How Elon Musk’s Twitter Faces Mountain of Debt, Falling Revenue and Surging Costs

To make the deal work, Mr. Musk has tried to add subscription revenue and reassure advertisers about the platform’s future. Twitter was losing money before Mr. Musk bought the company, and the deal added a debt burden that required fresh sources of cash.

It is difficult to determine the status of the company. Twitter is no longer required to file regular financial reports with the Securities and Exchange Commission, which are important tools for determining a company’s financial health.

Analysts and academics have been able to piece together a picture of the company from the information Mr. Musk has offered as well as details of the deal and the company’s latest regulatory filings. Bankruptcy can be a consequence. Mr. Musk, the world’s richest person, can raise new funds, or take back debt from creditors, giving Twitter a buffer to turn around its business.

Here’s a look at their assessment of Twitter’s financial status and prospects.

Twitter’s finances, pre-Musk

Twitter is a popular tool for politicians, celebrities and journalists. But as a business, it was stagnant.

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It hasn’t posted an annual profit since 2019, and has posted losses in eight years of the past decade. The company’s net loss in 2021 fell from $1.14 billion to $221.4 million. last year

Twitter has struggled to attract new users and increase revenue, which was about $5.1 billion last year. In its most recent quarterly filing as a public company, for the period ended June 30, revenue was $1.18 billion, down slightly from the year before.

Almost 90% of its revenue last year came from advertising, and it has traditionally been the company’s main source of revenue. In 2021, Twitter received $4.51 billion from advertisers, and $572 million from licensing data and other services.

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The company had more than $2 billion in cash and less than $600 million in net debt before the takeover talks, the least in the S&P 500 index for a company. But the cash position fell 35% in the year to June 30 from a year earlier, filings show, and Mr. Musk paid for Twitter by taking on $13 billion in debt. He paid for the rest in equity, some contributed by several investors.

Twitter had a market capitalization of $37.48 billion in March, a month before Mr. Musk agreed to buy it, S&P data showed. Social media stocks have fallen sharply since then. But now, according to Jeffrey Davis, a former credit analyst and founder of data provider Enersection LLC, “this thing probably isn’t worth much more than a debt stack, frankly, unless you just have a lot of options on Elon.” Be valuable.” Mr. Musk said last month that he and investors are overpaying the company in the short term.

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REvening under the musk

Mr Musk said earlier this month that Twitter had suffered a “significant decline in revenue” and was losing $4 million a day. It is unclear whether this reflects a broader decline in the digital advertising market or a hiatus from advertising by several companies since Mr. Musk bought the business.

Some companies, including the burrito chain Chipotle Mexican Grill Inc.,

Cereal maker General Mills Inc.

and United Airlines Holdings Inc Inc.,

Their ad spending on Twitter has been held back by uncertainty about where the company is headed. The departure of several top executives from its advertising division has strained relations, the Wall Street Journal reported.

The exit of advertisers poses a threat to a company that relies so much on that revenue stream. “As an online advertising company, you’re facing a disaster,” said Aswat Damudran, a finance professor at New York University’s Stern School of Business.

Elon Musk has bought Twitter, ending a month-long saga of whether or not he will go ahead with his offer to acquire the social media platform. The WSJ looks inside the tweets, texts and files to see how the battle ended. Photo: Jordan Crans

Negotiations for long-term contracts, which normally begin at the end of the year, have not yet been held or have been delayed. The Wall Street Journal reported that these deals account for more than 30% of Twitter’s US advertising revenue.

Revenue will remain under pressure until customers fully understand the new business model, potentially causing many of them to return to the platform, said Jefferies Group LLC, a senior financial services firm. said strategist Brent Teal. “Those advertisers will come back if they feel there are users and the ability to monetize their ads.” Mr. Thiel said.

But it can take time. Mr Thiel said it could take months for advertisers to get clarity. “It’s an issue,” he said.

Market research firm Insider Intelligence Inc. recently predicted that annual advertising revenue for Twitter will drop by nearly 40% through 2024.

Mr. Musk wants the company to rely more on subscriptions and less on digital advertising. The company’s upgraded subscription service, which costs $7.99 a month, will launch on November 29, he said last Tuesday.

A walk through Twitter’s headquarters in San Francisco. The company has drastically reduced staff to cut costs.


Image:

George Nectin/Shutterstock

Cut costs

The company has moved quickly to cut costs, including cutting half of its workforce. Salaries and other compensation constitute a large part of the total expenditure. The company had 7,500 full-time employees at the end of 2021, up from 5,500 a year earlier, filings show.

Laying off about 3,700 people could save the company about $860 million a year, if the employees who are leaving make an average of about $233,000 a year — the company’s most recently disclosed median salary. The estimated savings will represent about 15% of Twitter’s $5.57 billion in costs and expenses last year. Its costs and expenses rose 51% over the previous year, as hiring increased salaries.

Several employees left the company last week, rejecting Mr. Musk’s plea that they commit to working “at high intensity for a long time” to stay.

Debt mountain

Before Mr. Musk’s acquisition, net debt was $596.5 million as of June 30, according to S&P Global Market Intelligence, a data provider. This compares to a negative balance of $2.18 billion in the prior year period, indicating an increase in cash flow.

Twitter paid $23.3 million in interest expense in the quarter ended June 30, according to a filing.

Now, the company must pay at least $9 billion in interest to banks over the next seven to eight years and repay $13 billion in debt, according to a review of Twitter’s debts by former creditor Mr. Davis. the analyst

Interest payments are significant for a company that has reported total operating cash flow of $6.3 billion over the past eight years, he said.

What’s more, the company’s debt stock now includes floating rate debt, which means interest costs are rising as the Federal Reserve continues to raise interest rates. Twitter’s debt was fully priced before the deal.

Twitter’s credit rating, which was below investment grade before the deal with Mr. Musk, has further deteriorated. Moody’s Investors Service cut Twitter’s rating from Ba2 to B1 on October 31, a two-notch cut, and S&P Global Ratings cut it from BB+ to B- on November 1, a five-notch cut.

If Twitter files for bankruptcy, Elon Musk’s $27 billion fortune will be wiped out.


Image:

Susan Walsh/Associated Press

Financial possibilities

Analysts and academics said Twitter’s financial challenges could lead the company to file for bankruptcy, raise equity or buy back some debt from creditors.

If Twitter files for bankruptcy, as Mr. Musk warned at an all-hands meeting earlier this month, his $27 billion investment will be wiped out as the company rebuilds. Shareholders are paid last.

Taking back debt from lenders at a deep discount will help the company reduce its debt burden and interest costs as well as its value, which will be beneficial in the long run, Mr. Davis said.

“I don’t think they’re going to lend any more,” Mr Davies said. “It’s a really, really tight structure.”

The company could replace some debt with equity, both from Mr. Musk and outside investors, said David Kass, a finance professor at the University of Maryland’s Robert H. Smith School of Business. For that, Mr. Musk will need to convince potential investors that he has a long-term business plan, he said. Debt swaps can enable a company to generate cash. Mr. Musk has talked about his latest Tesla Inc.

The stock sale, netting nearly $4 billion in cash, was due to Twitter.

If successful, the company could generate positive free cash flow within two to three years, which it could use to pay down outstanding debt and eventually go public, Mr. Kass said. “The prospect of an IPO in three to five years will be very attractive to large funds,” he said.

– Theo Francis and Jennifer Williams-Alvarez contributed to this article.

Write to Mark Maurer at [email protected]

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