Twitter Isn’t Rid of Wall Street

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Twitter’s revenue growth is slowing, and even after going private it won’t be free of the need to grow given its debt to Wall Street banks

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That light will now need to show Mr. Musk the money—specifically, how to make Twitter pay for itself. Twitter’s average annual revenue growth has lagged behind its peers over the last four years. And both the company and the world’s richest person himself are incurring a substantial amount of debt from a group of lenders led by no less of a Wall Street institution than Morgan Stanley to fund the $44 billion deal. The takeover also happens to be taking place during a global online advertising slump that is affecting peers such as Google, Facebook and Snapchat,

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On Thursday morning Twitter said advertising revenue rose 26% year over year to $1.1 billion in the first quarter. That was slightly below Wall Street’s target, though the company also reported the addition of about 14 million daily active users—a big jump from the 5 million added in each of the last two quarters.

Mr. Musk has criticized Twitter’s reliance on advertising, and spoken out in favor of new potential revenue streams such as subscriptions. But whichever direction he chooses to drive the company, even a privately held Twitter won’t be free of the pressure to earn and boost profits. The debt incurred from Mr. Musk’s purchase will take the company’s leverage to nearly nine times its annual adjusted earnings from its current level of about 3½ times, according to a Wall Street Journal analysis. That could mean about $845 million a year in interest payments compared with the $51 million Twitter is currently on the hook for.

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That’s a big bill for a company whose annual free cash flow peaked at about $856 million four years ago and went negative last year due to an $810 million payment to settle a shareholder class action lawsuit. In the first quarter, net cash from operations actually fell to $126 million from $390 million a year earlier, in part due to a $150 million payment related to a Federal Trade Commission complaint from 2020.

Twitter could also find its fate closely tied to that of Tesla,

the electric car company Musk runs and depends on for the bulk of his wealth. Tesla’s shares dropped 12% Tuesday after Twitter’s deal announcement, shedding some $128 billion in market value. About $12.5 billion worth of the funding to buy Twitter is coming from margin loans backed by Mr. Musk’s Tesla shares, meaning a sharp drop in the value of the historically volatile stock could put Mr. Musk under a margin call.

And despite Mr. Dorsey’s utopian vision of Twitter as a public service, running an always-on global publishing operation for more than 200 million vocal users carries a big price tag. Twitter in February projected capital expenditures in the range of $900 million to $950 million for this year, mainly to serve “our existing data centers and infrastructure needs.” The company didn’t update that figure in Thursday’s report, and didn’t hold a conference call to discuss the results, given the pending acquisition.

If Mr. Musk wants to go the way of subscription toward more predictable, recurring revenue, the platform will need a whole lot of new features worth paying for. Twitter Blue launched for $2.99 ​​a month in November offering users the ability to avoid ads as they read some articles, among other features. But the new segment called “subscription and other revenue” still actually posted a revenue decline of 5% from a year earlier in the first quarter, even after accounting for the impact of a divestiture. Mr. Musk has tweeted about making Twitter Blue an ad-free experience. Then again, he also tweeted that it should be made even cheaper.

So it seems inevitable that Twitter will need to rely on ads, at least for the foreseeable future—to generate the cash flow needed to service the incoming debt load. Compared with social media peers like Meta Platforms’ Facebook and Instagram, Twitter’s ad tech is woefully behind, something new chief executive officer Parag Agrawal, a former software engineer, was appointed to fix. The company’s average revenue per user was about 46% below that of Facebook-parent Meta Platforms in the first quarter. To get more advertisers interested in the platform, Twitter needs to not only spend to attract more users but invest in upping its ad game.

Historically, Twitter has been heavy on brand advertisements, which aren’t meant to elicit immediate conversion, therefore making advertisers’ return on investment difficult to quantify. New iOS tracking changes only compound that problem. In its fourth-quarter shareholder letter, Twitter said brand ads were still 85% of its overall advertising mix. Mr. Musk isn’t buying Twitter to become an advertising innovator, but he may have no choice.

“It appears that Twitter is tantalizingly close to being in the hands of someone with the risk appetite to try a bunch of things,” wrote AB Bernstein’s Mark Shmulik. That is good news from a debt perspective, because it seems the company will need more of all of the things, all at the same time.

Write to Dan Gallagher at [email protected] and Laura Forman at [email protected]


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