Tesla's (NASDAQ:TSLA) third-quarter vehicle deliveries were both better and worse than expected -- depending on how you look at them. Total deliveries put the company on pace to exceed its full-year guidance, yet production of the electric-car maker's important Model 3 was behind schedule.

Here's what investors should know.

Tesla vehicle production at its factory

Tesla vehicle production. Image source: author.


In an important demonstration of Tesla's ability to continue growing sales of its higher-priced sedan and SUV even after the Model 3's introduction, combined Model S and X deliveries during the quarter were Tesla's highest yet.

Tesla said after market close on Monday it delivered 26,150 vehicles, up about 18% sequentially and about 5% year over year. Though management hadn't provided any guidance for its third-quarter deliveries, it did previously say it expected combined Model S and X deliveries in the second half of the year to be higher than first-half deliveries of 47,077. So with 26,150 deliveries already in the bag, Tesla now only has to deliver 21,000 vehicles in the fourth quarter to meet its initial guidance.

Tesla delivered 14,065 Model S and 11,865 Model X units. The remaining 220 were Tesla's recently launched Model 3.

In response to the higher-than-expected Model S and X deliveries, Tesla has increased its guidance for the full year. The company now expects to deliver about 100,000 Model S and X vehicles in 2017, up 31% compared to deliveries in 2016.

Unlike Tesla's solid Model S and X deliveries during the quarter, Model 3 deliveries were worse than the electric-car maker was aiming for. In Tesla's second-quarter shareholder, management said it was "confident" it could produce "just over" 1,500 Model 3 units during Q3. This would have likely put third-quarter Model 3 deliveries somewhere around 1,000 units.

Tesla said it produced just 260 Model 3 units during the quarter, citing "production bottlenecks" for the underperformance. "Although the vast majority of manufacturing subsystems at both our California car plant and our Nevada Gigafactory are able to operate at high rate, a handful have taken longer to activate than expected," Tesla said.

What's next

Looking ahead, Tesla seems confident it will be able to fix its Model 3 production constraints.

"It is important to emphasize that there are no fundamental issues with the Model 3 production or supply chain," Tesla explained. "We understand what needs to be fixed, and we are confident of addressing the manufacturing bottleneck issues in the near term."

It would be difficult to overstate the importance of the Model 3 to Tesla's business. While the vehicle was only expected to represent a fraction of Tesla's total revenue in Q3, the automaker expects the lower-priced vehicle's production to soar in the coming quarters.

The Model 3's interior and 15-inch touch display

Model 3. Image source: Tesla.

Tesla has said that by some point in the fourth quarter, it expects Model 3 production to reach a rate of 5,000 units per week, helping the company begin making a dent in its 455,000 Model 3 reservations (as of last count). Before the end of next year, Tesla expects Model 3 production to achieve a weekly rate of 10,000 units.

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