 billion.
Tesla shares closed at $288.50 on Wednesday before its earnings were released, down more than 20 percent from early August. The stock was up 10 percent in aftermarket trading.
DealBook Briefing: WeWork Might Be Too Big to Fail
In just eight years, WeWork has become a titan of the real estate market, snapping up pricey leases around the world. Critics have long scoffed at its business model, and many think that it will face a reckoning in an economic downturn.
But WeWork has said that it is the largest real estate tenant in New York, London and Washington. And in his latest column, Andrew argues that the claim may ensure the company’s continued success:
WeWork has gobbled up leases for so much space in so many cities, there’s a compelling case to be made that its landlords wouldn’t be able to afford for it to go under.
Because of WeWork’s size, “they have more power in a down market,” said Thomas J. Barrack Jr., the longtime real estate investor and founder of Colony Capital.
We’ll get a close look at the state of WeWork’s finances later today when it releases third-quarter earnings.
NY State Kicking In $1.5 Billion-Plus for Getting Amazon HQ
Amazon stands to get more than $1.5 billion in grants and tax breaks from New York state in exchange for bringing at least 25,000 workers to a new campus in Queens, a record-setting incentive package that was both cheered and jeered Tuesday by elected officials in the city.
At a celebratory news conference, Gov. Andrew Cuomo acknowledged that the economic development plan offered to Amazon to move to Long Island City was the richest in state history.
The company would get city and state help settling into a site along a boat basin on the East River, now occupied by a gritty mix of private industrial buildings, parking lots and city-owned properties. Amazon would invest $2.5 billion of its own money to create the campus, and if it hits its hiring and building targets, the company would get $1.2 billion in tax credits over 10 years plus a cash grant of $325 million.
New York’s incentives were nearly triple those offered by Virginia, which also landed 25,000 Amazon jobs in the Washington suburbs.
But Cuomo, a Democrat, insisted it would pay off with $27.5 billion in new tax revenue. He said that amounted to a $9 return for every dollar of public funds spent.
“This is a big moneymaker for us,” he said. “It costs us nothing – nada, niente, goose egg. We make money doing this.”
The plan was immediately assailed by others as a corporate giveaway.
Alexandria Ocasio-Cortez, a Democrat newly elected to Congress from Queens, said on Twitter that her constituents were outraged that the company would be getting so much public support “at a time when our subway is crumbling.”
“We need to focus on good healthcare, living wages, affordable rent. Corporations that offer none of those things should be met w/ skepticism,” she wrote.
City Council Speaker Corey Johnson said he was skeptical of the plan and couldn’t understand why a company as rich as Amazon would need any public support. State Sen. Michael Gianaris and City Councilman Jimmy Van Bramer, Democrats who represent the Long Island City area, also condemned the deal.
“We are witness to a cynical game in which Amazon duped New York into offering unprecedented amounts of tax dollars to one of the wealthiest companies on Earth for a promise of jobs that would represent less than 3 percent of the jobs typically created in our city over a 10-year period,” they said in a joint statement.
More powerful city Democrats, though, lined up in support of the project, which represented a rare moment of close cooperation between Cuomo and Mayor Bill de Blasio, a fellow Democrat but frequent political rival.
De Blasio, who campaigned for office on a promise to give more thought to regular New Yorkers than big corporations, called the deal “an extraordinary day for Queens.”
The opportunity to create 25,000 mostly well-paying jobs outside well-off Manhattan, he said, trumped concerns about whether the project would overburden the neighborhood’s subways, schools or sewers. He promised it would benefit even residents of a nearby public housing development, one of the nation’s largest.
Part of the deal involved setting aside part of expected new tax revenue for projects that would benefit all of Long Island City and western Queens, not just the area being taken over by Amazon, he said.
New York’s inventive package would give Amazon roughly $48,000 in benefits for every job it created in the state, compared to $22,000 for Virginia and $13,000 for Tennessee.
Amazon vice president for real estate John Schoettler said the company, which already has a large presence in New York City, planned to start hiring next year.
Securing part of Amazon’s second headquarters represents Cuomo’s biggest economic development project, topping his “Buffalo Billion” initiative in western New York.
Some of his other initiatives haven’t panned out as hoped. The construction a Tesla solar panel manufacturing plant hasn’t created the number of jobs Cuomo expected. His top economic development adviser was convicted of corruption charges linked to the project.
“It certainly appears New York is being overwhelmingly generous,” said David Friedfel, director of state studies for the Citizens Budget Commission, a nonpartisan state government watchdog group. “And we have a history of providing economic development benefits that don’t pan out.”
Amazon Plans to Split HQ2 Between Long Island City, N.Y., and Arlington, Va.
After conducting a yearlong search for a second home, Amazon has switched gears and is now finalizing plans to have a total of 50,000 employees in two locations, according to people familiar with the decision-making process.
The company is nearing a deal to move to the Long Island City neighborhood of Queens, according to two of the people briefed on the discussions. Amazon is also close to a deal to move to the Crystal City area of Arlington, Va., a Washington suburb, one of the people said. Amazon already has more employees in those two areas than anywhere else outside of Seattle, its home base, and the Bay Area.
