The Most Important Information From LinkedIn's 1Q 2012

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Investors Mosaic

Prepared Remarks [see transcript]

  • "The first quarter of 2012 was as a solid one, building on the Company's momentum in 2011."
  • Revenue of $189M and EBITDA of $38M exceeded expectations.
  • At the end of March they passed 161 million members, +58% yoy. Still adding two new members every second!
  • In the quarter,
    1. Of the 15 million new members, 2/3 were International. Now 61% of members are International. The fastest growing geographies are Latin America, Asia-Pacific, and Southern Europe.
    2. Unique member visits +37% yoy, reaching 102.5 million.
    3. Member page views +35% yoy based on comScore traffic. Based on internal metrics that includes mobile, unique visitors grew 50% and page views increased 60%.
  • 2012 will be a year of accelerated product innovation after investing heavily in this area in 2011. The focus is on Simplify, Grow, and Every Day.
    1. In March, introduced new version of People You May Know. Went live to all members in mid-April and they have seen record network engagement and member-to-member invitation send.
    2. Simplified and improved search experience. At a run rate of 5.3 billion professionally-oriented searches in 2012.
    3. Launched Follow Company button in February, enabling members to stay connected with companies.
  • Launched 2 local languages in Q1 (Czech and Dutch) and added Polish in April. Bringing the total to 17 with more planned this year.
  • Opened new offices in Madrid and Hong Kong, now totaling 25.
  • Began testing Talent Pipeline in January, which allows recruiters to manage, track, and stay in touch with active and passive candidates.
  • LinkedIn has more than 2 million Company Pages.
  • As of quarter end 22% of unique visitors came from mobile devices, up from 8% last year.
    1. Launched the iPad app last week, which has been very well received thus far.
  • Have 60,000 developers using the API (up from 50,000 in 4Q) and 400,000 publishers using the LinkedIn Share button (up from 300,000 in 4Q).
  • Acquired SlideShare, a professional content sharing community with 9 million presentations and 29 million monthly unique visitors in March. People post presentation on this platform. This give LinkedIn control over highly professional content that people use to "show off" their skills.
  • There was some relative softness in Europe for the marketing solutions group.
  • Added 331 new employees and will continue to invest in the team in 2012. Management is happy with how the firm's culture is remaining intact despite the rapid growth.

Financial Metrics

  • Key financial metrics:
    • Members: 161 million, +58% yoy (vs. +60% last Q).
    • Unique Visitors: 102.5 million per month, +37% yoy (vs. +41% last Q).
    • Internal page views +60% yoy (vs. +77% last Q).
    • Revenue: $186M, +101% yoy (vs. +105% yoy last Q).
      • Hiring Solutions: $100M, +121% yoy (vs. +136% last Q). Represents 54% of total revenue.
      • Marketing Solutions: $48M, +73% yoy (vs. +77% last Q). Represents 26% of total revenue.
      • Premium Subscriptions: $38M, +91% yoy (vs. +87% last Q). Represents 20% of total revenue.
    • EBITDA: $38M, +190% yoy (vs. +110% last Q).
      • EBITDA margin of 20%, up 600bps from 14% from last year.
    • Non-GAAP Operating Income: $24.6M, +324% yoy (vs. +107% last Q).
    • EPS: 15c, up 170% yoy (vs. +118% last Q).
    • Operating Cash Flow: $63M, +137% yoy (vs. +50% last Q).
    • Free Cash Flow: $41M, up from $10M last year.
  • Mobile remains the fastest growing segment with 275% yoy growth for unique visitors from a mobile device.
  • Salesforce productivity remained consistent with 4Q levels, even in the face of higher spending.
  • There are 10,400 enterprise accounts and increase of 118% yoy and 13% sequentially.
    • Customer churn dollars remained stable vs. the last few quarters.
    • Renewal rate and add-on rate remained solid, but moderated some from the very high levels of 2011.
  • The self-serve ad platform is performing well, growing 100% yoy and outpacing the Marketing Solutions growth rate. Click-through rate and CPC increases are "encouraging."
  • Geographic breakdown for revenue:
    • International revenue: 36% vs. 31% last year.
  • Channel breakdown for revenue:
    • Field sales were 54% of sales, online were 46% (similar to last quarter)
  • Non-GAAP gross margin was 87.0%, up from 82.0% last year.
    • Benefiting from scale and passing sales tax through to customers in new local payments platform.
  • Sales & Marketing expense was 33% of revenue, up from 30% last year as head count grew 90% yoy.
    • 2/3 of new employees are in sales & marketing; 60% were International
  • R&D expense was 22% of revenue, down from 25% last year. Benefiting from scale & '11 being a big R&D year.
  • Acquired SlideShare for $119M, with the goal of "making professionals more productive and successful."
  • Non-GAAP General & Administrative expense was 12% of revenue, down from 13% last year.
  • "The product road map is as promising as it's ever been."
  • Guidance for 4Q and Full Year:
    • 2Q 2012:
      • Revenues: $210M - $215M, or 73% - 78% yoy growth.
      • EBITDA: $40M - $42M, or 19% EBITDA margin @ mid-point.
      • D&A: $18.5M - $19.5M.
      • Stock-based Comp Expense: $18M - $19M.
      • 113M fully diluted shares.
      • Factors in weakness in Europe.
      • Factors in modest impact from SlideShare.
    • Full Year
      • Revenue: $880M - $900M, or 71% yoy growth @ mid-point. Up $40M from previous guidance.
      • EBITDA: $170M - $175M, or 19.4% EBITDA margin @ mid-point. Up $10-$15M from previous.
      • Stock-based Comp Expense: $65M - $75M, up $5M from previous guidance.
      • D&A: $80M - $90M.
      • On a non-GAAP basis, tax rate will be in the mid-30% range.
      • Capex in the mid-teens as % of revenue.
      • 115M fully diluted shares.
      • SlideShare will be slightly accretive on revenue and neutral on EBITDA.

