Investors cheered Tuesday after Twitter CEO Jack Dorsey’s announcement of plans to cut up to 336 jobs, or 8 percent of the global workforce, as part of an effort to strengthen long-term growth.
Made some tough but necessary decisions that enable Twitter to move with greater focus and reinvest in our growth. http://t.co/BWd7EiGAF2
— Jack (@jack) October 13, 2015
Dorsey, the company cofounder who last week reclaimed his former position as chief executive, announced the painful round of cuts in a memo to employees, emphasizing plans to send a clear message, walk a straight line toward profitability, and focus on making Wall Street and Silicon Valley understand how Twitter plans to monetize its core product offerings.
“The team has been working around the clock to produce streamlined roadmap for Twitter, Vine, and Periscope and they are shaping up to be strong,” Dorsey said in the memo. “The roadmap is focused on the experiences which will have the greatest impact.”
Dorsey noted the launch last week of Moments, a new application that Twitter introduced to consolidate top news and other events taking place on Twitter.
Twitter expects third-quarter results to come in at or above the high-end of previously forecasted figures of US$545 million to $560 million in revenue and $110 million to $115 million in earnings, it said in an Securities and Exchange Commission filing.
Twitter shares rose more than 5 percent to $30.68 in early trading on Tuesday, as investors applauded the cuts and the revised forecast. However, whether Dorsey can address the company’s lagging issue of user growth, and whether the company can expand with new product offerings that consumers care about, will be subject to ongoing scrutiny.
Grow the Future
This round of cuts may be the first of several steps that Dorsey has to take to address Twitter’s fundamental problem with user growth and retention.
“Twitter has this wonderful problem of being a very well-known brand and being respected around the world, but it’s not the easiest product to build a monetization strategy around,” said Brian Blau, research director, personal technologies, at the Gartner Group. “It’s a very difficult problem for an entrepreneur and a business.”
Twitter needs to grow — not necessarily vertically, but horizontally, by opening up to become more of a platform for great new applications that people want to use, Blau told the E-Commerce Times.
To accomplish that, Dorsey, who stepped up to run Twitter this summer while also helming his mobile payments startup, Square, would have to invest in pulling together a great team.
After reporting a second-quarter revenue of $502 million in late July, a 61 percent increase from year-ago revenue, then acting-CEO Dorsey said that despite the company’s good progress in monetization, Twitter officials were not satisfied with their performance in growing the overall audience for its products.
Twitter reported 316 million monthly active users in the second quarter, a 15 percent increase from the year-ago quarter and 308 million monthly active users in the prior quarter.
Too Much, Too Soon?
It’s questionable whether announcing this round of cuts was the best message Dorsey could send to investors coming out of the box. If earnings fall short of expectations the next time around, then long-term concerns about the company may become exacerbated.
“Cuts always weaken a company over the short term, and there is a high risk that one or more of the people you let go may be that person who has the idea or skill that saves the company,” noted Rob Enderle, principal analyst at the Enderle Group.
“That’s why you don’t want to do this more than once,” he told the E-Commerce Times. “It’s like Russian Roulette. The more you do it, the more likely you are simply ensuring a bad outcome.”
Twitter expects to incur between $10 million and $20 million of cash expenditures in severance costs, and total restructuring expenses will be between $5 million and $15 million, it said in its regulatory filing. The total numbers are lower than the cash figures because of a credit related to a reversal of stock-based compensation.