Tesla
Inc.


TSLA -1.92%

reported a record quarterly profit as increased output of its Model 3 sedan ended a seven-quarter stretch of red ink for the electric-car maker, defying Wall Street expectations and giving embattled Chief Executive Elon Musk renewed credibility.

The performance, which followed a series of production delays and missteps by Mr. Musk that have roiled Tesla and its stock, delivered on Mr. Musk’s promise that higher Model 3 production would lead to profit during the third quarter. The CEO in a letter to shareholders on Wednesday affirmed that pledge for the current period.

Mr. Musk also said Tesla is accelerating its manufacturing plans in China, where it now aims to bring parts of Model 3 production next year to serve the local market.

“I’ve said before that we must prove that Tesla can be sustainably profitable,” Mr. Musk told reporters during a public conference call with analysts. “This quarter was an important step towards that.”

The Silicon Valley company on Wednesday posted third-quarter earnings of $311.5 million, marking its third quarterly profit ever and reversing a loss of $619.4 million a year earlier. Revenue in the latest period more than doubled to $6.82 billion, as the Model 3 became one of the best-selling car models in the U.S.

The numbers are the “first sign that the company is moving to sustained profitability,” said Gene Munster, managing partner at investment and research firm Loup Ventures. It “appears they are exiting a painful yearlong ramp of Model 3 production.”

The Model 3, priced starting at $46,000, is Mr. Musk’s bet that he can transform the company from a niche luxury brand into a legitimate competitor against the world’s largest auto makers. Tesla’s two existing cars, the Model S sedan and Model X sport-utility vehicle, typically sell for around $100,000.

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Mr. Musk’s vision of the future of transportation had sent shares soaring to give Tesla a market value rivaling

General Motors
Co.

But his struggles in bringing out the Model 3 during the past year and his sometimes erratic behavior have raised questions about the company’s ability to execute.

Most notably, Mr. Musk said in

Twitter

messages in early August that he had secured funding to take Tesla private. The surprise announcement sent shares soaring only to later plummet as it became clear that a deal wasn’t completed.

The Securities and Exchange Commission filed a lawsuit claiming Mr. Musk misled investors and sought to get him banned from being a director or officer at any publicly traded company. Mr. Musk and the SEC reached a settlement late last month requiring that he step down as chairman for three years and that Tesla add two independent directors to its board and establish a system to oversee Mr. Musk’s communications.

Asked about the governance changes on the call with analysts Wednesday, Mr. Musk declined to comment.

Big challenges remain for Tesla. In addition to implementing those changes to its governance, which are scheduled to take effect by mid-November, the company must continue to increase production and fend off growing competition from bigger rivals that are pushing out new electric-vehicle models. Mr. Musk has pledged to introduce another new Tesla, a compact sport-utility vehicle called the Model Y, that will likely add new complexities to its operations.

Tesla’s profit in the latest quarter of $1.75 a share trounced the average estimate for a loss of 99 cents by analysts surveyed by FactSet. Shares soared nearly 11% in after-hours trading to about $320. Before the earnings report, the stock had fallen 14% over the past year.

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Tesla had last reported a profit in the third quarter of 2016 when a boost from its sale of emission-tax credits to other auto makers helped it record earnings of $22 million. It has yet to record an annual profit.

In the latest period, improvements in sales volume and profit margins of the Model 3 helped Tesla generate more cash than analysts had expected. Tesla’s free cash flow rose to $881 million, compared with a negative $740 million during the second quarter. Analysts had expected free cash flow of $191 million during the third quarter.

Tesla’s cash on hand rose to $3 billion at the end of September from $2.2 billion three months earlier. That could buttress Mr. Musk’s argument that Tesla doesn’t need to raise more cash to fund its growth, although accounts payable rose to $3.6 billion from $3 billion at the end of the June.

The company said it expects its cash to remain about “at least flat” during the fourth quarter, even as it repays $230 million in debt due in November. It also expects sales of the Model 3 this quarter to exceed the 55,840 it delivered during the third quarter, and it said combined sales of the Model S and Model X are on track to finish the year at a total of 100,000 vehicles.

The SEC filed a lawsuit against Elon Musk for securities fraud over a market-moving tweet in August about possibly taking Tesla private. The news is just the latest development in a tumultuous year for the CEO. Photo illustration: Heather Seidel/The Wall Street Journal

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The company was operating at an exhausting pace to churn out a record 80,142 vehicles during the third quarter, after a year of struggle during which Tesla missed several self-imposed deadlines to increase production of the Model 3.

The vehicle began assembly in July 2017, and Tesla finally reached the long-promised goal of making 5,000 Model 3s in a single week during the last seven days of June. The company aimed to build on that pace but ultimately averaged 4,300 Model 3s a week, excluding planned downtime, during the period. It said it build more than 5,300 of the cars during the final week of the third quarter.

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



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