Questions and Answers

  • Can you talk about seat growth? Added ~1,200 seats in the quarter, which is considered great given the huge Q4. Average seat per customer remained flat at 3 - 4.
  • What is happening with customer mix and mobile trends? Moving slightly more international and small and medium businesses (SMB) - as expected. SMB makes up ~25% of the customer account. The mobile customer displays higher levels of engagement, close to the highest levels on the PC. Management expects that this will hold for monetization as well.
  • What are the drivers of Premium Subscriptions? LinkedIn has improved the internal targeting system to be able to customize what different members see, making sure they get the most relevant content. Historically, all premium members saw the same content regardless of interest, location, and function. This enables better conversion for LinkedIn when trying to monetize the platform.
  • How will mobile monetization differ from PC? LinkedIn is aggressively pursuing a mobile strategy and thinks that it will be accretive to the Hiring Solutions and Premium Services. For Marketing Solutions, however, the iPad should monetize well because there is plenty of real estate. But for the iPhone and Android, it will not monetize as well b/c of lack of ad space. The company is mostly focused on getting the user experience right, not maximizing revenue from these platforms, so there is risk.
  • How do you think about market opportunity on the Hiring Solutions? $27 billion market in total, but LinkedIn can target 20,000 U.S. companies and 60,000 International companies (that have more than 500 employees). Being at 10,400 customers today, LNKD has only penetrated ~15% of their target customer set (likely more of the revenue opportunity).
  • What do you have in the Product Pipeline? The mobile apps, especially the iPad app, are doing well. Released version 2.0 of People You May Know, which will provide much greater relevancy.
  • Talk about renewal rate? Churn has remained relatively stable. Add-on renewals moderated from very high levels in Q4. As SMB become a larger portion of the business, there is less initial upside with those businesses.
  • Describe the trends in the monetization gap between domestic and International? Management fully expects to continually close the gap between revenue per user in the U.S. vs. International, and the focus on domestic offices will be a big part of that program.
  • What is happening in the college market? This is their fastest growing segment (but off a very small base). There are some products that are soon to be announced. The service that allows members to search the database for alumnus has good response.
  • Discuss the impact of European weakness? The segment grew 120% yoy in the quarter, so weakness is relative. But the soft economy did have an impact.
  • Hiring plans for Q2? Expecting to hire between 305 - 400 employees, mostly in sales & marketing.
  • What is the long-term business model economics? Management expects this to be a 30%+ EBITDA business. Gross Margin is around 87% today, and they think there is a little room for improvement. On sales & marketing, long-term model is mid-20% range (a hybrid between a SAAS and web company). R&D should fall to high-teens. G&A should fall to 11%.

Takeaway: Business seems to be firing on all cylinders. This is an expensive stock, but the valuation can be justified by the company's expected growth, amazing margin profile, and disruptive nature.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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