Hello again from parental leave! Today we’re looking at Twitter’s finances pre, and post-Musk. Thanks to Liza for giving this a read before it went out. Feel free to hit the button below and stick around while I learn how to type and bounce a baby at the same time! — Alex
Twitter is facing down a pile of debt this year in the wake of its sale to Elon Musk in 2022. Reporting is running hot concerning how the company will finance its loans and survive as a business.
After digging through historical results and recent reporting, it appears likely that Twitter will eat a shit sandwich this year.
The company has done work to better align its revenues and expenses. Cutting costs to finance debt in the wake of a leveraged buyout is standard corporate practice, of course. But Twitter needs to make lots more money to finance its debts, and with its revenues in decline it is being squeezed on both its top and bottom lines. Perhaps letting go of so much of its advertising sales team was an error.
Let’s do two things together today. First, we’ll go back to Twitter’s Q1 and Q2 2022 results, the last data that it shared before its sale to get a feel for where it was pre-Musk. Second, we’ll collect data from recent reporting, allowing us to come up with a rough sketch of the company’s present-day financial position. And then we’ll compare the two, handicapping results for the change in macroeconomic conditions to get a feel for how Musk’s tenure is shaping up.
Cool? Let’s get into it.
Rewind the clock
Where you apportion blame for the company’s situation likely turns on how you feel about Musk himself. But what I don’t think is fair no matter your perspective is to say that Twitter was on death’s door before it was sold.
Why? The numbers. In the first six months of 2022, Twitter’s revenue came to $2.38 billion, up from $2.23 billion in the year-ago period; more closely, Twitter’s revenue was up 16% in Q1 2022 to $1.20 billion, and down 1% in Q2 2022 to $1.18 billion.
Twitter’s profitability in the first half of 2022 was impacted by its sale of MoPub, so let’s first look at its operating income. On a GAAP (fully-loaded) basis, Twitter lost $471.6 million in operating terms in the first six months of last year, inclusive of a $343.8 million operating deficit earned in the second quarter.
Sticking to Q2 2022, Twitter’s large operating loss led to a net loss of $270.0 million, and adjusted EBITDA of +$111.7 million.
What to make of those numbers? It’s clear that Twitter’s first quarter was stronger than its second. It grew, instead of shrank, and posted smaller operating losses and far-greater adjusted EBITDA, albeit boosted by the MoPub sale. But in aggregate they don’t feel that bad.
Narrowing our vision to just cash, Twitter’s operations were cash flow positive in the first half of 2022, kicking off $155.8 million. The company’s Q2 2022 operating cash flow of $29.7 million follows the trend we’ve seen thus far in which Twitter’s 2022 was seemingly getting worse over time, though we should be a little skeptical of sequential-quarterly analysis of a business that is at least partially seasonal.
All told, Twitter’s revenue was up very modestly in the half-year before its sale, it generated operating cash flow and positive adjusted EBITDA, albeit at the cost of material GAAP losses.
My read of Twitter’s first half of 2022 is that the company was muddling along.
There were other positive signs that we could point to (“Q2  average monetizable daily active usage (mDAU) was 237.8 million, up 16.6% compared to Q2 ,” Twitter reported in June), and less healthy indicators that we could include (GAAP costs rising more quickly than revenue, to pick one). But it’s hard for me to look at the company’s results and $2.68 billion worth of cash and equivalents stacked next to its $3.44 billion worth of short-term investments and fret about its $5.25 billion worth of convertible and long-term notes as of June 30, 2022.
Twitter was not in danger of running out of cash, and it had a liquid stock at the time that it could have levered should it have needed to raise more funds. Was Twitter a company causing me to chafe at my journalistic restrictions precluding single-company investments? No, but it wasn’t about to die.
This makes certain coverage of the company a little hard to parse. Here’s the FT recently, for example:
The company’s dire finances — it made a loss of $221mn in 2021 before the acquisition and Musk has said revenues have declined since — have led the new owner to regularly raise the prospect that the company could crash into bankruptcy.
If you read that quickly you might think that Twitter was teetering on the edge of collapse before it died. As we have seen above, that wasn’t really the case.
Now, what has happened since Twitter’s final quarters as a public company? This is where things get hairy.
Rising debt + falling revenue = ?
I’ve collected a few facts that are pertinent to our work to understand where Twitter sits today, from a financial perspective.
The Information reports that Twitter’s “daily revenue on Tuesday was 40% lower than the same day a year ago”
The Financial Times reports that Twitter’s debt load of $13 billion undertaken by Musk to finance his buy of the company includes around $1.5 billion worth of “annual interest payments”
The same FT piece indicates that Musk has stated that Twitter has around $1 billion in cash
Regarding the 40% figure, recall that Twitter reported $1.20 billion worth of Q1 2022 revenue, inclusive of zero top line from MoPub. That means we can use the figure as a loose benchmark for our calculatory needs sans the need to exclude now-divested revenue sources. Presuming that Twitter’s daily revenue decline holds fast the whole quarter, a 40% reduction in top line compared to Q1 2022 would give Twitter around $720 million worth of revenue in Q1 2023.
Annualizing that figure puts Twitter on a $2.88 billion run rate. Given an anticipated $1.5 billion worth of debt payment per the FT, Twitter would have around $1.38 billion worth of top line left to pay its costs of revenue, staff costs, and other expenses. I doubt that even today’s far-leaner Twitter is able to make that math work (Twitter’s Q2 2022 costs were $1.52 billion, to underscore our skepticism.)
With the Financial Times reporting that Twitter’s first interest payment on its debt could come as soon as this month, time is very, very short for the company to redouble its revenues and get its financial house in order. You might even say that the window of opportunity has passed.
With $1 billion in cash, the company can likely pay its first coupons and keep its staff paid. But as the company’s new owner has complained about its losses since he bought it, there does appear to be an end-date ahead of the private company where it runs out of money. Now private, Twitter cannot just issue more stock; it will have to find funding through other channels.
Not all of this is Musk’s fault. As anyone in the larger media business can tell you, ad sales are not kicking off 2023 on a high note. Still, while we cannot say that the entire 40% cut to Twitter’s daily revenue is due to Musk’s well-reported leadership style or other choices since he bought the social media company, a portion is. And the fact that Twitter’s debt load has greatly increased is entirely due to his choices.
The combination of smaller revenues due in part to Musk, and the stiff financing costs he stapled to the company to finance his takeover thereof have put Twitter into a worse position than it would, had it been left alone. From our analysis, then, the Musk tenure at Twitter appears to be an example of biting off more than one might be able to chew. Indeed, I wonder if even with flat revenues Twitter could have serviced its new debt load without choking. The company’s positive operating cash flow that we discussed above was nice to see, but modest. Twitter only kicked off so much cash before its debt skyrocketed, and you can’t put a ten-ton weight in a row boat that was already floating a bit low in the water and expect it not to sink.
Twitter was getting by before Musk. Now its new debts and self-inflicted wounds busy exacerbating a larger advertising slowdown make me wonder if it can avoid even more drastic measures to just stay alive. As far as vanity projects go, this one is living up to the demarcation.
The featured image on this post is an excerpt from a piece of Henrik Dønnestad work, whom I wish to thank.
Leverage is such a dangerous tool for businesses. Further to meeting the interest payments, business need to be operated with such efficiency to not breach covenants that may put everything down to a death spiral. Have a look to what happened to Lojas Americanas in Brazil a few weeks ago.
Nice analysis, and great rowboat analogy