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

To make the agreement, Mr. Musk sought 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 to the debt burden that required a fresh source of cash.

It is difficult to determine the state of the company. Twitter is not required to submit regular financial reports to the Securities and Exchange Commission, which is an important tool 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. Kasturi has offered as well as the details of the deal and the company’s last regulatory filings. Bankruptcy can be one result. mr. Musk, the world’s richest man, could also raise new funding, or buy back debt from lenders, giving Twitter a buffer to turn its business around.

Here’s a look at his assessment of Twitter’s financial situation and prospects.

Finance Twitter, Pre-Musturi

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

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

Twitter has struggled to attract new users and increase revenue, which came in about $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.

Almost 90% of last year’s revenue came from advertising, and it has traditionally been the company’s main source of revenue. By 2021, Twitter will take in $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 the takeover talks. Instead, it’s the least debt-heavy company in the S&P 500 index. But that cash position was down 35% from a year earlier as of June 30, filings show, and Mr. Kasturi paid for Twitter by taking on $13 billion in debt. He paid the rest in equity, some contributed by some 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 Davies, a former credit analyst and founder of data provider Enersection LLC, “It’s probably no more valuable than a pile of debt, frankly, unless you put a lot of option value on Elon.” Mr. Kasturi said last month with investors it’s overpaying for the company in the short term.

Revenue Dina Kasturi

Mr. Musk said earlier this month that Twitter has experienced “a massive drop in revenue” and lost $4 million a day. It’s unclear whether that reflects a broader decline in the digital advertising market or a pause in advertising by some companies since Mr. Musk bought the business.

Some companies, including burrito chains

Chipotle Mexican Grill say,

cereal maker

General Mills speak

and airlines

United Airlines Holdings say,

rowdy paused their advertising spending on Twitter more uncertainty around where the company is headed. The departure of several top executives from the advertising department has soured the relationship, The Wall Street Journal has reported.

The exodus of advertisers poses a threat to companies that rely on that revenue stream. “As an online advertising company, you are flirting with disaster,” said Aswath Damodaran, professor of finance at New York University’s Stern School of Business.

Elon Musk has bought Twitter, ending a months-long saga over whether he would pass on his bid to take over the social media platform. The WSJ took an in-depth look at the tweets, texts and filings to see exactly how the battle played out. Illustration: Jordan Kranse

Deal negotiations for long-term contracts that normally begin at the end of the year have not taken place or have been delayed. The offer is inclusive more than 30% of US Twitter ad revenue, The Wall Street Journal reported.

Income will likely remain under pressure until advertisers fully grasp the new business model, potentially leading many of them to return to the platform, said Brent Thill, senior analyst at Jefferies Group LLC, a financial services firm. “Those advertisers will come back if they feel that there are users and there is an ability to monetize their ads,” said Mr. Thill.

But that can take time. Mr. Thill said it may take months for advertisers to get clarity. “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 lean more toward subscriptions and not rely on digital advertising. He said last Tuesday that the company Enhanced subscription servicecosting $7.99 a month, will run Nov. 29.

A walkway at the Twitter headquarters in San Francisco. The company has aggressively cut staff to reduce expenses.


Photo:

George Nikitin / Shutterstock

Reduce Costs

The company has moved quickly to slash costs, including cutting its staff by half. Salaries and other compensation make up a large chunk of the overall cost. The company has 7,500 full-time employees by the end of 2021, up from 5,500 a year earlier, filings show.

Layoffs of about 3,700 people could save the company about $860 million a year, given that the departing employees average about $233,000 per year — the company’s recently disclosed median salary figure. It’s estimated the savings will represent about 15% of Twitter’s $5.57 billion in costs and expenses last year. Costs and expenses rose 51% from the previous year, as renters increased their salaries.

More employees leave the company last week, rejected Mr. Kasturi’s request that they commit to work “long hours at high intensity” still.

Mount Debt

Before the acquisition Mr. Musk’s net debt totaled $596.5 million as of June 30, according to S&P Global Market Intelligence, a data provider. That compares with a negative balance of $2.18 billion the previous year period, indicating a cash surplus.

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

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

The interest payments are huge for a company that reported $6.3 billion in total operating cash flow over the past eight years, he said.

What’s more, the company’s current debt pile includes floating-rate debt, meaning interest costs are set to rise as the Federal Reserve continues to raise interest rates. Twitter’s total debt remains at pre-deal levels.

Twitter’s credit rating, which was below investment grade before the transaction with Mr. Musk, has deteriorated further.

Moody’s

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

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


Photo:

Susan Walsh / Associated Press

Financial Prospects

Twitter’s financial challenges could prompt the company to file for bankruptcy, raise equity or buy back some debt from lenders, analysts and academics say.

If Twitter files for bankruptcy, as Mr. Musk warned it might at an all-hands meeting earlier this month, its $27 billion investment will likely be wiped out because equity holders are last paid when the company restructures.

Buying back debt from lenders with a steep discount will help the company reduce its debt burden and interest costs as well as its valuation, which will be beneficial in the long term, said Mr. Davies.

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

The company can also replace some debt with equity, both from Mr. Musk and from outside investors, said David Kass, professor of finance at the University of Maryland’s Robert H. Smith School of Business. Therefore, Mr. Musk will need to convince potential investors that he has a viable long-term business plan, he said. Replacing debt can allow companies to generate cash. Mr. Kasturi has said some of his latest

Tesla speak

stock sale, generating almost $4 billion in cash, that’s because of Twitter.

If successful, the company could generate positive free cash flow within two or three years, which it could use to pay down remaining debt and eventually go public again, Kass said. “The prospect of an IPO eventually in three to five years will be a very attractive enticement 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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