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

It’s powerful to find out the state of the corporate. Twitter not has to file common monetary reviews to the Securities and Trade Fee, that are essential instruments for figuring out an organization’s monetary well being.

Analysts and teachers have been capable of piece collectively an image of the corporate from data Mr. Musk has provided in addition to particulars of the deal and the corporate’s final regulatory filings. Chapter might be one consequence. Mr. Musk, the world’s richest individual, may additionally elevate new funds, or purchase again debt from lenders, giving Twitter a buffer to show round its enterprise. 

Here’s a have a look at their assessments of Twitter’s monetary state of affairs and prospects. 

Twitter Funds, Pre-Musk

Twitter is and was a preferred software for politicians, celebrities and journalists. However as a enterprise, it was stagnating. 

It hasn’t booked an annual revenue since 2019, and posted a loss in eight years of the previous decade. The corporate’s internet loss narrowed in 2021, to $221.4 million from $1.14 billion the earlier 12 months.

Twitter has struggled to draw new customers and improve income, which got here in at about $5.1 billion final 12 months. In its final quarterly submitting as a public firm, for the interval ended June 30, income was $1.18 billion, down barely year-over-year. 

Almost 90% of its income final 12 months got here from promoting, and it historically has been the corporate’s predominant income. In 2021, Twitter took in $4.51 billion from advertisers, and $572 million from licensing knowledge and different companies.

The corporate had greater than $2 billion in money and fewer than $600 million in internet debt earlier than the takeover talks—little or no debt for an organization within the S&P 500 index. However that money place was down 35% from a 12 months earlier as of June 30, filings present, and Mr. Musk paid for Twitter by taking up $13 billion in debt. He paid for the remaining in fairness, some contributed by a number of buyers. 

Twitter had a market capitalization of $37.48 billion in March, the month earlier than Mr. Musk agreed to purchase it, S&P knowledge confirmed. Social-media shares have slumped sharply since then. However now, in response to

Jeffrey Davies,

a former credit score analyst and founding father of knowledge supplier Enersection LLC, “This factor’s in all probability not price greater than what the debt stack is, fairly frankly, until you set a variety of possibility worth simply on Elon.” Mr. Musk final month mentioned he and buyers had been overpaying for the corporate within the brief time period. 

Revenue Below Musk

Mr. Musk mentioned earlier this month that Twitter had suffered “a large drop in income” and was shedding $4 million a day. It isn’t clear if that displays the broader downturn within the digital advert market or the pause in promoting by a number of firms since Mr. Musk purchased the enterprise. 

Some firms, together with burrito chain

Chipotle Mexican Grill Inc.,

cereal maker

Normal Mills Inc.

and airline

United Airways Holdings Inc.,

have paused their advert spending on Twitter over uncertainty round the place the corporate is headed. The departure of a number of high executives from its advert division have soured relationships, The Wall Road Journal has reported.

The exodus of advertisers poses a menace for an organization so reliant on that income stream. “As a web-based advert firm, you’re flirting with catastrophe,” mentioned

Aswath Damodaran,

a finance professor at New York College’s Stern Faculty of Enterprise. 

Deal negotiations for long-term contracts that often start on the finish of the 12 months haven’t taken place but or have been placed on maintain. These offers comprise greater than 30% of Twitter’s U.S. advert income, The Wall Road Journal reported.

Income will possible stay below stress till advertisers totally grasp the brand new enterprise mannequin, probably main a lot of them to return to the platform, mentioned

Brent Thill,

a senior analyst at Jefferies Group LLC, a financial-services agency. “These advertisers will come again in the event that they really feel that the customers are there and there’s a capability to monetize their commercial,” Mr. Thill mentioned. 

However that would take time. Mr. Thill mentioned it may take months for advertisers to get readability. “It’s an enigma,” he mentioned.  

Market-research agency Insider Intelligence Inc. just lately lower its annual ad-revenue income outlook for Twitter by practically 40% by 2024. 

