To make the deal work, Mr. Musk tried to add 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 burden that requires new sources of cash.
It is difficult to determine the state of the company. Twitter no longer has 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 were able to piece together a picture of the company from information provided by Mr. Musk as well as details of the deal and the company’s latest regulatory filings. Bankruptcy could be a result. Mr. Musk, the world’s richest person, could also raise new money or buy up debt from lenders, giving Twitter a buffer to turn around.
Here’s a look at their assessments of Twitter’s financial condition and outlook.
Twitter finance, before Musk
Twitter is and was a popular tool for politicians, celebrities, and journalists. But as a business, it was stagnating.
It hasn’t posted an annual profit since 2019 and has recorded a loss in eight years over the past decade. The company’s net loss narrowed in 2021 from $1.14 billion to $221.4 million. Last year.
Twitter has struggled to attract new users and grow revenue, which stood at around $5.1 billion last year. In its last quarterly filing as a public company, for the period ended June 30, revenue was $1.18 billion, down slightly year-over-year.
Nearly 90% of its revenue last year came from advertising, and it’s traditionally the company’s main source of income. In 2021, Twitter received $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 before takeover talks — very little debt for an S&P 500 index company. But that cash position was down by 35% from a year earlier to June 30, according to filings, and Mr. Musk paid for Twitter by taking on $13 billion in debt. He paid the rest in equity, some contributed by several investors.
Twitter had a market capitalization of $37.48 billion in March, the month before Mr. Musk agreed to buy it, according to S&P data. Social media stocks have fallen sharply since then. But now, according to Jeffrey Davies, former credit analyst and founder of data provider Enersection LLC, “That thing probably isn’t worth more than the pile of debt, quite frankly, unless you put a lot of option-only value on Elon.” Last month, Mr Musk said he and investors were paying too much for the company in the short term.
RUnder Musk party
Mr Musk said earlier this month that Twitter had suffered “a massive drop in revenue” and was losing $4 million a day. It is unclear whether this reflects the broader slowdown in the digital advertising market or the pause in advertising for several companies since Mr. Musk bought the company.
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Some companies, including burrito chain Chipotle Mexican Grill Inc.,
cereal manufacturer General Mills Inc.
and the airline United Airlines Holdings Inc.,
suspended ad spending on Twitter due to uncertainty about the company’s direction. The departure of several senior executives from its advertising department 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 advertising company, you’re flirting with disaster,” said Aswath Damodaran, professor of finance at New York University’s Stern School of Business.
Negotiations for long-term contracts which usually start at the end of the year have not yet taken place or have been suspended. These deals account for more than 30% of Twitter’s advertising revenue in the United States, the Wall Street Journal reported.
Revenue will likely remain under pressure until advertisers fully grasp the new business model, which could lead many to return to the platform, said Brent Thill, principal analyst at Jefferies Group LLC, a financial services company. “These advertisers will come back if they feel the users are there and there is an opportunity to monetize their advertising,” Mr. Thill said.
But it could take time. Mr Thill said it could take advertisers months to get clarification. “It’s an enigma,” he said.
Market research firm Insider Intelligence Inc. recently cut its annual ad revenue outlook for Twitter by nearly 40% through 2024.
Mr. Musk wants the company to rely more on subscriptions and depend less on digital advertising. He said last Tuesday that the company’s enhanced subscription service, which costs $7.99 per month, would launch on November 29.
The company quickly cut costs, including halving its workforce. Salaries and other remuneration represent a large part of the overall expenditure. The company had 7,500 full-time employees at the end of 2021, up from 5,500 a year earlier, according to filings.
The layoffs of about 3,700 people could save the company about $860 million a year, if departing employees earned an average of about $233,000 a year, the company’s most recently disclosed median salary. The estimated savings would represent about 15% of Twitter’s $5.57 billion in costs and expenses last year. Its costs and expenses soared 51% from a year earlier as hiring drove up its payroll.
More employees left the company last week, rejecting Mr Musk’s request to commit to working “long hours at high intensity” to stay.
mountain of debt
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 for the prior year period, indicating excess cash.
Twitter paid $23.3 million in interest expense in the quarter ended June 30, according to a filing.
Now the company will have to pay at least $9 billion in interest to banks and hedge funds over the next seven to eight years when the $13 billion in debt comes due, according to a review of Twitter’s loans by Mr. Davies, the former credit analyst.
Interest payments are substantial for a company that reported total operating cash flow of $6.3 billion over the past eight years, he said.
Additionally, the company’s debt pile now includes floating rate debt, which means interest charges are expected to rise as the Federal Reserve continues to raise interest rates. Twitter’s debt was entirely fixed rate before the deal.
Twitter’s credit ratings, which were below investment grade before the deal with Mr. Musk, deteriorated further. On Oct. 31, Moody’s Investors Service downgraded Twitter’s rating to B1 from Ba2, a two-notch drop, and S&P Global Ratings on Nov. 1 downgraded it to B- from BB+, a five-notch drop.
Twitter’s financial troubles could lead to the company filing for bankruptcy, raising equity or buying out some debt from its lenders, analysts and academics have said.
If Twitter files for bankruptcy, as Mr. Musk warned it was possible at a town hall meeting earlier this month, its $27 billion investment would likely be wiped out as shareholders are the last to get paid when a company restructures.
Buying debt from lenders at a deep discount would help the company reduce its leverage and interest costs as well as its valuation, which would be beneficial in the long term, Davies said.
“I don’t think they can issue more debt,” Mr Davies said. “It’s a really, really tough structure.”
The company could also replace some debt with equity, both from Mr. Musk and from outside investors, said David Kass, professor of finance at the Robert H. Smith School of Business at the University of Maryland. For that, Mr. Musk would have to persuade potential investors that he has a viable long-term business plan, he said. Debt replacement could allow the company to generate cash. Mr. Musk said some of his latest Teslas Inc.
sale of shares, bringing in nearly $4 billion in cash, was due to Twitter.
If successful, the company could generate positive free cash flow in two or three years, which it could use to pay down residual debt and eventually go public again, Kass said. “The prospect of a possible 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 [email protected]
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