SAN FRANCISCO (Reuters) - Twitter Inc (TWTR.N) Chief Executive Officer Dick Costolo abruptly announced he was stepping down on Thursday amid increasing scrutiny of the company's slow user growth and inability to attract advertisers at the same rate as its competitors.
Costolo will be replaced by co-founder Jack Dorsey on an interim basis.
The company's shares jumped 7.7 percent to $38.60 following the news before paring gains to trade at $37.54.
"Unfortunately this news isn't surprising," said Nate Elliott of management consultant Forrester Research. "The bottom line is that Twitter isn't very good right now at serving either its users or its marketers."
Costolo said on a conference call that he announced his resignation before announcing a CEO to ensure transparency in the search process. He added that Twitter will be considering both internal and external candidates and that it has the “strongest management team (it’s) ever had,” which influenced his decision to step down.
Dorsey said the search has not begun yet, but he noted the company was looking for a CEO who uses Twitter every day and "loves" the product.
Anthony Noto, Twitter’s chief financial officer, said Costolo did not receive a severance package because he voluntarily stepped down.
Costolo said he believed scrutiny of the company would intensify if he remained CEO throughout the search process.
In a statement, Costolo said he was "tremendously proud" of his six years at Twitter.
"I am deeply appreciative of the confidence the board, the management team and the employees have placed in me over the years," Costolo said.
He will step down on July 1 and will continue to serve on the board, the company said in a regulatory filing.
Costolo has agreed to cancel all of his remaining unvested equity in Twitter after July 1. Dorsey, who will continue to serve as CEO of Square Inc, had served as Twitter's president and CEO from May 2007 to October 2008.
Twitter was abuzz on Thursday afternoon with tweets reacting to the news of Costolo’s departure.
The site was flooded with posts from employees paying tribute to him, many tagged with the hashtag "#ThankYouDickC."
Other posts mused about the company’s future direction amid concerns on Wall Street about its business model.
Costolo noted the news on Twitter by simply writing "Welcome back, @jack !!" and repeating the tweet from the company announcing the change.
Twitter has long struggled to gain users at the rate of other social media companies, such as Facebook Inc (FB.O) Instagram and Snapchat.
"Twitter has never been great at giving its users reasons to come back. While other social sites have introduced new features and functionality the past few years, Twitter has mostly stood still. The result has been excruciatingly slow user growth", Forrester's Elliott said.
Chris Sacca, one of Twitter’s earliest investors, posted an 8,500-word manifesto earlier this month calling on the company to better engage its users.
He simultaneously praised the company’s strong acquisitions of Periscope and TellApart, but Sacca pointed out that one billion users had tried Twitter and left the service.
In a recent CNBC interview, Sacca said that Twitter would be an “instant fit” for Google (GOOGL.O) if it were to acquire the microblogging service.
Data firm eMarketer projects that Twitter's monthly user base will grow at 14.1 percent this year, compared to more than 30 percent two years ago. (link.reuters.com/neb98v)
Twitter reaffirmed its outlook for the second quarter of 2015, expecting revenue of $470 million to $485 million and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $97 million to $102 million.
It sees stock-based compensation expense of $190 million to $200 million, excluding equity awards that may be granted in connection with potential future acquisitions
The company disappointed investors in its first quarter results when it reported that its number of monthly average users was growing at a slower pace than Wall Street’s expectations.
(Fixed typo in paragraph 5)
Additional reporting by Anya George Tharakan in Bengaluru and Julia Love in San Francisco; Writing by Sriraj Kalluvila and Bernard Orr.