Mr. Musk needs the corporate to lean extra on subscriptions and rely much less on digital promoting. He mentioned final Tuesday that the corporate’s upgraded subscription service, costing $7.99 a month, would launch Nov. 29. 

Lowering Prices

The corporate has moved rapidly to slash prices, together with chopping its workers by half. Salaries and different compensation make up a big chunk of total bills. The corporate had 7,500 full-time workers on the finish of 2021, up from 5,500 a 12 months earlier, filings present.

The layoffs of roughly 3,700 individuals may save the corporate roughly $860 million a 12 months, if the staff which are leaving made a median of about $233,000 yearly—the corporate’s most just lately disclosed median pay determine. The estimated financial savings would signify about 15% of Twitter’s $5.57 billion in prices and bills final 12 months. Its prices and bills climbed 51% from the earlier 12 months, as hiring drove up its payroll.

Extra workers left the corporate final week, rejecting Mr. Musk’s demand that they decide to working “lengthy hours at excessive depth” to remain.

Debt Mountain 

Earlier than Mr. Musk’s acquisition, internet debt totaled $596.5 million as of June 30, in response to S&P International Market Intelligence, an information supplier. That compares with a unfavourable stability of $2.18 billion the prior-year interval, indicating a money surplus.

Twitter paid $23.3 million in curiosity expense within the quarter ended June 30, in response to a submitting. 

Now, the corporate must pay at the least $9 billion in curiosity to banks and hedge funds over the following seven to eight years, when the $13 billion in debt matures, in response to a assessment of Twitter’s loans by Mr. Davies, the previous credit score analyst.

The curiosity funds are substantial for an organization that reported $6.3 billion in complete working money stream over the previous eight years, he mentioned. 

What’s extra, the corporate’s debt stack now consists of floating-rate debt, that means that curiosity prices are set to rise because the Federal Reserve continues to extend rates of interest. Twitter’s debt was completely mounted fee earlier than the deal. 

Twitter’s credit score rankings, which had been under funding grade earlier than the transaction with Mr. Musk, have deteriorated additional.

Moody’s

Buyers Service on Oct. 31 downgraded Twitter’s ranking to B1 from Ba2, a two-notch drop, and S&P International Rankings on Nov. 1 downgraded it to B- from BB+, a five-notch drop. 

Monetary Prospects 

Twitter’s monetary challenges may consequence within the firm submitting for chapter, elevating fairness or shopping for again some debt from its lenders, analysts and teachers mentioned. 

If Twitter information for chapter, as Mr. Musk warned was attainable in an all-hands assembly earlier this month, his $27 billion funding would possible be worn out as a result of fairness holders are the final to be paid when an organization restructures.

Shopping for again debt from lenders at a steep low cost would assist the corporate scale back its debt load and curiosity prices in addition to its valuation, which might be useful in the long term, Mr. Davies mentioned. 

“I don’t assume they will problem any extra debt,” Mr. Davies mentioned. “It’s a very, actually powerful construction.” 

The corporate may additionally change a few of the debt with fairness, each from Mr. Musk and from exterior buyers, mentioned

David Kass,

a finance professor on the College of Maryland’s

Robert H. Smith

Faculty of Enterprise. For that, Mr. Musk would wish to steer potential buyers that he has a viable long-term marketing strategy, he mentioned. Changing debt may allow the corporate to generate money. Mr. Musk has mentioned a few of his newest

Tesla Inc.

inventory sale, yielding virtually $4 billion in money, was due to Twitter. 

If profitable, the corporate may generate optimistic free money stream in two or three years, which it may use to pay down the residual debt and finally go public once more, Mr. Kass mentioned. “The prospect of an eventual IPO inside three to 5 years can be a really engaging enticement for giant funds,” he mentioned. 

—Theo Francis and Jennifer Williams-Alvarez contributed to this text.

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