SCTY Solarcity Corp.

By Tim Higgins 

Tesla Motors Inc. posted a surprise record third-quarter profit of $22 million, buoyed by record sales, that may help Chief Executive Officer Elon Musk raise cash next year as he prepares to ramp up production of the forthcoming Model 3 sedan.

The Silicon Valley auto maker's report on Wednesday of its first profit after 12 previous quarterly losses came amid a push by Mr. Musk to roll out the $35,000 car next year, which he says could take Tesla's annual production to 500,000 in 2018 from about 50,000 last year.

The surprise profit was driven by an improvement in sales, a reduction in costs and boost from selling pollution tax credits to other auto makers. Such sales helped boost gross profit to $139 million from $39 million a year ago -- above UBS analyst Colin Langan's estimate for $30 million during the quarter.

The company's shares were up 3.8% in after-hours trading on Wednesday.

The manufacturing ramp-up is part of a broader effort by Mr. Musk to accelerate his long-term vision for the company, including a proposed merger with SolarCity Corp., a company he is also chairman and majority owner of, on which shareholders are expected to vote Nov. 17.

Telsa is on pace to turn a profit on an adjusted basis in the fourth quarter, Mr. Musk told analysts during a conference call.

Tesla said it had positive free cash flow, repaid $600 million in debt and finished September with $3.1 billion in cash, a decline of $162 million from the end of the second quarter, the company said Wednesday. Its cash position has been under scrutiny since Mr. Musk, after Tesla had said it planned to raise money before the year's end, announced in October that the company wouldn't need additional funds this year or in the first quarter of 2017.

Tesla probably needs $2.5 billion between now and the end of 2017 for the Model 3 rollout and the completion of a huge battery factory under construction in Nevada, according to an estimate by Brian Johnson, an analyst at Barclays.

Oppenheimer estimated the combined Tesla and SolarCity may need to raise $12.5 billion for spending through 2018.

Mr. Musk urged employees during the quarter to boost sales and cut costs. "The third quarter will be our last chance to show investors that Tesla can be at least slightly positive cash flow and profitable before the Model 3 reaches full production," Mr. Musk wrote in a memo obtained by Bloomberg News.

Sales were likely helped by a cheaper version of the Model S hitting showrooms. The July through September period was the first full quarter in which Tesla offered a version of the Model S sedan that was 9% less costly than the previous least-expensive model. In June, it began selling a $66,000 version of the car with a modified battery that limits range to about 200 miles on a charge.

The average sale price of Model S sold decreased 6.5% sequentially, mostly because of the cheaper version, Tesla said Wednesday.

Tesla's results also got a boost from selling pollution tax credits to other auto makers. Such sales helped boost gross profit to $139 million from $39 million a year ago. That was above UBS analyst Colin Langan's estimate for $30 million during the quarter.

Analysts had been bracing for confusion around Tesla's results after the company announced it would stop reporting adjusted revenue figures. "For a growing company like Tesla, revenues under GAAP will be consistently lower than non-GAAP," Barclays's Mr. Johnson wrote in a note to investors. "Ironically, while our revised 3Q estimate under the old accounting treatment would have been a quarterly profit (the first non-GAAP profit in two years), the new accounting treatment keeps our estimate at a loss."

On an adjusted basis, Tesla was expected to post a loss of 27 cents a share, according to analysts surveyed by FactSet, compared with a net loss of 58 cents a share in the same period a year earlier.

Tesla lowered its guidance on capital spending this year to $1.8 billion, suggesting $1 billion of that could occur in the fourth quarter, from $2.25 billion.

The third-quarter profit of $22 million compared to a $230 million loss during the same quarter a year ago. That equated to a profit of 14 cents a share, better than the loss of 98 cents a share predicted by analysts surveyed by FactSet.

Revenue more than doubled to $2.3 billion from $936 million a year ago.

The company delivered 24,821 vehicles during the July through September period, a 114% gain from 2015. Tesla reiterated that it is on track to sell 50,000 vehicles in the second half, including more than 25,000 in the fourth quarter.

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

(END) Dow Jones Newswires

October 26, 2016 18:52 ET (22:52 GMT)

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