The Contortions Required to Make X Sound Like a Healthy Business
Reading Time: 5 minutesThe Contortions Required of Linda Yaccarino to Make X Sound Like a Healthy Business, Elon Musk’s social network claims to be cash-flow positive excluding its debt payments. Let’s talk about the debt!, Linda Yaccarino said X/Twitter is cash-flow positive mi
Elon Musk has all the money in the world, but most of it is tied up in stock he’s not really supposed to get rid of. This has been a pesky little issue for Musk (net worth: somewhere north of $200 billion) ever since he decided on a lark to buy Twitter for $44 billion. To do it, he borrowed a few billion dollars from a collection of rich people. He spent something like $20 billion of his own cash . And he got the rest from banks, which lent about $12.5 billion. It’s tough being so rich you can outspend anyone, but not so rich you can afford to buy a third-rate social network without a little help.
And so Elon Musk (or, technically, the company he bought) has loans. They’ve been a pretty bad deal for the banks so far. Interest rates have gone up, and Musk has behaved in ways that make Twitter (now X) look like a bad business bet, so the banks have had a hard (or impossible) time selling Musk’s debt to investors who can find less repellent opportunities elsewhere. That isn’t even the only way his Tesla shares have functioned like a pair of stainless-steel handcuffs: He started out with a plan to use his Tesla stock to get financing for Twitter, but that looked like it might actually threaten his golden goose, so he didn’t do it. His need for liquidity prompted him to hit up another company of his, SpaceX, for a billion-dollar loan that made plain how easy it is for the lines to blur between Musk’s companies. (It’s unclear if that was to help his Twitter purchase or for some other purpose around the same time suddenly requiring him to have an extra billi. At any rate, he paid it back.)
The result of all of this is that Musk has loaded Twitter up with debt. On paper, he would appear to have the raw wealth to pay off all of that $12.5 billion with no problem, but he’s sort of boxed in, because Tesla shareholders get jumpy when Musk sells his stock. After he sold tens of billions of dollars of it in 2022, he promised not to sell any more in 2023 ‘under any circumstances.’ The nature of Musk’s Tesla fortune—that it fluctuates in large part depending on confidence in Musk—is the same reason he can’t just sell it and put Twitter, his new thing, on sound financial footing. So Musk’s lackeys at Twitter, who work for the richest man in the world, are in a bind: They have a company that their boss told everyone he overpaid for, which is now worth like a third of what he paid, and which is swimming in debts he won’t just pay off on behalf of his free-speech megautility. And they’ve got to spin it.
Here’s what that looks like: X CEO Linda Yaccarino going into a meeting with her boss’ bank lenders and telling them, according to Bloomberg’s paraphrasing last week: ‘Not including the cost of servicing debt, the company already is cash flow positive. And it should reach that milestone even when including debt by the back half of 2024.’ For a lot of businesses, ‘not including the cost of servicing debt’ is a reasonable qualifier that reveals something useful about the trajectory of the company. For Twitter, reaching profitability ‘not including the cost of servicing debt’ is more akin to a drowning man reaching the surface of the ocean ‘not including the sack of heavy rocks that a rich guy tied around his waist.’
Getting a window into Twitter’s finances is rare these days, because Musk’s privatization of the company freed it from releasing quarterly results. Nobody has to take anything Musk or his lieutenants say at face value, but Yaccarino probably did not get on a call with a bunch of Twitter’s debtholders and lie to them. Prosecutors and regulators do not like it when very high-profile rich people, even at private companies, lie to their lenders. (That is, in fact, one of the charges Sam Bankman-Fried is facing in his trial right now.) The lenders already gave Musk the money. There’s not much sense in creating the opening.
But it’s a funny attempt on X’s part to place the bar on the floor and then step over it, either in the eyes of its bankers or the industry press. Twitter in its old days had a reputation as a company that didn’t make money, and that was mostly true, but it wasn’t as if it was an endless cash pit. Twitter had a lot of decent cash-flow quarters in its latter years as a public company. Its business made money in 2019 and (barely in) 2020. In 2021, the company was what one might call ‘profitable not including the cost of class-action litigation.’ Twitter had many down years, and Musk had arguably inflicted one on the business himself in 2022 before he succumbed to making it all his own problem. The company also sometimes posted net losses even when it posted operating profits in its core business.
Since taking over Twitter, Musk has crushed the company’s valuation by every available indicator. Advertisers, historically responsible for 90 cents out of every dollar Twitter made, started leaving after Musk took over and still haven’t restored their old budgets, Yaccarino reportedly acknowledged in the meeting with bankers. The company has surely made money by leaning into its subscription product, now called X Pro, but it’s done that while chasing off its most lucrative historic revenue source to the tune of what Musk, in July, said was a 50 percent advertising revenue drop. Musk has definitely slashed costs to the bone, taking Twitter’s staff size down to what seems to be well under half of its level when he took over. In this way Musk is running a nice little mom-and-pop business with low overhead and likely small but steady margins (if you don’t count debt). It’s a lot for $44 billion, but it’s honest work.
The debt, though. The debt! Twitter made the first payment on that debt in January, likely about $300 million, Bloomberg calculated. It made another the next quarter, also likely about $300 million. It will keep having more of these payments, several times a year, until it’s paid back $12.5 billion plus interest. Even in Twitter’s profitable years in 2019 and ’20, before Musk made the platform a horrifying place for advertisers, that would’ve been a lot. One year’s operating income was $27 million, about the annual cost of an elite shortstop in free agency. Another year’s operating income was about $273 million. These are smaller numbers than the debt payment Twitter/X has likely made multiple times this year. And they are the product of Musk making a truly insane offer to buy Twitter at a stock price—$54.20—that he picked because he likes marijuana jokes. This is what Yaccarino has to talk about with a straight face as she sits on calls with people in suits who would ultimately like to get their money back.
The banks probably will get their debt payments, because they are harder to stiff than random vendors and it would not be great for Musk’s cross-company reputation if he didn’t pay them. Life will go on. Twitter might never be worth $44 billion again, but its outlook not including the potentially crippling amount of money it owes powerful financial institutions is rosier than the mainstream media will tell you.
Reference: https://slate.com/technology/2023/10/x-linda-yaccarino-debt-cash-flow-positive.html
Ref: slate
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