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UPDATE 6-Tesla debuts $35,000 Model 3, sees loss in first quarter

Alexandria Sage

(Adds new analyst, detail on layoffs, stores)

SAN FRANCISCO, Feb 28 (Reuters) - Tesla Inc said on Thursday it would offer a $35,000 version of its Model 3 sedan with a delivery time of two to four weeks, while closing many of its retail stores worldwide, steps designed to increase demand and cut overhead costs for the electric vehicle maker.

Chief Executive Elon Musk on a conference call said the company would not turn a profit in the first quarter but would return to profitability in the second, CNBC reported. In its fourth-quarter shareholder letter, Tesla had said its "optimistic target" was for a "very small" net profit in the first quarter.

Shares of Tesla fell 3.4 percent after hours. Investors have regularly voiced concerns about whether Tesla would be able to maintain profit margins through cost cutting - such as recent layoffs - and efficiency as it cut prices of its newest vehicle.

Still, the price drop could quell concerns from some analysts that demand for the higher-priced versions of the Model 3 was beginning to dry up, especially after a federal tax credit was cut in half this year.

"Tesla wants to drum up demand," said Elazar Advisors' Chaim Siegel. "There was a slowdown in the U.S. as the tax credits dropped. More tax credit hits later in the year too so they are trying to be proactive."

The announcement comes nearly three years after Musk promised the car at that price to appeal to the mass market. Tesla said its sales would now be online-only around the world and it would close many stores.

"Shifting all sales online, combined with other ongoing cost efficiencies, will enable us to lower all vehicle prices by about 6 percent on average, allowing us to achieve the $35,000 Model 3 price point earlier than we expected," Tesla said in a blog on its website https://bit.ly/2IHjLw4.

The new sales strategy is a dramatic shift for the company that has prided itself on its boutique retail stores. In June 2017, Musk pledged to increase the number of stores, saying they had "barely touched the surface" of what was possible.

As of the fourth quarter, Tesla said it recently opened 27 new locations, bringing its total of stores and service centers to 378.

Thursday was the third time this year that Tesla lowered the price on the Model 3, which recently started at $42,900.

The new $35,000 version has a top speed of 130 miles per hour (209 km per hour) and can go from zero to 60 mph in 5.6 seconds, Tesla said. For $2,000 more, Tesla offers a version with a range of 240 miles (386 km) and a top speed of 140 mph.

A $35,000 Model 3 is a major shot in the arm for Tesla during a period of major challenges for the Silicon Valley company and could put to rest concerns among some analysts that demand for Tesla's vehicles might be constrained in 2019. Besides the Model 3, Tesla is developing a new Model Y SUV for 2020 production, while beginning to build a factory in Shanghai.

"This is a game changer," Wedbush Securities analyst Daniel Ives said in a telephone interview. "Especially at this juncture when they're going through such a difficult period as the EV (electric vehicle) tax credit rolls off in the U.S., this is really exactly what the doctor ordered."

He warned, however, there could be "more speed bumps ahead," with a new influx of buyers potentially exacerbating prior problems with deliveries and service to customers.

Some analysts have questioned how a $35,000 version of the car could affect gross margins, which were above 20 percent in the fourth quarter. Offering the car, while at the same time cutting overhead costs, could alleviate concerns.

Musk said last month that service and quality were two main priorities for the company. Many customers have complained on social media and online forums of long waits for parts and repairs on their vehicles.

As part of cost-cutting efforts, Tesla last month reduced its full-time headcount by 7 percent, following a similar cut of 9 percent to its workforce in June 2018.

WAITING FOR YEARS

Tesla stunned the automotive world after its reservations list for the promised $35,000 Model 3 ballooned to over half a million orders in 2017. Tesla no longer discloses the number of reservations, but many analysts believe those on the list are still waiting for this cheaper version.

The news comes three days after renewed tensions between Musk and U.S. Securities and Exchange Commission. The agency petitioned a judge this week to have Tesla's CEO found in contempt of an October settlement between the parties. The SEC accuses Musk of having made material statements about production levels on Twitter without first having them vetted internally.

That settlement between Musk, Tesla and the SEC concerned Musk's August Twitter post in which he claimed to have "funding secured" to take Tesla private at $420 per share. As part of the settlement, Musk stepped down from his chairmanship role and he and Tesla agreed to pay $20 million each in fines. On Friday, Tesla is due to repay a $920 million convertible bond. Convertible issues give bondholders the right to trade their debt for equity after shares rise over a certain price. Tesla shares are currently about $40 below the $359.87 conversion price.

Tesla had $3.7 billion in cash and cash equivalents at the end of December.

(Reporting by Alexandria Sage; Additional reporting by Ben Klayman in Detroit and Vibhuti Sharma in Bengaluru; Editing by Lisa Shumaker)