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Since its launch in May 2003, LinkedIn (LNKD) has grown into the world's largest online professional network, connecting more than 100 million registered members in 200 countries. By creating a free profile, LinkedIn members can search and communicate with business contacts, learn about career opportunities, join industry groups, research organizations and share information.

With an expanding user base and rising member engagement driving more data onto its platform, the company has established three fast-growing and high-margin revenue streams: Enterprise recruiting solutions, targeted advertising and premium subscriptions. LinkedIn plans to raise $263 million by offering 7.8 million shares at a price range of $32 to $35. At the midpoint of the range, LinkedIn will have a market cap of $3.6 billion, making it the most valuable Internet IPO since Google (NASDAQ:GOOG). Morgan Stanley (NYSE:MS), BofA Merrill Lynch (NYSE:BAC) and J.P. Morgan (NYSE:JPM) are the lead managers on the deal, which is one of three deals on the US IPO calendar for the week of May 16.

Business

Hiring solutions (recruiting) is LinkedIn's largest and fastest growing segment (49% of sales), thanks primarily to the subscription-based recruiter platform which allows companies to search for active and passive job seekers based on industry, job function, geography, experience and education. Advertising solutions (30% of sales) include print and display ads that can effectively target its affluent and influential user network. Premium subscriptions (21%) are primarily used to generate sales leads through enhanced search, email and other functionality. Over 50% of the network's members are International, and LinkedIn generates 31% of sales outside the US.

For the 1Q (March 2011), revenue grew 110% to $94 million, primarily as a result of 174% growth in the hiring solutions segment. Advertising sales and premium subscriptions grew at 95% and 47%, respectively, as total registered members grew 58% to over 101 million. However, EBITDA grew only 46% to $13 million as a result of a 181% increase in sales and marketing spend related to the buildout of its sales force. For the last 12 months, revenue and EBITDA were $292 million and $52 million, respectively.

Key Issues

Member stickiness and engagement is key; most do not visit LinkedIn on a monthly basis, and a substantial majority of page views are generated by a minority of members. Ultimately, its value proposition as an enterprise recruiting platform relies on members' willingness to share accurate and up-to-date professional profile data. Employers could block access to LinkedIn for security and confidentiality reasons, or limit employee data sharing to prevent job search/passive recruiting. Users may choose to rely on social networks (Facebook) for professional purposes. Finally, EBITDA and net income are expected to decline in 2011 as a result of investments in its field sales force, both in the US and internationally.

Outlook

LinkedIn is aggressively stepping up investment in its global sales force and IT infrastructure in order to support the expansion of its potentially-disruptive enterprise recruiting platform, while also targeting a multi-billion dollar online advertising market. LinkedIn's compelling value proposition, particularly as a recruiting tool, has helped it establish a critical mass of worldwide members and an impressive track record of accelerating revenue growth.

Though near-term investments in enterprise sales personnel and IT infrastructure will weigh on margins in the near term, powerful network effects should drive continued member engagement and attractive ROI. As the world's largest online professional network, this highly-anticipated IPO will see huge pent-up demand from investors seeking exposure to the next generation of transformative Internet companies.

Source: Invite LinkedIn to Join Your IPO Portfolio