Shares of electric-car maker Tesla Motors (NASDAQ:TSLA) are trading about 5% higher in pre-market trading on Thursday after the company reported a surprising quarterly profit on Wednesday afternoon.
Here's an overview of the results, as well as a look at some other takeaways from the third-quarter report.
Profits and cash flow
Tesla's previously reported record deliveries during the quarter sent automotive revenue up 152% compared to the year-ago quarter. Total revenue was up 145% during the same period. Pairing this revenue growth with operating leverage thanks to Tesla's improving automotive business, the company was able to report meaningful profits and cash flow.
Tesla reported a third-quarter net profit of $22 million and operating cash flow of $424 million, driven primarily by a sharp increase in vehicle sales and "careful expense management," management explained in the company's third-quarter shareholder letter.
For a reference point, GAAP and non-GAAP EPS were $0.14 and $0.71, respectively. Analysts, on average, were expecting a non-GAAP loss of $0.54, based on Bloomberg's last-minute survey of the seven analysts who managed to change their forecasts to reflect Tesla's recent decision to no longer adjust the metric for resale value guarantees or vehicles leased through banking partners (the new non-GAAP EPS only excludes stock-based compensation).
Perhaps even more surprising than Tesla's GAAP profitability and meaningful operating cash flow was its positive free cash flow, or operating cash flow less capital expenditures. Tesla reported free cash flow of $176 million even after $248 million in capital expenditures purposed to "increase production capacity, accelerate Gigafactory construction, and expand customer support infrastructure," management said.
Tesla used these strong cash flows to strengthen its balance sheet.
"[W]e were able to reduce the balances on our borrowing facilities by $178 million and settle $422 million of conversions on our 2018 convertible notes," management noted.
Of course, investors should take these results with a grain of salt after Musk urged employees in an Aug. 29 email to trim any costs that weren't critical, as the company set its sights on its second quarterly profit ever. But given how substantial reported operating cash flow was, the achievement is still worth giving some weight.
Tesla also provided some updates on its expectations for upcoming quarterly deliveries and the Model 3.
Management maintained its full-year outlook for 50,000 new vehicle deliveries during the second half of the year. Delivering 24,821 in its third quarter, this leaves just over 25,000 units to go for the company to hit its target.
Regarding its upcoming $35,000 Model 3, which Tesla plans to begin delivering in the second half of 2017, management said the vehicle is on schedule. Furthermore, Tesla provided a nice update on the overall progress it's making on the Model 3 program ahead of the vehicle's launch:
For Model 3, we have completed production line layouts and will soon begin installation of new welding and final assembly lines. We have established a world class team of suppliers for Model 3 production equipment and components, and critical long lead time equipment and components have been sourced. We are now testing vehicle systems such as chassis, the high voltage drive system, and low voltage subsystems such as vehicle controllers, HVAC, infotainment and lighting. As refinement of the Model 3 continues, we remain on plan for our timing, volume, vehicle capability, pricing, and margin targets.
As Tesla prepares to bring its higher-volume Model 3 to market next year, it's good to see the company reporting meaningful operating cash flow. With Tesla expecting the Model 3 to help take the company from its 100,000 annualized vehicle build rate today to producing 500,000 vehicles in 2018 alone, the automaker will need its flagship Model S and X to be cash contributors to help support this growth.