Jack Dorsey is the official CEO at Twitter (TWTR), and his first big move is laying off 336 people. While cost cutting is a bit atypical for a fast-growing technology company, it was a necessary move, sending a strong message for both the company and TWTR stock.
Here’s what Dorsey had to say:
“The roadmap is also a plan to change how we work, and what we need to do that work. Product and Engineering are going to make the most significant structural changes to reflect our plan ahead. 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.”
Why Twitter Layoffs Are Necessary
For the last few years Twitter has been one of the fastest growing employers in Silicon Valley. Back in 2012 Twitter had just 900 employees, and that year it nearly tripled revenue and had an operating margin of negative 25%.
Three years later and Twitter has grown its headcount to 4,100 and has continued to grow rapidly, but its operating margin has actually worsened to a negative 32%.
Often times when companies hire aggressively, like Twitter, increasing its job count by a whopping 350% in less than three years, the company becomes too bloated, with positions that intertwine and no real sense of chemistry. Therefore, becoming smaller, more nimble and streamlined can actually help the company.
When you incorporate the management and board turnover at Twitter over the last year, there’s a good chance that Twitter is the type of company that should benefit from a smaller workforce. This is a company whose vision has come under scrutiny, a company that is growing revenue fast, but has struggled immensely to grow active users.
Ultimately, in the world of social media, the ability to grow a network larger consistently is often the difference in becoming the next Facebook (FB) or the next Myspace. Notably, TWTR stock has suffered over the last year, down 40%, due to its inability to grow users and the ongoing questions surrounding its vision.
Nonetheless, Twitter layoffs account for roughly 8% of its workforce, but won’t have a major cost-saving effect. Twitter estimates that severance costs will be between $10 and $20 million, and already noted that it will book a restructuring expense of $5 to $15 million.
For a company that has a net loss of nearly $600 million during the last 12-months, I doubt that an extra $5 to $15 million will be noticed too much, or that the loss of these employees will cause a noticeable improvement to the $2.3 billion plus of operating expenses that Twitter has recorded during the last four quarters.
What these cuts will accomplish is raising the bar for accountability at Twitter, and according to Dorsey it will improve efficiencies and execution. It will make the company easier to manage and provide existing employees with a greater opportunity to shine with more accountability.
For a company that has had such instability in its leadership and constant questions surrounding its vision, it is likely that this move will be great for the long-term direction of the company.
But What About TWTR stock?
With Twitter’s stock losing much of its value, and Dorsey disclosing that TWTR’s third-quarter revenue and adjusted EBITDA will be at the high-end of guidance, it might seem that now is a great time to own TWTR stock.
However, even if TWTR meets expectations for creating revenue of $2.24 billion this year and $3.23 billion next year, growth of 59.4% and 44.4%, respectively, TWTR is still pricey with a valuation of nearly $20 billion.
While Dorsey is sure to make good moves that are in the best interest of the company and TWTR stock, investors should still want to see proof that TWTR can significantly grow users while improving its operating margin. Right now, TWTR is spending ferociously and is still having a hard time growing users. When TWTR finally slows spending, investors will demand profits.
Therefore, I like Dorsey’s first big move as permanent CEO, and I am equally optimistic with him accepting the position as CEO.
If TWTR can show consistent user growth while reducing operating expenses, and maintaining its growth rate, TWTR stock would then become a good investment. Until then, investors should wait and see, as TWTR stock could still go either way.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
