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Twitter CEO shakeup: Costolo out, Dorsey in

Twitter CEO Dick Costolo is out after months of disappointing investors. Twitter co-founder Jack Dorsey becomes interim CEO on July 1.

As of next month, Dick Costolo will no longer hold the reins at Twitter. James Martin/CNET

Twitter's Dick Costolo, who has spent months defending his performance in the hopes of saving his job, is out as CEO.

The microblogging site announced Thursday that co-founder Jack Dorsey will become interim CEO on July 1, as the company looks for a permanent replacement. Costolo will remain on Twitter's board of directors, and Dorsey will continue as chief executive of Square, the mobile-payments company he also founded.

Costolo said the company has great leaders who work well together and clear strategies and objectives. He said there is no one better than Dorsey to lead the transition.

"I believe now is the right time for Twitter to focus on finding a new leader for the years ahead," said Costolo during a conference call Thursday with analysts. "You want to do these things when the organization is strong, when it's robust, when there's a clear plan and a clear path forward. And that's where we are today."

Wording of Costolo's "Terms of Transition," which the company filed with the Securities and Exchange Commission, suggests Costolo was fired. He will forfeit all shares that remain unvested after July 1.

For the past two years, Costolo has received an annual base salary of about $14,000 at his own request, and he received no stock grants last year. "Our CEO did not receive any equity grants in 2014 because our Compensation Committee believed that his existing equity ownership position sufficiently aligns his interests with those of our stockholders," according to an SEC document filed in April.

Costolo's departure throws Twitter into further disarray. Investors had been calling for him to step down, as the social-media giant struggles to deliver sustainable growth and sales. Last week, major Twitter investor Chris Sacca said in an 8,500-word blog post that Twitter has been improving but has so far

Sacca tweeted Thursday that in less than five years as CEO, Costolo grew Twitter from a company valued at $3 billion to one valued at $23 billion. "Credit where credit is due," Sacca said. "Thanks, Dick."

Another early Twitter investor, respected venture capitalist Fred Wilson, fired off a hail of tweets defending Costolo and the company co-founders Dorsey and Ev Williams.

"@jack gave Twitter its initial product market fit; @ev built Twitter the company (and) @dickc scaled Twitter into a massive business and valuable publicly traded company," Wilson said. "All three of them were exactly what Twitter needed at the time."

Twitter's stock, which had dropped 35 percent since October, rose as much as 7 percent after Thursday's announcement.

For months Costolo said he wasn't worried about his job security, as investors questioned his ability to run the company. As recently as last month's Code Conference in Southern California, Costolo said he needed to show Wall Street that Twitter could make money.

A tweet from Costolo after the announcement. Screenshot by CNET

"People believe the strategy," he said then. "They buy it. But we have to show that. 'It's great you reached a billion people on and off your site -- help me understand how you're going to monetize that. Show me how you're going to monetize that.' Those are things we know, and we need to show them how we do it."

But during Thursday's conference call, Costolo said he initiated discussions late last year about stepping down.

Costolo joined Twitter in 2009 as the company's chief operating officer, taking over the chief executive role in 2010. Before Twitter, Costolo co-founded and was CEO of FeedBurner, a Web feed platform that was acquired by Google in 2007. Before that, he co-founded two other companies: Web page-monitoring firm SpyOnIt and Burning Door Network Media, a Web design consulting company.

Dorsey may have to wear two hats -- CEO of both Square and Twitter -- for a while.

Twitter co-founder Jack Dorsey James Martin/CNET

"Twitter is going to have to search for the right leader and that's going to take a special person to turn it around," said Gartner analyst Brian Blau. "They need a leader who can understand what it means to run a global brand, and one that has the potential to have a lot of influence around the world."

During Thursday's conference call, Dorsey, Costolo and Twitter CFO Anthony Noto adamantly told investors they do not foresee any changes in strategies and direction.

"Despite all that we have accomplished, Twitter still has huge unmet potential," Dorsey said.

Twitter on Thursday also announced it will remove the 140-character limit on direct messages, as of July 1.

CNET's Rich Nieva contributed to this report.