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Tesla's surprising profit a good sign for proposed SolarCity merger

Tesla Motors CEO Elon Musk, under pressure to prove that  the electric vehicle maker can be profitable as it looks to merge with SolarCity, delivered in a big way on Wednesday, stunning Wall Street by reporting its second quarterly profit ever, along with record numbers for vehicle production and deliveries.

"It's very exciting," Musk said, during a conference call Wednesday evening. "Definitely one of the best moments ever for Tesla."

The earnings report offered reassurance to investors as its shareholders prepare to vote on Nov. 17 on the company's proposed $2.2 billion merger with SolarCity as part of Musk's vision to create a renewable energy powerhouse built around electric vehicles, batteries and solar power.

SolarCity and Tesla also are expected to unveil a new roofing product on Friday that combines solar panels with battery storage and a Tesla electric vehicle charger.

"I think you'll be pleasantly surprised by what we debut on Friday," Musk said.

"It has exceeded my expectations," he said. "It's really good."

[Related: Why Tesla wants to team up with Panasonic in Buffalo]

Tesla has signed a non-binding letter of intent with Japanese electronics giant Panasonic to make solar cells and modules within the Buffalo factory - a move that will put an experienced solar panel manufacturer in a key role at the Buffalo factory, which is set to begin production next year. Some analysts had raised concerns about the ability of SolarCity, which has never made solar panels, to operate the biggest solar panel factory in the Western Hemisphere.

"I was relieved when I saw Panasonic step in," said Ben Kallo, an analyst at Robert W. Baird. The Panasonic deal is contingent on the merger being approved by shareholders.

Musk said collaborating with Panasonic will duplicate the model it uses at its Nevada battery gigafactory, where Panasonic makes battery cells. That relationship, Musk said, has improved efficiency, allowed the factory to ramp up faster and has reduced costs.

"We're confident we can achieve this same outcome in solar and, at the same time, create a new solar roof product that's better than a normal roof," he said.

It is important to have "tight control" of solar panel production in order to have a "beautiful" product, said Musk, who has long emphasized the importance of making rooftop solar systems better looking.

Musk said he expects SolarCity, which has churned through billions in capital as its expanded sales led to bigger losses, to generate slightly more cash than it uses during the fourth quarter or have a neutral cash flow. The company has been shifting more of its installations toward loans that require less cash than its leasing program that requires SolarCity to front the entire system cost and then be repaid in small monthly payments over 20 years.

"I feel pretty good having examined the SolarCity financials," Musk said. "It depends on how fast we can ramp up production in Buffalo."

Tesla said it earned $22 million, or 14 cents a share,  compared with a loss of $229.9 million, or $1.78 a share, a year ago.  On an adjusted basis,Tesla's earnings per share reached 71 cents, far better than the loss of 54 cents per share that analysts were expecting.

[Related: Musk's vision at stake in Tesla shareholders' vote on SolarCity merger]

Tesla's revenues also were a big surprise, with the company's sales nearly doubling to $2.3 billion, far more than the $2 billion analysts had forecast.

And the company said it expects to be profitable again during the fourth quarter, excluding some stock-based compensation. Musk said there was a chance Tesla could be profitable even after including those compensation expenses.

The company said new product launches, combined with improved efficiency at its stores and the opening of 17 new locations, led to a 68 percent jump in orders for its Model S sedans  and Model X sport utility vehicles.

Tesla said it delivered more than 24,800 vehicles during the quarter, about 300 better than its estimate early this month, including 16,047 Model S and 8,774 Model X vehicles. Tesla said another 5,065 vehicles were in transit to customers at the end of September, and it predicted that it would deliver a little more than 25,000 vehicles during the current quarter.

Tesla has been under close watch from investors concerned about its $2.7 billion in debt and its need to raise billions in new capital to pay for its launch of its more affordable Model 3 sedan and the $5 billion battery factory it is building in Nevada. The company said it paid down $600 million of its debt during the third quarter.

Tesla also said it expects its capital expenditures this year will be about $1.8 billion, compared with the $2.25 billion it forecast at the end of the second quarter, as it continues to focus on capital efficiency and better execution. Capital expenditures for the past three quarters totaled $759 million, the company said.

Musk said Tesla has no plans to raise additional capital through the first quarter. He said the company did not need to raise additional funds to pay for the ramp up in production of its Model 3 next year, although Musk said Tesla could decide to raise additional capital to give it a bigger financial cushion.

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