By Alexandria Sage and Sonam Rai
(Reuters) - Tesla Inc ended 2018 with a small quarterly profit and predicted on Wednesday it would make money every quarter this year, but acknowledged that the erosion of a U.S. tax credit in 2019 would cut into sales.
Shares of the electric car maker led by Elon Musk fell 2.1 percent after hours as fourth-quarter profit missed Wall Street expectations.
Wednesday's results offered a mix bag for investors as the company both expressed optimism that it could post a profit in the first quarter despite fewer deliveries of its flagship S and X vehicles, while warning of challenges such as global deliveries of its new Model 3.
Tesla said Model 3 production volume in California would ramp up, ultimately reaching a long-promised 7,000 units per week by the end of the year.
Tesla faces 2019 with a host of challenges, not the least of which is putting the Model 3 into the hands of international customers. The company must deliver on its timeline to begin building the Model 3 in China, in order to meet its target of making 500,000 such vehicles "sometime between Q4 of 2019 and Q2 of 2020," it said.
That 500,000 annual target was originally expected to have been met in 2018.
A period of market euphoria after Tesla reported a third-quarter net profit in October buoyed the stock in late 2018, but gains mostly pared in January after Musk announced a 7 percent workforce reduction and warned that fourth-quarter profit would be smaller than the previous quarter.
"The road ahead is very difficult," Musk wrote in an email to employees earlier this month, saying it was crucial that the company roll out lower-priced versions of its Model 3.
In May, Musk tweeted that offering the originally promised $35,000 version of that vehicle would cause Tesla to "lose money & die," and in October said that building such a car with positive gross margins was less than six months away.
"We need to reach more customers who can afford our vehicles," Musk wrote in his recent email, fuelling increased speculation that demand for current, higher-priced offerings was constrained. The lowest-priced Model 3 today is priced at $44,000.
Tesla is hoping that money saved from job cuts, together with ongoing improvements to manufacturing processes, will boost its margins and free cash flow, which widened to $909.6 million in the quarter after ending its third quarter at $881 million, excluding costs of systems for its solar business.
Tesla said it ended the quarter with $4.3 billion in cash after spending $325 million in capital expenses and said it had sufficient cash to pay a $920 million convertible bond maturing in March.
Investors have been wondering whether Tesla will seek more capital, which many analysts believe will be necessary to fund ongoing projects, such as upcoming production in 2020 of the Model Y SUV, the building of factories in China and Europe, and the expansion of Tesla's existing Nevada battery plant, the Gigafactory.
The winding down of a federal subsidy this year will make all Tesla cars more expensive and could hurt sales. Some analysts have also expressed concerns that sales of the Model S and X - which carry higher margins - may slow due to the erosion of the tax credit.
Tesla acknowledged such, saying it expected lower S and X deliveries in the first quarter, given a "pull-forward in demand" in 2018 for those vehicles in 2018 when the subsidy was still available in full.
The company said it made a net profit of $139.5 million in the three months ended Dec. 31, compared with a $311.5 million profit in the third quarter, when it benefited from regulatory credits. (https://bit.ly/2Uv6szO)
The results missed analysts' expectations for quarterly profit. Excluding items, Tesla earned $1.93 per share. Analysts had expected a profit of $2.20 per share, according to IBES data from Refinitiv.
(Reporting by Sonam Rai in Bengaluru and Alexandria Sage in San Francisco; Editing by Bernard Orr and Lisa Shumaker)
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