Amazon executives met two weeks ago with Gov. Andrew M. Cuomo in the governor’s Manhattan office, said one of the people briefed on the process, adding that the state had offered potentially hundreds of millions of dollars in subsidies. Executives met separately with Mayor Bill de Blasio, a person briefed on that discussion said. Long Island City is a short subway ride across the East River from Midtown Manhattan.
“I am doing everything I can,” Governor Cuomo told reporters when asked Monday about the state’s efforts to lure the company. “We have a great incentive package,” he said.
“I’ll change my name to Amazon Cuomo if that’s what it takes,” Governor Cuomo said. “Because it would be a great economic boost.”
The need to hire tens of thousands of high-tech workers has been the driving force behind the search, leading many to expect it to land in a major East Coast metropolitan area. Many experts have pointed to Crystal City as a front-runner, because of its strong public transit, educated work force and proximity to Washington.
[Crystal City’s upsides: good transit, diverse residents, a friendly business climate and a single developer with a big chunk of land.]
JBG Smith, a developer who owns much of the land in Crystal City, declined to comment, as did Arlington County officials.
Amazon declined to comment on whether it had made any final decisions. The Wall Street Journal earlier reported Amazon’s decision to pick two new locations instead of one.
About 1,800 people in advertising, fashion and publishing already work for Amazon in New York, and roughly 2,500 corporate and technical employees work in Northern Virginia and Washington.
Amazon narrowed the list to 20 cities in January, and in recent weeks, smaller locations appeared to fall out of the running. For example, although Denver made the initial cut, Gov. John Hickenlooper of Colorado said last month, “Wouldn’t they rather have their second big hub on the East Coast?”
Amazon announced plans for a second headquarters in September 2017, saying that the company was growing faster than it could hire in its hometown Seattle. The company said it would invest more than $5 billion over almost two decades in a second headquarters, hiring as many as 50,000 full-time employees that would earn more than $100,000 a year on average.
HQ2 would be “full equal to our current campus in Seattle,” the company said. If Amazon goes ahead with two new sites, it is unclear whether the company would refer to both of the locations as headquarters or if they would amount to large satellite offices.
Picking multiple sites would allow it to tap into two pools of talented labor and perhaps avoid being blamed for all of the housing and traffic woes of dominating a single area. It could also give the company greater leverage in negotiating tax incentives, experts said.
“Even if the most obvious reasons appear to be about attracting more tech workers, the P.R. and government incentives benefits could help, too,” said Jed Kolko, chief economist at Indeed, the online jobs site. With big presences in two cities, the local governments “might feel pressure to increase the incentives they are offering Amazon, and the surprise is yet another news cycle for the Amazon headquarters process,” he said.
The HQ2 search sent states and cities into a frenzied bidding war. Some hired McKinsey & Company and other outside consultants to help them with their bids, investing heavily in courting Amazon and its promise of 50,000 jobs. Even half of that would amount to one of the largest corporate location deals, according to Greg LeRoy, executive director of Good Jobs First, which tracks corporate subsidies. “These are very big numbers,” he said.
As Amazon’s search dragged on, residents in many of 20 finalist cities worried about the impact such a massive project could have on housing and traffic, as well as what potential tax incentives could cost the community. The decision to split into two sites could alleviate some of that resistance.
Seattle has been one of the fastest growing cities in the country, in part because of Amazon’s growth. The company has about 45,000 employees in the city, and the company said it needed to hire more employees than the city could attract or absorb.
“Not everybody wants to live in the Northwest,” Jeff Wilke, the head of Amazon’s retail division, said at a conference last year. “It’s been terrific for me and my family, but I think we may find another location allows us to recruit a different collection of employees.”
Amazon gave cities six weeks to pitch themselves in a public courtship. Almost 240 municipalities responded, trying to lure the tech giant with marketing gimmicks, promises of new transit lines and, as proposals trickled out, billions in tax incentives.
The details of most bids are not public, to the frustration of even some lawmakers. A few elected officials from the short list of 20 cities signed what amounted to a mutual nonaggression pact, trying to avoid a bidding war that would give up too much from taxpayers.
But mostly, cities continued their hard sell, showing Amazon executives around their proposed sites and trying to assure the company that the region had sufficient housing and transportation. Since wrapping up visits with cities in the spring, Amazon has been almost silent on the search. That led journalists, residents and politicians to look for clues in new job postings and the flight path of the corporate jet used by Jeff Bezos, Amazon’s chief executive.
To meet its own deadlines, Amazon will need to move fast. It had said it wanted 500,000 square feet of office space — enough for thousands of employees — available for use next year.
Jay Brodsky, who lives in Arlington, Va., said about a week ago that his wife took part in a 45-minute phone survey about her opinion if Amazon moved to the area. “It was everything from, ‘What do you think about the local government,’ to ‘Are you concerned about traffic?’” he said. She received an Amazon gift card for participating.
“People are sort of on pins and needles,” Mr. Brodsky said. “It’s almost like people want it to happen, and are afraid of what would happen if it does.”
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