Saturday, November 7, 2015

UBI funding option for Canada

The right amount for (Universal Basic Income) UBI in Canada is $15k per year.  This is because that is the amount of maximum benefits for old age security in Canada. 

For any country, the correct UBI amount is the benefits of the largest significant program it would replace.  The higher this UBI amount, generally the more money it saves taxpayers since UBI is more efficient than the programs it replaces, and so the net tax burden of people other than the recipients goes down.

Keeping OAS or reducing the age qualification for it as an alternative to UBI
The core philosophy of UBI is that every citizen receives the same amount, and is the citizen's fair share of the tax revenue paid as a dividend.  But an alternative that achieves universal dignity is to modify the existing OAS system either:

  1. Have UBI for those under age 65, and OAS for those above 65.  The UBI benefit can be lower, and because OAS+GIS has a clawback system, and low overhead, paying OAS is cheaper than UBI.
  2. Reduce the age of eligibility of OAS potentially all the way down to age 18.
The Canadian OAS+GIS system is a mix of UBI and NIT(negative income tax)
 OAS is treated exactly like UBI (except for condition that recipient is age 65).  $570 per month to citizens over 65.  GIS (guaranteed income supplement) is also available to those over 65, and is a top up system like Guaranteed minimum income or NIT.  Somewhat complex differences in clawback rates and amounts based on marital status, but for single seniors it is $772/month with 50% surtax/clawback on income.  For a senior couple, it is $1025/month at similar clawback rate.

For a UBI system for those under 65 to be equivalent, it would be $6950/year. + a GMI of $9000 at 50% clawback surtax rate (GIS component).

UBI is affordable at $15k/year amount, but
Its more affordable if the OAS system is kept for those over 65.  While I continue to recommend a UBI level of $15k/year because that amount includes a personal development (or childcare) allowance and can further eliminate higher education and entrepreneurship subsidies while significantly boosting outcomes in those fields, and $15k is  affordable but $12k/year is more affordable.

The core difference between Guaranteed and Basic Income
Guaranteed (topup) income is a scheme where most of the costs are paid for by the poorest workers through high clawbacks from the lowest income levels, provides 0 benefit above a relatively low cutoff level, and still requires tax funding from those receiving no benefits

UBI is funded through relatively small uniform tax hikes that provide net tax advantages (compared to system it replaces) to 80% or 90% of income earners.  The highest earners who face a net tax increase also gain the most from the economic stimulus of UBI, and so everyone should expect a rise in after tax income as a result of UBI.

GMI is poor policy because the high low income clawbacks create cheating opportunities and discourage work in general, but specifically especially discourage part time and part year work.  For this reason, extending OAS+GIS to younger Canadians is not recommended.

BUT, if GMI is relatively small, say $4000, and the clawback rate modest, say 10% surtax on income up to $40k. then the disincentives and cheating opportunities are unlikely to influence anyone's lives, and a $4000 GMI can be a useful supplement to UBI.

A $4000 carbon tax and dividend
We collectively need a carbon tax to curb climate change and sea level rise related to global warming.  Using carbon tax revenue proceeds to distribute as a dividend allows for an average no net change scenario.  Average energy users continuing the same behaviour will receive $4000 and pay $4000 in higher energy costs.  A carbon tax and dividend scheme though allows us all to profit from any personal effort we make to cut carbon emissions.  Also, since poorer citizens may not drive or have smaller homes to heat and cool, a carbon tax tends to be relatively progressive.

Sample breakdown of $4000 carbon tax as it relates to use:

  • $2500 for 500 gallons of gasoline per adult.  Enough to drive 10k miles at 20mpg.  $5/gallon.
  • $1000 for heat and electricity of 900 square foot home per adult.
  • $500 for goods transportation typical of $20k spending on goods (including food) per adult
Those who use less resources than that would have a cash profit.  Those who use more, would be especially incentivized to use part of the $4000 dividend to improve efficiency.

A $4000 carbon tax could be worth an equivalent UBI of $2500 to a stay at home entrepreneur, $3000+ to a student, and $3500+ to someone near homelessness.

$6000 - $8000 of UBI replacing funding has been obtained
The  $8000 in carbon dividend and GMI funding we have found so far is a high benefit to low income people, but very little benefit to middle income people.  Those earning over $40k per year get 0 from GMI, and the energy use of $40k income households may not be very different than the energy use of $100k income housholds, and so they'd receive little net benefit from the carbon tax as well.

from CRA's stats for 2012 tax data

14M of 26.7M tax returns had total income below $40K.  The median income (in the under 40k group) would appear to be around $18k.
5M returns reported an age amount (indicating they are over 65).

This would suggest the net cost of the $4000 GMI amount would be 9M * $2200 = $19.8B.

Ontario's costs for social services is $1000 per taxfiler.  Another $700 per taxfiler for Police/prisons, children services, and government services.  $700 per ontario taxpayer in social, labour, and miscelaneous transfers from the fedral government, with another $300 in equalization payments.

While I cannot find the total amount itemized, another significant combined federal and provincial benefit is the sales and property tax and northern resident credits paid at a clawed back rate to citizens.  I'd guess it averages $500 per tax filer.

