Twitter Raises $1.8 Billion In Debt – What Does This Tell Us?
Twitter (NYSE:TWTR) recently raised $1.8 billion in debt. It issued $900 million of 0.25% convertible senior notes and another $900 million of 1% convertible senior notes. [1] We have updated our valuation model to reflect this additional debt as well as the resulting interest expense, which will have a slight negative impact on earnings per share (EPS) going forward. More specifically, we now expect Twitter’s 2014 diluted non-GAAP EPS to be $0.09, down from our previous estimate of $0.10. Demand for these convertible notes was strong, and while the company did not state a specific purpose for issuing the debt, we discuss one likely factor below.
Our price estimate for Twitter stands at $32, implying a discount of about 40% to the market price.
See our complete analysis for Twitter
Twitter Needs To Invest More In R&D And Marketing
Twitter’s free cash flow has been negative for the past four years, and we expect that to continue in 2014. If we only look at operational cash flow, we find that, including the expected free cash flow in 2014, Twitter has burned net cash of more than $400 million over the course of five years. Meawhile, its marketing expenses are growing and considering the recent slowdown in user base growth, we expect Twitter to invest more in R&D and marketing to increase user engagement and attract more ad spending. So far, the company has done well in terms of improving its monetization, but may hit a ceiling in the next couple of years unless it can innovate further. Twitter’s advertising revenues grew 129% year over year, amounting to $277 million for the second quarter of 2014. [2] The sequential growth stood at 22.5%. These figures were commendable considering that mobile accounts for a large chunk of Twitter’s usage. Figuring out a successful monetization strategy is key to the future of most Internet-based companies. Mobile accounted for 81% of Twitter’s revenues during the quarter, which is much higher than the figure for Facebook. [3]
We think that the real test of Twitter’s ad products will come when it reaches optimal ad density and the average ad pricing becomes the dominant factor in determining the company’s ad revenue growth. For now, the path seems fairly clear. Twitter wants to sell as many ad slots as possible and considering the platform’s targeting capabilities, advertisers are likely to divert more of their budgets towards marketing on Twitter. The newly raised debt can help Twitter add more features and usability to its platform and invest in technology to target ads even better
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- Twitter’s SEC Filings [↩]
- Twitter’s SEC Filings [↩]
- Twitter’s Q2 2014 Earnings Transcript [↩]