Dick Costolo took over as Twitter's (NYSE:TWTR) CEO in October 2010. In 2013, TIME Magazine named him one of the ten "most influential" U.S. tech CEOs, and Business Insider called him "one of Silicon Valley's most impressive CEOs".
But by the end of 2014, analysts and investors were calling for his resignation. Twitter stock plunged 47% during the year, user growth was slowing down, and Costolo's vision for the future was unclear.
Last November, major investors like Walter Price at Allianz Global and Bill Miller at Legg Mason criticized Costolo's leadership skills in a scathing Wall Street Journal article. CNBC's Jim Cramer called Costolo's conference call with analysts that month "incoherent," and SunTrust analyst Robert Peck predicted that Costolo probably wouldn't last another year.
Its dismal first quarter earnings report, ironically leaked on Twitter, didn't do much to boost investor confidence. Is it time for Twitter's board to scout out potential replacements for Costolo?
Lackluster growth and lots of excuses
Back in 2013, Dick Costolo declared that Twitter would have 400 million monthly active users (MAUs) by the end of the year. But last quarter, MAUs only rose 18% annually and less than 5% sequentially to 302 million -- more than a year after Twitter was supposed to have 400 million MAUs, according to Costolo's original forecast. By comparison, MAUs rose 25% year over year in Q1 2014.
In Q4 2014, when MAUs climbed 20% to 288 million, Costolo blamed an "unforeseen bug in the release of iOS 8" for causing a loss of 4 million MAUs. Yet it wasn't really a "bug" at all. Apple simply blocked Safari's "Shared Links" feature from auto-updating shared links from Twitter. In other words, Twitter was counting auto-updates on Safari as "active" users.
Those users, as far as anyone knows, could be inactive ones who haven't used Twitter for months. Twitter openly admits that 8.5% of its active users are likely third party apps which "may have" contacted its servers without any "user-initiated action". Therefore, Costolo seems to be willing to count spam accounts, bots, and third-party apps as active users, as long as they contribute to Twitter's MAU count.
Executive departures and a murky strategy
Plenty of Twitter's top executives abandoned ship last year, including its VP of product, creative director, chief operating officer, head of North American media, head of news, and the senior VP and VP of engineering. Those departures don't inspire much confidence in Costolo's leadership skills.
The most significant departure was that of COO Ali Rowghani. Rowghani warned that Twitter could lose its identity if it let Google include tweets in its search results. That's why Twitter stopped letting Google search its tweets in 2011.
With Rowghani out of the picture, Costolo recently inked a new deal with Google which lets the search giant directly link to its tweets while bypassing the News Feed, which generates most of Twitter's ad revenue.
Former Twitter employees told The Wall Street Journal that Costolo was a person who simply "bounces from one idea to the next", and that his vision had been scattered after the company's IPO in late 2013.
In my opinion, "scattered" is an understatement. To maximize Twitter's ARPU (average revenue per user) to offset slowing MAU growth, the company introduced new features like Promoted Videos, video editing and streaming tools, group chat, e-commerce partnerships, and even mobile payments in select markets.
Those new features boosted Twitter's quarterly ARPU to $1.44 last quarter, up 47% year over year. That growth is encouraging, but it's unclear if the additional revenue from these extra services can keep offsetting Twitter's ongoing slowdown in MAU growth.
Costolo's selling spree
In April 2014, Costolo -- along with Twitter co-founders Jack Dorsey and Evan Williams -- promised to not sell any shares after the Twitter IPO lockup period expired last May. But a few months later, Costolo set up a plan to sell shares for his family trust. In November, the trust abruptly dumped 50% of its shares. Costolo has sold over $34 million in stock since then, according to SEC filings.
That selling spree has cast serious doubt on Twitter's viability as a long-term investment. One institutional investor told Business Insider that Costolo had likely lost the respect of Twitter's employees, since he was too "busy grabbing a lifeboat" as the company's market value plummeted.
Costolo certainly isn't the ideal CEO. However, it's unclear if replacing him will improve the situation. With new executives adjusting to their roles, it might not be a smart move to change leaders during a transition. Therefore, unless an ideal candidate appears, it's highly unlikely that Twitter's board will replace Costolo any time soon.
Leo Sun owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Twitter. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.