Updated from 4:46 p.m. to include addition information parsed throughout the story.
Dorsey, who helped co-found the San Francisco-based Twitter nearly seven years ago, will remain CEO of Square, the payments company he started in 2009, while taking the interim CEO spot at Twitter. Dorsey will take over as interim CEO starting July 1.
"I am tremendously proud of the Twitter team and all that the team has accomplished together during my six years with the Company," Costolo said in a statement. "We have great leaders who work well together and a clear strategy that informs our objectives and priorities. There is no one better than Jack Dorsey to lead Twitter during this transition. He has a profound understanding of the product and Twitter's mission in the world as well as a great relationship with Twitter's leadership team. I am deeply appreciative of the confidence the Board, the management team and the employees have placed in me over the years, and I look forward to supporting Twitter however I can going forward."
Costolo will remain on Twitter's board of directors.
TheStreet's Jim Cramer welcomed Dorsey back to the top spot at Twitter.
On a conference call discussion the transition, Costolo said he first had discussions with the company's board of directors regarding a CEO transition last year, but talks escalated last week at its most recent board meeting. Dorsey said there was no timetable for finding a new CEO, noting it had employed a search firm to find the right person to lead the company.
Twitter and specifically, Costolo, have come under intense scrutiny in recent months, since going going public in Nov. 2013. The company has been plagued by ineffectively communicating its strategy to investors, who are unhappy with the lack of user growth the company has experienced in recent quarters.
The latest misstep for the micro-blogging social network was data-mining firm Selerity scraping the company's investor relations site, causing Twitter's first quarter earnings results to be leaked prior to the market close last month. The company said it missed revenue and earnings estimates due to problems with its direct response advertising business.
Twitter also today reaffirmed its outlook for the second quarter of 2015, saying it expects revenue to be between $470 million and $485 million and adjusted EBITDA to be between $97 million and $102 million. Analysts surveyed by Thomson Reuters expect the company to generate $481.43 million in revenue.
$TWTR--numbers won't be cut--mau's yes... Future better with new ceo— Jim Cramer (@jimcramer) June 11, 2015
Investors, most notably Chris Sacca, have recently come out criticized the company and laid out their own plans for how it should proceed going forward.
Shares were moving sharply higher in after-hours, gaining 5.1% to $37.65.
"The future belongs to Twitter thanks in large part to Dick Costolo's dedication and vision," Dorsey said in a statement. Dick has put a world-class team in place and created a great foundation from which Twitter can continue to change the world and grow.
We have an exciting lineup of products and initiatives coming to market, and I look forward to continuing to execute our strategy while helping facilitate a smooth transition as the Board conducts its search."
TheStreet Ratings team rates TWITTER INC as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:
"We rate TWITTER INC (TWTR) a SELL. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. Among the areas we feel are negative, one of the most important has been unimpressive growth in net income over time."
You can view the full analysis from the report here: TWTR Ratings Report