Tesla net income falls 54%; China pre-production under way

Tesla Inc. posted a surprise quarterly profit on Wednesday, making good on CEO Elon Musk's promise, and said it was "highly confident" in exceeding 360,000 EV deliveries this year.

The electric automaker said net income for the third quarter fell 54 percent to $143 million, but shares in the company nonetheless soared 16.2 percent to $295.82 in early trading on Thursday because Wall Street expected a loss for the quarter. The stock price on Wednesday reached $307 in after-hours trading. 

On a per-share basis, Tesla posted a profit of $1.86 per share. Analysts were expecting a loss of 42 cents per share.

"Tesla's profitable third quarter is a great show of persistence," Edmunds analyst Jeremy Acevedo said in an e-mailed statement. "Domestic sales might be down but the company has sustained steady demand for its vehicles in spite of waning federal tax credits and the introduction of a slew so-called 'Tesla-killers' (by competitors) this year."

Total revenue fell 8 percent to $6.3 billion. Operating cash flow, less capital expenditures, fell 58 percent to $371 million.  

The sale of regulatory credits to other automakers generated $134 million of revenue, a 29 percent drop from the same quarter last year but a 21 percent increase from the second quarter. 

Tesla said Model 3 sedan production surged 50 percent to 79,837 vehicles and announced that pre-production has begun at the company's new plant in China ahead of schedule. 

"We are already producing full vehicles on a trial basis, from body, to paint and to general assembly, at Gigafactory Shanghai," the company said. "We have cleared initial milestones toward our manufacturing license and are working towards finalizing the license and meeting other governmental requirements before we begin ramping production and delivery of vehicles from Shanghai."

Model S and X production fell 39 percent to 16,318 units. 

Model Y, pickup plans

The company said it expects to begin producing its Model Y crossover earlier than expected next summer at its plant in Fremont, Calif. 

"Model Y equipment installation is underway in advance of the planned launch next year," the statement said."We are moving faster than initially planned, using learnings and efficiencies gained from our Gigafactory Shanghai factory design."

Musk -- never one to back down from outlandish predictions -- said the crossover could outsell the Model S, X and 3 combined.

A new Tesla pickup, which Musk has teased on Twitter and said could be unveiled next month, is the company’s “best product ever,” he told analysts on the earnings call.

The CEO was as candid as he’s ever been about the extent to which Tesla is no longer focused on the high-priced Model S and X, both of which can sell for six figures, calling them “really niche products.”

“To be totally frank, we’re continuing to make them more for sentimental reasons than anything else,” he said. “They’re only of minor importance to the future.”

Said Acevedo: "If Musk stays true to his word and the Model Y launches sooner than anticipated and in a seamless fashion, this will no doubt be a positive step for the company next year. But questions remain on whether the Model Y is a product that American shoppers can actually rally around in the same way that they've done with the Model 3 without cannibalizing other vehicles in the Tesla lineup." --Jeremy Acevedo, Edmunds' senior manager of insights

Tesla said its total global inventory stood at 17 days, down from 31 days at the same point last year. 

Expense cuts

The report said the company cut operating expenses 16 percent to $930 million during the quarter. 

Musk has announced at least three rounds of job cuts since last year and restructured business units to counter slowing sales of its higher-margin models.

“Operating expenses are at the lowest level since Model 3 production started,” Tesla said in a statement. “As a result, we returned to GAAP profitability in Q3 while generating positive free cash flow. This was possible by removing substantial cost from our business.”

But earnings also improved in part thanks to the company recognizing deferred revenue based on Musk making a controversial addition to its suite of drive-assistance features known as Autopilot. Smart Summon, which allows Tesla owners to tap their smartphone and remotely call for their car to pick them up, was rolled out to customers through an over-the-air software update days before the end of the quarter.

Musk has been charging customers for performance features that Tesla vehicles aren’t actually capable of yet. At the end of June, the company said it expected to recognize $567 million of deferred revenue in the following 12 months. It’s now anticipating the release of almost $500 million tied to the rollout of Autopilot and “Full Self Driving” features, according to the statement, which doesn’t give a time frame.

Tesla’s gross margin in the third quarter was 22.8%, down from a year ago but a 3.9 percentage point improvement from the prior three months.

“The stock is popping because of gross margin, which is impacted by the Full Self Driving features,” said Ross Gerber, president of fund manager Gerber Kawasaki, which holds Tesla shares. “By releasing Smart Summon on the last weekend of the quarter, Musk was able to realize some of that deferred revenue.”

Smart Summon has attracted attention from federal safety regulators following reports of several minor accidents linked to the technology. 

Philip Nussel, Reuters and Bloomberg contributed to this report.