How Elon Musk’s Twitter faces a mountain of debt, falling revenue and rising expenses

For the deal to work, Mr. Musk has been trying to increase subscription revenue and reassure advertisers about the future of the platform. Twitter was losing money before Mr. Musk bought the company, and the deal added a debt load that will require new sources of funds.

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

Analysts and academics have been able to build a picture of the company from the information Mr. Musk has offered, as well as the details of the transaction and the company’s recent regulatory filings. Bankruptcy could be a consequence. Mr. Musk, the world’s richest person, could also raise new funds or buy back debt from lenders, giving Twitter a buffer to turn its business around.

Here’s a look at their assessments of Twitter’s financial health and prospects.

Twitter finance, pre-musk

Twitter is and has been a popular tool for politicians, celebrities and journalists. But as a business it stagnated.

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

Twitter is struggling to attract new users and increase revenue, which is what happened at 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 a year ago.

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

The company had more than $2 billion in cash and less than $600 million in net debt prior to acquisition talks — very little debt for a company in the S&P 500 index. But that cash position was down 35% year over year as of June 30, filings show, and Mr. Musk paid for Twitter by incurring $13 billion in debt. He paid for the rest with equity, some of which was contributed by several investors.

Twitter had a market cap of $37.48 billion in March, the month before Mr. Musk agreed to buy it, S&P data showed. Social media stocks have since plummeted. But now, according to Jeffrey Davies, a former credit analyst and founder of data provider Enersection LLC, “This thing is probably worth no more than that mountain of debt, frankly, unless you put a lot of option value just on Elon.” Mr Musk said last month, he and investors paid too much for the company short term.

REvening under Musk

Mr Musk said earlier this month that Twitter was “a massive decline in revenue” and lost $4 million a day. It’s not clear whether this reflects the general downturn in the digital advertising market or several companies’ advertising hiatus since Mr. Musk bought the business.

Few businesses including burrito chain

Chipotle Mexican Grill inc,

grain manufacturer

General Mills inc

and airline

United Airlines Holdings inc,

to have paused their ad spend on Twitter about the uncertainty about where the company is going. The departure of several top advertising executives has soured relations, the Wall Street Journal reported.

The exodus of advertisers poses a threat to a company so dependent on this revenue stream. “As an online advertiser, you’re flirting with disaster,” said Aswath Damodaran, finance professor at New York University’s Stern School of Business.

Elon Musk has bought Twitter, ending a months-long saga of whether or not he would accept his offer to acquire the social media platform. The WSJ looks through the tweets, texts and files to see exactly how the fight turned out. Image: Jordan Kranse

Deal negotiations for long-term contracts, which usually start at the end of the year, have not yet taken place or have been put on hold. These offers include more than 30% of Twitter’s US ad revenue, The Wall Street Journal reported.

Revenue will likely remain under pressure until advertisers fully understand the new business model, potentially leading many of them to return to the platform, said Brent Thill, a senior analyst at Jefferies Group LLC, a financial services company. “These advertisers will come back when they feel like users are there and there’s a way to monetize their advertising,” Mr. Thill said.

But that could take time. Mr Thill said it could be months before advertisers had clarity. “It’s a mystery,” he said.

Market research firm Insider Intelligence Inc. recently lowered its forecast for Twitter’s annual ad revenue through 2024 by almost 40%.

Mr. Musk wants the company to be more subscription-based and less reliant on digital advertising. He said last Tuesday that the company updated subscription servicewhich costs $7.99 per month would be launched on November 29th.

A sidewalk at Twitter’s headquarters in San Francisco. The company has been aggressively shedding staff to cut costs.


Photo:

George Nikitin/Shutterstock

reduce costs

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

The layoffs of about 3,700 employees could save the company about $860 million a year if the laid-off employees earned an average of about $233,000 a year — the company’s most recent published average compensation. The estimated savings would account for about 15% of Twitter’s $5.57 billion in costs and expenses last year. Its costs and expenses rose 51% year over year as new hires drove up payrolls.

More employees left the company Last week he rejected Mr Musk’s demand that they commit to working “long hours at high intensity” in order to stay.

mountain of debt

Prior to Mr. Musk’s acquisition, net debt totaled $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 same period last year, indicating a cash surplus.

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

Well, the company will have to pay At least $9 billion in interest for banks and hedge funds over the next seven to eight years when the $13 billion in debt matures, according to a review of Twitter’s loans by Mr. Davies, the former credit analyst.

The 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.

Additionally, the company’s debt mountain now includes adjustable-rate debt, which means interest costs will rise as the Federal Reserve continues to raise interest rates. Twitter’s debt was fully fixed-rate prior to the deal.

Twitter’s credit rating, which was below investment grade before the transaction with Mr. Musk, has continued to deteriorate.

Moody’s

Investors Service downgraded Twitter’s rating from Ba2 to B1 on Oct. 31, a two-notch decline, and S&P Global Ratings downgraded it from BB+ to B- on Nov. 1, a five-notch decline.

If Twitter files for bankruptcy, Elon Musk’s $27 billion investment would likely be wiped out.


Photo:

Susan Walsh/Associated Press

financial prospects

Twitter’s financial challenges could see the company filing for bankruptcy, raising equity or repurchasing debt from its lenders, analysts and academics said.

If Twitter files for bankruptcy, as Mr Musk warned in an all-hands meeting earlier this month, its $27 billion investment would likely be wiped out because shareholders are last to be paid when a company is restructured.

Buying back debt from lenders at a deep discount would help the company reduce its debt burden and interest costs, as well as its valuation, which would be beneficial over the long term, Mr Davies said.

“I don’t think they can issue any more debt,” Mr Davies said. “It’s a really, really tough structure.”

The company could also replace some of the 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. That would require Mr Musk to convince potential investors that he has a viable long-term business plan, he said. Debt replacement could allow the company to generate cash. Mr. Musk has said some of his latest

Tesla inc

The stock sale, which raised nearly $4 billion in cash, was thanks to Twitter.

If successful, the company could generate positive free cash flow in two to three years, which it could use to pay off the remaining debt and eventually go public again, Kass said. “The prospect of an eventual IPO within three to five years would be a very attractive incentive for large funds,” he said.

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

Write to Mark Maurer at mark.maurer@wsj.com

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