Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)

Shares of LinkedIn (NYSE:LNKD) saw a modest correction in after-hours trading on Tuesday after the professional networking website reported its third quarter results, accompanied by a relative soft guidance for the fourth quarter.

As revenue growth per user is slowing down, I grow a bit worried as the metric is crucial in boosting future revenues.

Third Quarter Results

LinkedIn generated third quarter revenues of $393.0 million, up 56.0% on the year before.

The company reported GAAP losses of $3.4 million, compared to a profit of $2.3 million in the comparable period last year. GAAP losses came in at $0.03 per share.

Non-GAAP earnings came in at $46.8 million, up from $25.1 million last year, with earnings per share totaling $0.39 per share. Consensus estimates for non-GAAP earnings stood at $0.32 per share.

CEO Jeff Weiner commented on the third quarter performance, "Increased member growth and engagement helped drive strong financial results in the third quarter. We continue to deliver value to professionals through investment in core products and strategic initiatives such as mobile, students, and the professional publishing platform."

Looking Into The Results..

Growth was driven by the talent solutions business which generated revenues of $224.7 million, up 62% on the year before.

The premium subscriptions business reported revenues of $79.8 million, which is up 61% on the year before.

The marketing solutions business generated revenues of $88.5 million, up 38% on the year before.

The total membership base rose by 38% to 259 million members, on which the company generated revenues of on average $1.52 per member over the past quarter. What is interesting to note is that the membership base totaled 238 million at the second quarter, generating average revenues of $1.53 per quarter at the time.

LinkedIn saw solid growth across the globe. US revenues rose by 51.1% to $245.3 million. Latin American and Canadian revenues were up by 57.7% to $27.0 million. Revenues in Europe, Middle-East and Africa were up by 65.2% to $90.1 million as Asian-Pacific revenues rose some 69.8% to $30.5 million.

..And Ahead

LinkedIn sees fourth quarter revenues coming in between $415 and $420 million. Adjusted EBITDA is seen between $98 and $100 million. Depreciation and amortization is seen between $43 and $45 million, while stock-based compensation is seen between $55 and $57 million.

At the midpoint of the revenue guidance, revenues are seen up by 37.5% compared to last year's revenues of $303.6 million. Revenues are seen up by 6.2% compared to the just released third quarter results.

Note that LinkedIn is typically quite cautious with its guidance, but the fourth quarter guidance seems to fall quite short compared to consensus estimates of $438.9 million.

Valuation

LinkedIn ended its third quarter with $2.27 billion in cash, equivalents and marketable securities. The company operates without the assumption of debt, for a solid net cash position after a recent secondary offering.

Revenues for the first nine months of the year came in at $1.08 billion, up 61.7% on the year before. The company reported GAAP earnings of $23.0 million, compared to earnings of $10.1 million last year.

Factoring in losses of 3% in after-hours trading, with shares exchanging hands at $240 per share, the market values LinkedIn at $27 billion. This values operating assets of the firm just below $25 billion, or at nearly 17 times GAAP earnings.

LinkedIn does not pay a dividend at the moment.

Some Historical Perspective

The public debut of LinkedIn in May of 2011 has been a huge success, and after shares have consolidated in 2012, they have seen great returns so far this year. By now shares have already more than doubled to highs around $250 per share. Note that the company's official public offering price was just $45 per share, after a very strong pricing.

The reason behind these strong returns is very strong operational growth. Between 2009 and 2012, LinkedIn is expected to grow its revenues from just $120 million to an expected $1.5 billion. The company has been reporting very modest GAAP earnings in recent years, essentially managing the firm to break-even on a GAAP basis.

Investment Thesis

So LinkedIn had a solid quarter, although the company is facing more obstacles to maintain growth, notably in developed markets. Jeff Weiner signaled that the company could reach a saturation point, for white-collar workers, notably in the US.

The company has been focusing on mobile devices, offering social content and "Sponsored Updates", among others to boost revenues. LinkedIn already acquired Pulse earlier this year for some $100 million to support these new developments as the unit will be integrated with LinkedIn Today.

Thanks to the relentless focus on mobile, 38% of unique visiting members reach LinkedIn via a mobile device, up from just 8% about two and a half year's ago. Mobile users which also reach LinkedIn via a desktop computer, tend to be 2.5 times more active than those just using their desktops.

Despite all these initiatives, average revenues per users fell by a penny over the past quarter to $1.52 per user.

This is quite a worrying trend for me, given all the extra efforts LinkedIn is making to boost revenues from existing users, as it becomes more difficult to grow the user base altogether. Combining this with a secondary offering of 5% of the share base, and I see two major red flags. This is even more so as LinkedIn doesn't desperately need the cash at the moment, indicating that the company thinks the valuation is rich.

Back in August, I last took a look at LinkedIn's prospects after the company reported strong second quarter earnings. At the time I concluded that shorts continued to have the riskiest position, but over the past three months shares have been stuck in a $220-$260 trading range.

At the time LinkedIn was cautious with its third quarter guidance, seeing revenues of $367-$373 million. This compared to consensus estimates of $383 million, and now actual reported revenues of $393 million. Note that consensus estimates at the third quarter were $13 million higher than guided for at the time, while this gap has increased to $21.5 million for the fourth quarter.

With network member growth slowing down, engagement is the new metric to watch. LinkedIn still sees good growth in pageviews and time being spend on the website, and it is exactly this reason why the average revenue per user decline is so worrying, as increasing member growth becomes increasingly more difficult.

All I can say for now is that LinkedIn has an absolute dominant position in professional networking, and that discussions about sky-high price-earnings ratios for firms like LinkedIn are irrelevant, as the company does not focus on short term earnings.

Instead of focusing on earnings, investors ought to focus on membership growth and average revenues per user. It is exactly this sequential decline in average revenues per user which worries me.

Therefore I become slightly more pessimistic about the long term growth trajectory. Assuming LinkedIn could boost the network to 400 million members while boosting ARPU towards $2.50 per quarter, annual revenues of around $4 billion should be attainable in 2015 or slightly later. Adding decent operating margins of 25% to such a business model and operating earnings of a $1 billion per annum should be attainable, still providing some rationale to the valuation.

That being said, even the smallest indications of a crack in the growth story could unleash a 20-30% correction. However as LinkedIn continues to grow and investors continue to believe in its growth story, a short position might be very risky as well.

I remain on the sidelines, although seeing potential for a near term sell-off if investors focus on disappointing revenue numbers per user.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: LinkedIn: Stagnating Revenues Per User Are Worrying