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Twitter said Tuesday it would jettison up to 336 people — roughly 8% of its workforce — as part of a restructuring CEO Jack Dorsey says will place the social media company “on a stronger path to grow.”
Dorsey confirmed the layoffs in a memo sent to employees and shared the news through his Twitter account.
Dorsey says the cutbacks are needed to speed innovation. Twitter is working “around the clock” on a streamlined road map for Twitter, its video app Vine and live broadcast service Periscope, Dorsey said.
“Product and engineering are going to make the most significant structural changes to reflect our plan ahead,” said Dorsey in his memo. “We feel strongly that engineering will move much faster with a smaller and nimbler team, while remaining the biggest percentage of our workforce. And the rest of the organization will be streamlined in parallel.”
Twitter also offered some good news for investors, saying it expects third-quarter revenue and adjusted earnings both to come in above the high end of its previously forecast ranges. It had forecast $545 million to $560 million in revenue and $110 million to $115 million in adjusted earnings.
Following the announcement, shares of Twitter surged 6% to $30.56 in early trading.
“Twitter indicates the restructuring is part of a plan to organize around top product priorities and drive efficiencies, and it intends to reinvest savings in top priorities to drive growth. We think this direction makes sense,” said S&P Capital IQ analyst Scott Kessler who reiterated his “strong buy” recommendation and his 12-month price target of $44.
But RBC Capital Markets analyst Mark Mahaney says the cutbacks are “potentially concerning.”
“Twitter should be focused on growth (audience, engagement, and especially the top-line) and not efficiency at this stage in its life cycle,” Mahaney said in a research report published Monday. “We are a bit concerned that some of the cuts are in engineering, which could hamper Twitter’s ability to continue growing at a robust pace.”
He also noted that Twitter has beat revenue and adjusted earnings guidance for four out of five quarters as a publicly traded company “thus we do not view this as a shocking surprise.”
Dorsey is undertaking a series of cost-cutting measures, including the layoffs and calling off the expansion of the company’s San Francisco headquarters, as his first official acts as Twitter’s new CEO.
“It’s a tough way for Jack Dorsey to introduce himself to the company, but Twitter needs to tighten its belt until it can figure out its user growth problem,” said Jan Dawson, chief analyst with Jackdaw Research.
Twitter’s expenses through the first half of the year rose 44% to $1.2 billion. Revenue totaled $938 million in the same period.
Dorsey, the company co-founder who has served as interim CEO since July, was appointed to the position last week after a three-month search.
He is retaking the helm at Twitter as it struggles to attract new users and restore confidence on Wall Street. The main challenge: Twitter faces growing competition for advertising dollars and people’s attention from Snapchat, Facebook and the Facebook-owned services Instagram and WhatsApp.
About 300 million people sign in to use the service at least once a month, making Twitter about one-fifth the size of rival Facebook, which has nearly 1.5 billion users, and smaller even than Instagram, which recently surpassed 400 million users.
Twitter Chief Financial Officer Anthony Noto said during the second-quarter conference call with analysts that reigniting user growth would take “considerable” time.
Dorsey has pledged to tackle the challenge head on by making the product “easier and more compelling to more people.”
Twitter has had better luck wringing money from the social media service. The company increased revenues from $28.3 million in 2010 to more than $1.4 billion in 2014 and is expected to surpass $2 billion this year. But revenue growth rates are slowing. In July, Twitter reported its smallest quarterly revenue growth as a publicly traded company. And Twitter is still not profitable.
“Monetization has been going really well, but it’s still not close to being consistently profitable and it’s been hiring pretty aggressively, so some cuts should help get things in better balance,” Dawson said.
Dorsey says the company will lay off up to 336 employees. As of June, Twitter had 4,100 employees. Twitter will incur Q4 severance costs of $10 million to $20 million.
The layoffs are unlikely to endear Dorsey to the staff, “even the ones that stay,” Dawson said. “It’ll be important to make clear that this is a once-and-done move and not something that’s going to become a regular occurrence at Twitter.”
Twitter was also planning a 100,000-square-foot expansion into a building across from its San Francisco headquarters that houses Square and Uber. That’s now been tabled.
Contributing: Brett Molina.