What Twitter Layoffs Mean Versus Its Valuation

In one of his first moves as the permanent chief executive officer, Dorsey is laying off a few hundred employees. His reasoning is that Twitter needs to become a stronger company and this is road that the company must traverse to achieve this goal.

In an SEC filing, Twitter stated:

On October 13, 2015, in connection with the announcement of a restructuring described further below, Twitter, Inc. (the “Company”) announced that it expects revenue and adjusted EBITDA for the third quarter of 2015 to be at or above the high end of the previously forecasted ranges of $545 million to $560 million and $110 million to $115 million, respectively. The foregoing information is preliminary and subject to completion of the Company’s quarter-end financial reporting processes and review. More information about the Company’s financial performance in the third quarter of 2015 will be provided when the Company reports final results on October 27, 2015, after market close.

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However this was only half of the story. The company also announced that it had approved a restructuring plan to reduce its staff by 336 employees, or 8% of its global workforce. This restructuring is part of an overall plan to organize around Twitter’s top product priorities and drive efficiencies throughout the company. Twitter intends to reinvest savings in its most important priorities to drive growth.

Overall, Twitter estimates it will incur roughly $10 million to $20 million of cash expenditures, substantially all of which will be severance costs. Total restructuring expenses are expected to be $5 million to $15 million, which is lower than cash restructuring costs due to a credit related to non-cash stock-based compensation expense reversals for unvested stock awards. These pretax restructuring charges are expected to be recognized by the end of the fourth quarter of 2015.

Currently Thomson Reuters consensus estimates call for Twitter’s 2015 earnings to be $0.34 per share and 2016 earnings to be $0.62 per share. Compared to Monday’s close, Twitter trades at 84.6 times 2015 expected earnings and 46.4 times 2016 earnings.

Shares of Twitter closed Monday down 6.8%, at $28.75 in its 52-week trading range of $21.01 to $53.49. In early trading on Tuesday, shares were up 3.3% at $29.70. The stock has a consensus analyst price target of $38.23.

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