Would Twitter layoffs be smart move or bad sign?

Speculation swirls that Twitter will announce layoffs, construction stop

jack dorsey
Jay Alabaster

With Jack Dorsey back at the helm as CEO of Twitter, employees better buckle up.

If rumors are true, Dorsey isn't wasting any time making major changes in what appears to be an attempt to finally make the social network profitable. News reports say that Dorsey is getting ready to cut costs by reducing headcount and halting the company's plans to expand its San Francisco offices.

The New York Times, citing unnamed sources, reported that the layoff announcement could come as soon as Tuesday, while re/code said the layoffs would come this week.

Today, Twitter is staying mum. A company spokesperson said in an email to Computerworld, "We're not commenting on rumor and speculation."

Early last week, Dorsey, Twitter's co-founder and former CEO, once again became head of the micro-blogging company. Dorsey had been working as interim CEO since the departure of Dick Costolo in July.

Analysts are split on whether the layoffs would be a smart move or one that signals trouble to users and investors.

When news hit of Dorsey taking the company's top seat again, industry analysts and observers immediately started talking about the challenges he is facing. Top among them is the fact that Twitter's user growth is slowing, its users aren't as engaged as they used to be and the company has yet to make a profit.

In 2014, Twitter reported revenue of $1.4 billion. Despite that flow of cash, the company still lost $539 million. In its last reported quarter, Twitter lost $137 million.

"This makes some sense," said Zeus Kerravala, an analyst with ZK Research, referring to the reported job cuts. "Twitter seemed to be headed on a path to never being profitable. It's important to have a staff that makes sense. The company has twice the number of employees from when it IPOed, but the user base has only grown by 50%."

The company appeared to be hiring ahead of the expected growth that didn't materialize.

"It's a common mistake made by companies that are in high-growth mode," said Kerravala said. "They think the current growth trajectory will last forever. Then the growth doesn't happen, and they have too many people for the subscriber and revenue base. So it makes sense to shrink back and hire as the company grows."

However, Dan Olds, an analyst with The Gabriel Consulting Group, said it looks bad for Dorsey to make layoffs his first order of business upon his official return as CEO.

"Dorsey has been back for, what, a few days, and they're laying off significant numbers of engineers and halting office construction?" he asked. "Those aren't the moves of a leader who wants to instill confidence with investors and partners, or who is looking to boost employee morale."

It's too much course correction too soon, he added.

"I think it's a tone deaf move," Olds noted. "While it's true the company still isn't profitable, is the state of their finances such that they have to make radical moves like this right now? Wouldn't it be better to have a slow roll so investors don't become frightened and shave a significant percentage off the value of the company?"

Copyright © 2015 IDG Communications, Inc.

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