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 now not has to file common monetary reviews to the Securities and Change Fee, that are essential instruments for figuring out an organization’s monetary well being.

Analysts and lecturers have been in a position to piece collectively an image of the corporate from data Mr. Musk has supplied in addition to particulars of the deal and the corporate’s final regulatory filings. Chapter may very well be one outcome. Mr. Musk, the world’s richest individual, might additionally increase 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 web 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. 

Practically 90% of its income final 12 months got here from promoting, and it historically has been the corporate’s foremost 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 web 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 over $13 billion in debt. He paid for the remaining in fairness, some contributed by a number of traders. 

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 line with

Jeffrey Davies,

a former credit score analyst and founding father of knowledge supplier Enersection LLC, “This factor’s most likely not price greater than what the debt stack is, fairly frankly, until you place numerous possibility worth simply on Elon.” Mr. Musk final month stated he and traders have been overpaying for the corporate within the quick time period. 

Revenue Below Musk

Mr. Musk stated earlier this month that Twitter had suffered “an enormous drop in income” and was dropping $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 corporations since Mr. Musk purchased the enterprise. 

Some corporations, together with burrito chain

Chipotle Mexican Grill Inc.,

cereal maker

Basic 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 prime executives from its advert division have soured relationships, The Wall Road Journal has reported.

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

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 doubtless stay below strain till advertisers absolutely grasp the brand new enterprise mannequin, probably main lots of them to return to the platform, stated

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 stated. 

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

Market-research agency Insider Intelligence Inc. lately minimize its annual ad-revenue income outlook for Twitter by almost 40% by way of 2024. 

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

Lowering Prices

The corporate has moved shortly to slash prices, together with chopping its employees by half. Salaries and different compensation make up a big chunk of general 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 might save the corporate roughly $860 million a 12 months, if the staff which can be leaving made a mean of about $233,000 yearly—the corporate’s most lately disclosed median pay determine. The estimated financial savings would symbolize 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, web debt totaled $596.5 million as of June 30, in line with S&P World Market Intelligence, an information supplier. That compares with a detrimental steadiness 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 line with a submitting. 

Now, the corporate must pay a minimum of $9 billion in curiosity to banks and hedge funds over the following seven to eight years, when the $13 billion in debt matures, in line with a evaluation 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 movement over the previous eight years, he stated. 

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

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

Moody’s

Traders Service on Oct. 31 downgraded Twitter’s score to B1 from Ba2, a two-notch drop, and S&P World Scores on Nov. 1 downgraded it to B- from BB+, a five-notch drop. 

Monetary Prospects 

Twitter’s monetary challenges might outcome within the firm submitting for chapter, elevating fairness or shopping for again some debt from its lenders, analysts and lecturers stated. 

If Twitter information for chapter, as Mr. Musk warned was attainable in an all-hands assembly earlier this month, his $27 billion funding would doubtless 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 cut back its debt load and curiosity prices in addition to its valuation, which might be useful in the long term, Mr. Davies stated. 

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

The corporate might additionally substitute a few of the debt with fairness, each from Mr. Musk and from outdoors traders, stated

David Kass,

a finance professor on the College of Maryland’s

Robert H. Smith

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

Tesla Inc.

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

If profitable, the corporate might generate optimistic free money movement in two or three years, which it might use to pay down the residual debt and ultimately go public once more, Mr. Kass stated. “The prospect of an eventual IPO inside three to 5 years could be a really enticing enticement for big funds,” he stated. 

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

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