Shares of LinkedIn (LNKD) the "professional" network website rose more than 7% in after hours trading on Thursday after the company published its second quarter earnings. Shares in the "professional" networking website returned almost 50% so far in 2012, while the "social" network website Facebook (FB) hit new lows on Thursday, marking losses of almost 50% since the public offering.
Second Quarter Results
LinkedIn which currently has over 175 million members in its professional network reported second quarter revenues of $228.2 million, up 89% compared to the second quarter of last year. Adjusted EBITDA rose to $50.4 million, for an EBITDA margin of 22%.
Net income fell from $4.5 million to mere $2.8 million, while non-GAAP net income rose from $10.8 million to $18.1 million. GAAP earnings per share came in at $0.03 per share, while non-GAAP earnings per share rose to $0.16. On average, analysts have been looking for the company to report for non-GAAP earnings of $0.16 per share.
Jeff Weiner, CEO Of LinkedIn commented on the results, "LinkedIn had a strong second quarter with all of our operating and financial metrics showing solid performance. Our ongoing investment in product innovation drove healthy engagement as measured by unique visiting members and member page views, and our three revenue streams all experienced significant growth."
Segmental Information
Revenues from hiring solutions rose 107% to $121.6 million, representing 53% of firmwide revenues. The marketing solutions division reported a 64% increase in revenues to $63.1 million, while revenues from premium subscriptions rose 82% to $43.5 million. The company generated $147.3 million of its total revenues in North America, about 65% of total revenues. The remainder came from international markets. Revenues in Europe, Middle East and Africa roughly doubled to $50.0 million, while Asian Pacific revenues rose over 150% to $15.8 million.
Outlook
LinkedIn revised its third quarter guidance upwards in today's presentation. It expects third quarter revenues in the range of $235-$240 million, with adjusted EBITDA coming in between $42-$45 million. The difference between GAAP and non-GAAP earnings is expected to grow as stock-based compensation is targeted at $27-$28 million, while depreciation and amortization charges are estimated at $20-$22 million.
For the full year of 2012 the company expects revenues of $915-$925 million. Adjusted EBITDA is expected to come in between $185-$190 million, stock based compensation at $85-$95 million and depreciation and amortization at $75-$80 million. Earlier the company guided for annual revenues of $880-$900 million and adjusted EBITDA at $170-$175 million.
Valuation
LinkedIn ended the second quarter with $617 million in cash, equivalents and short term investments. The company operates without any debt for a net cash position equivalent to the previously mentioned number. Factoring in a 7% jump in after hours trading, the market values the firm at $10.3 billion, or $9.7 billion for its operating assets. This values the firm at roughly 10.5 times annual revenues. GAAP earnings per share for the first six months of the year came in at $0.07, resulting in a non-meaningful price-earnings ratio.
Currently the company does not pay a dividend.
Investment Thesis
Many investors and market commentators have wondered why the LinkedIn public offering has been such a great success. Shares were offered little over a year ago at $45 per share and have more than doubled from that level. The offering price was already revised upwards significantly from indicative price ranges in the weeks leading into the offering. At the same time, other public offerings from online darlings including Groupon (GRPN), Zynga (ZNGA) and Facebook (FB) have gone bad, very fast.
While still growing phenomenally fast, the pace of LinkedIn's revenue growth is slowing down. First quarter revenues rose 101% on the year, slowing down to a 89% growth rate in the second quarter of 2012. The midpoint of the third quarter revenue guidance implies a 70% year on year growth rate, while the full year revenue growth is expected to come in around 76%.
Valued at over 10 times annual expected revenues, the company is way too expensive as it already has an extensive network among the world's business professionals. Unless the company has a viable solution to increase monetization rates per user, the stock is doomed to fall as subscribe growth is slowing down. Net member growth came in at 13 million members for this quarter and compares to a net addition of 14 million members in the second quarter last year.
Given that year on year growth rate is already falling from 101% in the first quarter to 70% for the third quarter, a 50% annual growth rate in the coming two years seems very ambitious. Even if LinkedIn manages to improve monetization of its current user base and grows annual revenues by 50% in both 2013 and 2014 the company still only generated $2 billion in annual revenues, valuing the firm at 5 times annual revenues. The company could only outperform if it becomes with a new innovative approach so significantly boost its revenues per user, which came in at $1.30 over the past quarter.
At these levels I might initiate a short position depending on tomorrow's price action.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
