Twitter Boss Dick Costolo Set to Exit, a Plan Long in Works

San Francisco: After replacing much of Twitter's top management team last year, Dick Costolo told members of the company's board that he wanted them to replace him as chief executive, too.

On Thursday, they did just that, announcing Costolo will step down July 1 and appointing Jack Dorsey, Twitter's co-founder and former chief, as interim chief executive while they look for a permanent successor.

Costolo, a wealthy former entrepreneur who has led Twitter for the last five years, had grown tired of second-guessing by Wall Street, with its focus on the social network's sluggish user growth and its repeated failures to make its products more appealing. In January, he confided to friends at the Consumer Electronics Show in January that he did not need the aggravation anymore.

Instead of beginning an immediate search for a new chief executive, the board kept him on, encouraging him to build up his management team and lay out a strategy for them to follow.

"There is never, ever the right time to begin a transition like this," Costolo told investors in a call to discuss the leadership transition. But "you want to do these things when the org is stable and the product is robust."

Even as Costolo and his lieutenants promoted their early progress in reinvigorating the company's products, criticism of his strategy grew. Last week, one of the company's biggest shareholders and cheerleaders, Chris Sacca, publicly called for change.

Twitter shares rose more than 7 percent in after-hours trading immediately after the change in leadership was announced.

Now Twitter, which has 302 million active users, faces deep questions about the future of its messaging service, which is built around 140-character snippets of text in a world that is increasingly about photos and video.

"The situation at Twitter must be much worse than it appears, as replacing the CEO is such a big step," said Brian Blau, an analyst with Gartner. "Twitter's problems are clearly not over, and while Jack Dorsey knows Twitter well, they really should bring in some outside perspective as most of their strategies so far are not working out so well."

Dorsey said Twitter's board was not seeking a change in strategy or direction for the company as it searched for a new permanent leader.

"We do have a great strategy, we do have a great direction, and we do have a great team behind it," he said in an interview.

Since Twitter's debut as a public company in 2013, Costolo has repeatedly failed to meet Wall Street's high expectations.

His departure is likely to renew speculation Twitter is an acquisition target for the handful of tech giants that could afford the company, which currently has a market valuation topping $24 billion. In recent weeks, Google has been rumored to be eyeing Twitter, but people with knowledge of the companies denied that a deal was in the works.

The research firm eMarketer estimates Twitter's monthly user base will grow 14.1 percent this year, down from 30 percent growth two years ago. By 2019, its worldwide user growth rate will be 6 percent, according to the firm.

Twitter accounted for 3.6 percent of the $19.2 billion mobile Internet ad market in the United States last year, according to eMarketer, while Facebook held an 18.5 percent share and Google dominated with 36.9 percent.

Pressure on Costolo grew in recent weeks after Sacca, an early Twitter investor, went public with an 8,500-word analysis of what Twitter could be and how it could get there. Shortly after the essay was published on Sacca's blog, Costolo fielded some tough questions from Twitter stockholders at the company's annual shareholder meeting.

Sacca's manifesto calls for a much deeper rethinking of Twitter's service and more experimentation at a company that has resisted change. "Twitter can afford to build the wrong things," Sacca wrote. "However, Twitter cannot afford to build the right things too slowly."

After Sacca posted his letter, Robert Peck, an analyst at SunTrust Robinson Humphrey, said that if Twitter's financial results disappointed investors again in July, as they had for the last two quarters, "we think it's possible that the company may look to make some changes" in leadership.

Twitter said Thursday that its second-quarter financial results were on track to meet its previous forecasts.

Twitter, founded in 2006, has never been known for its stable management, with a history of plots and counterplots among its founders and early executives.

Costolo became chief executive in October 2010 in a boardroom coup against Evan Williams, Twitter's co-founder and then chief executive. Williams remains on the board and is one of the company's biggest shareholders. He will be part of a search committee for a new chief executive.

Last year, much of Costolo's executive team was fired or resigned as he sought to speed up the company's pace of product improvements.

Dorsey, who preceded Costolo as chief executive, is deeply familiar with the company and its products. He is also the chief executive of Square, a tech start-up he founded in 2009 that specializes in online payments and has its headquarters down the street from Twitter's San Francisco office building.

This is the second rise to Twitter's top ranks for Dorsey. After being ousted as chief executive and replaced by Williams in 2008, Dorsey returned to Twitter as executive chairman in 2011 when Williams himself was pushed out.

But ever since his ouster in 2008, Dorsey has wanted to return to the helm of Twitter, according to two people with knowledge of his thinking. As chairman during Costolo's tenure, Dorsey has angled to become more prominent in his influence on Twitter's direction, these people said.

Dorsey will continue as chief executive of Square and will not be on the search committee for a new Twitter boss.

As rumors swirled around Costolo, Twitter insiders have divided into camps regarding who should replace him.

Adam Bain, who oversees global revenue and partnerships, is a favorite for the top job among Twitter employees, according to multiple people inside of the company. Bain, a longtime media executive who worked at Fox Interactive Media, has strong relationships with many of Twitter's media partners.

Outside watchers of the company have looked at Anthony Noto, a former technology banker at Goldman Sachs and Twitter's current chief financial officer, as another potential candidate for chief executive.

In recent months Noto has sought a more operational role, according to multiple people inside the company. Earlier this year, he was given oversight of Twitter's marketing efforts, a role snatched away from Gabriel Stricker, Twitter's chief communications officer.

Peck, the SunTrust analyst, also suggested as possible candidates Ross Levinsohn, a former interim chief executive of Yahoo, and Mike McCue, the chief executive of Flipboard, a news aggregation service. Twitter recently explored a purchase of Flipboard but decided against the deal, according to a person with knowledge of the discussions who spoke on the condition of anonymity.

"They've done a lot of things right, and some things wrong," said Ben Schachter, an analyst with the Macquarie Group. "The truest thing they've said is that Twitter has not lived up to its potential."