Twitter is not rid of Wall Street


Elon Musk takes Twitter TWTR 0.97%

“back from Wall Street” in the words of its co-founder. The irony is that the turbulent social network will be beholden to the markets more than ever.

Shortly after Twitter agreed to be acquired by the outspoken mega-billionaire, its co-founder and two-time CEO Jack Dorsey was quick to thank Mr. Musk for taking his baby out “of an impossible situation”. Twitter as a supposedly Wall Street-dominated company and advertising model, Mr. Dorsey tweeted, “has always been my only problem and biggest regret.” The now-enthusiastic bitcoin evangelist added in a series of tweets that Mr. Musk “is the singular solution I trust. I trust his mission to expand the light of consciousness.

That light will now have to show Mr. Musk the money, especially how to make Twitter profitable. Twitter’s average annual revenue growth has lagged its peers over the past four years. And the company and the richest person in the world are taking on substantial debt from a group of lenders led by at least one Wall Street institution Morgan Stanley to fund the $44 billion deal. The takeover also comes during a global online advertising crisis that is affecting peers such as Google, Facebook and Snapchat..

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, although the company also reported adding around 14 million daily active users, a big jump from the 5 million added during each of the two. last quarters.

Mr Musk criticized Twitter’s reliance on advertising and spoke out in favor of potential new revenue streams such as subscriptions. But whichever direction he chooses to run the business, even a private Twitter won’t be immune to the pressure to win and increase profits. The debt incurred following the purchase of Mr Musk will raise the company’s leverage to almost nine times its annual adjusted profit from its current level of around 3.5 times, according to a Wall Street analysis Log. That could mean around $845 million a year in interest payments, compared to the $51 million Twitter is currently charging for.

That’s a big bill for a company whose annual free cash flow peaked at around $856 million four years ago and turned negative last year due to an $810 million payment to settle. a shareholder class action. 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 lawsuit. 2020 Trade Commission.

Twitter could also find its destiny intertwined with that of Tesla,

the electric car company that Mr. Musk runs and on which most of his fortune depends. Tesla shares fell 12% on Tuesday after Twitter announced the deal, losing some $128 billion in market value. About $12.5 billion of the funding to buy Twitter comes from margin loans backed by Mr. Musk’s Tesla stock, meaning a sharp drop in the historically volatile stock’s value could put Mr. Musk under a margin call.

And despite Mr. Dorsey’s utopian vision of Twitter as a public service, running a permanent global publishing operation for more than 200 million voice users is very expensive. In February, Twitter forecast capital expenditures in the range of $900 million to $950 million for this year, primarily to support “our existing data centers and infrastructure needs.” The company did not update that figure in Thursday’s report and did not hold a conference call to discuss the results, given the pending acquisition.

If Mr. Musk is to follow the subscription path to more predictable recurring revenue, the platform will need a lot of new features worth paying for. Twitter Blue launched for $2.99 ​​per month in November, giving users the option to skip ads when reading certain articles, among other features. But the new segment called “subscription and other revenue” still saw a 5% year-over-year revenue decline in the first quarter, even after taking into account the impact of a divestiture. Mr. Musk tweeted to make 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 have to rely on ads, at least for the foreseeable future, to generate the cash flow needed to service the incoming debt load. Compared to social media peers like Facebook and Meta Platforms’ Instagram, Twitter’s advertising technology lags woefully behind, something new chief executive Parag Agrawal, a former software engineer, has been appointed to fix. The company’s average revenue per user was about 46% lower than Facebook’s parent meta-platforms in the first quarter. To get more advertisers interested in the platform, Twitter must not only spend to attract more users, but invest in improving its advertising game.


Can Twitter cover the debt contracted by Elon Musk to finance his acquisition? Join the conversation below.

Historically, Twitter has focused on brand ads, which are not intended to drive immediate conversion, making advertisers’ return on investment difficult to quantify. The new iOS tracking changes only make this problem worse. In its fourth-quarter letter to shareholders, Twitter said branded ads still make up 85% of its overall ad mix. Mr. Musk isn’t buying Twitter to become an ad innovator, but he may have no choice.

“It looks like Twitter is about to get into the hands of someone with a taste for risk to try a lot of things,” AB Bernstein’s Mark Shmulik wrote. This is good news from a debt perspective, as it looks like the company will need more of all of these things, all at the same time.

Twitter will go private if Elon Musk’s $44 billion takeover bid is approved. The move would allow Musk to make changes to the site. The WSJ’s Dan Gallagher explains the changes Musk is proposing and the challenges he might face adopting them. Artwork: Jordan Kranse

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

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