Yesterday Tesla Motors’ third quarter earnings were announced in an optimistically toned letter that highlighted everything positive it was doing around the world, and reported a modest gain by one accounting measure, and ultimately a loss.

According to generally accepted accounting principles (GAAP), Tesla reported a loss of $38 million on revenues of $431 on the quarter ending Sept. 30. This however represented less of a loss than a year ago which saw a $111 million loss on $50 million in revenues as Model S production was only just ramping up.

The Model S was launched June 2012, and the first several months Tesla took care in working out its production processes, and estimated total deliveries in 2012 were only 2,400 with 900 of them coming after Q3 in December, an estimated 800 in November, and 450 estimated for October.

In other words, during Q3 2012 Tesla was not delivering Model S cars in any significant number and this year is its first solid year.

The fact of Tesla being practically not in business last year was not clearly stated by the New York Times and other reports highlighting Tesla’s financials as a “reality check” for exuberant investors.

Accentuating the positive, Tesla in its letter reported a non-GAAP $16 million profit and gross margins increased from 14 percent last quarter to 21 percent this quarter without reliance on ZEV credits sold to other automakers to account for these earnings.

“As more people see our car on the road, take a test drive or talk with another Model S owner, more demand is created for our product,” said a shareholder letter signed by CEO Elon Musk and CFO Deepak Ahuja. “Demand exceeds supply, despite no advertising, no discounts and no paid endorsements.”

As for Tesla’s rationale for what some call questionable math, Tesla says it presented non-GAAP financials to leave out the effect of lease accounting.

“We believe these non-GAAP financials are useful because they align with the underlying cash flow activity and timing of vehicle deliveries, and we use such information internally for operational management and financial planning purposes,” said Tesla. “Non-GAAP financials add back deferred revenues and related costs for Q3 cars sold with a resale value guarantee to customers who obtained financing from one of our banking partners.”

The market however was less persuaded. Tesla released the news as the stock market closed, but after hours trading saw TSLA stock take a 12-percent plunge.

The Upside

Shareholder letters are traditionally a glowing report that put a corporation’s best face forward.

With that qualifier in mind, Musk and Ahuja highlighted a record 5,500 Model S deliveries including 1,000 that went to Europe.

They also reiterated news of Tesla’s tripling of a previous supply agreement with Panasonic for at least 1.8 billion cells over four years.

“This number should be viewed as more of a floor than a ceiling,” said the shareholder letter, and these batteries will also be used for the Model X.

Tesla further reported strong global demand, and expansion of its retail and service locations by almost 20 percent to over 100 locations – as it promised more details on this soon.

“During the quarter, we made dramatic improvements in our service operations. Our investments in staffing, training and locations are beginning to bear fruit,” said the letter. “Tesla is pioneering a new approach to vehicle servicing that we believe will revolutionize the customer experience. An announcement about this will be forthcoming shortly.”

Tesla also touted its Supercharger option which is chosen by 90 percent of Model S buyers.

“Customers cite the ability to supercharge as one of the top 5 reasons they choose a Tesla,” the company said.

To date one-third of Model S sedans have been supercharged at least one time. Tesla estimates this is enough electrical power to save nearly 200,000 gallons of fuel.

Perhaps more significantly, Musk and Ahuja said the future looks bright because the Model S is having a strong impact.

“Model S is becoming more pervasive every day. Over 19,000 Model S owners are driving in excess of 700,000 miles per day in over 20 countries and have now driven their cars more than 100 million miles,” said the shareholder letter.

Looking to the next quarter, Tesla says its production will expand to allow for just-under 6,000 Model S deliveries for a total 21,500 worldwide cars for the calendar year.

“Model S gross margin may continue to make slight improvements over the next several quarters as we continue to drive down manufacturing costs,” said the company. “While we expect to achieve our target of 25 percent non-GAAP automotive gross margin in Q4 (assuming no contribution from ZEV credits), further progress is likely if customers continue to purchase our vehicles with a high option take rate.”

For a more details, you can view the Q3 shareholder letter here.