An additional $8000 in UBI
The $8000 in GMI and carbon dividend amounts are not enough to eliminate programs, and even if UBI/GMI is a transfer from citizens to citizens, in order to provide value beyond the freedom and dignity of every citizen, program savings need to be made:

$1800 from basic personal deduction (federal) can be eliminated.  Per adult.
$660 from basic personal amount at provincial (ontario) level can be eliminated.
$500 sales, property, and other miscelaneous average credits can be eliminated.
$1000 as a conservative estimate of the up to $2000 in federal and provincial program savings per taxfiler (discussed in previous section).

That is a net cost for an $8000 UBI component of $4040 per 21M eligible Canadians.  or $85B.  with $19.8B GMI cost, the total cost is $105B before savings and additional revenue

Savings and additional revenue are (most items discussed here in greater detail.  A big item is that 14.5% in payroll taxes is being eliminated, but replaced with an equivalent 13% income tax, and 7.5% increase in employment wages (employers would pass along the payroll taxes that they "secretly" pay into employee's salaries.  A 13% tax increase results in equivalent after tax income):
$22B from elimination of EI benefits (revenue remains)
$30B from income normalization of dividend and capital gains income, and 13% "payroll" taxes applied to non-employment income.
$10B from normalization of corporate income and passthrough of their dividend tax credit to shareholder income.
$42B from applying 13% "payroll taxes" on incomes above $50K.
$6.2B   from 11%average tax rate on the 7.5% employment income increase (= 0.24 * 0.075 * 750)

$110.2B in savings and revenue means net savings of $5.2B if other provinces are similar enough to Ontario.  Miscellaneous savings such as healthcare and crime reductions have not been included.  Neither have major tax revenue increases resulting from economic growth resulting from spending most of the $105B in net new personal transfer payments.

Summary of UBI Plan
  • $4000 carbon tax dividend paid to residents including seniors (though reduced amount for seniors is thinkable).  Expected to increase personal net income for those earning less than $60k.
  • $4000 NIT grant paid to residents but not seniors.  10% surtax on income up to $40,000 claws this back.
  • $8000 UBI cash grant to citizens who are not seniors.
  • EI and CPP benefits eliminated.  (CPP already contributed still pays out as scheduled)
  • Current payroll (EI/CPP) taxes on employment income eliminated, and replaced with a 13% Social safety net (SSN) tax.  The 13% tax applies also to income over $50k.
  • All income is treated the same as employment income.
  • Personal income tax rates at federal and provincial level are unchanged except for the removal of the basic personal exemption, and refundable credits including sales and property tax/rent credits.
  • Corporate tax rates may be increased, but corporations receive the privilege of deducting dividend payments as a tax deductible expense.  The dividend recipient pays income tax in the (provincial and federeal) jurisdiction of the corporation.
  • Income taxes are payable by foreign investors and non-citizen residents, but they are excluded from paying SSN tax.
  • SSN tax is paid by Canadians on their foreign income.  Canadians pay both SSN and income taxes on Canadian income.
  • No change to OAS system.  Above benefits except carbon tax applied only to those under 65.  OAS system kicks in above age 65.

Effects on sample Canadians
 The examples below use a generality assumption

No other income
$16000 in cash grants.  $1000 expected higher energy related costs if does not drive.

$20000 employment income
No change in taxes paid, other than loss of $3000 in basic exemption and tax credits.  $10000 UBI+GMI, and expected $1000 benefit from carbon tax dividend.  $8000 additional effective after tax income.

$20000 capital gains income
Currently pays 0 tax.  New taxes $6800 (including 6% provincial).  $11000 cash and net carbon benefits.  $4200 net additional cash, and $24200 after tax income.

$40000 investment income including $20k capital gains income
Likely a millionaire.
currently pays $6300 taxes. New taxes about $13600.  $8000 UBI benefit.  $700 more after tax income

$40k to $50k employment income
No tax changes.  $8000 UBI less loss of $2400 in credits.  $5600 increased income.

$93077 employment income
Breakeven with old scheme.  $5600 extra taxes and $5600 net UBI.

Households with non working spouse
 Get $16000 additional household income, ignoring change in carbon usage from single household member.

$53077 rental interest and business income
Breakeven with old scheme.  $5600 extra taxes and $5600 net UBI.  Likely assets of such a person $1.9M

Every $10000 income above $53077 investment or $93077 employment income
$1300 extra taxes compared to current system.

Notes on $5.2B surplus and alternatives
The projected surplus is conservative as additional savings especially in police and healthcare should materialize, and this is a highly stimulative economic program that will result in  tax revenue increases. 

One option is that for every 1% lowering of the (13%) SSN tax, $10.6B less revenue is collected at 2012 GDP.  Lowering this rate is a fairly equal tax cut accross all income levels.

Carbon tax revenue will go down as a result of people's choices to avoid and conserve such energy.  Economic growth surpluses and other savings will keep the carbon dividend fixed.

Elimination of CPP contributions will also put a higher strain on future GIS payments.  As compensation though, RRSP contributions now save 15% payroll taxes as well, and so are even more attractive than they are today on incomes above $50k/year.  Its conceivable to one day eliminate the OAS system for those over 65, replacing it with the UBI system

Some wage inflation (completely healthy) is expected as a result of UBI scheme.  UBI/GMI automatically grants citizens the bargaining power of refusing work, and so improved work conditions are guaranteed.  Such wage inflation is inherently economic growth.  As is any automation that replaces work whether because it is too expensive or unnecessary.

UBI should grow with productivity and wage inflation.  Some gains can also go towards tax reduction.  While I don't have a fear of UBI being too generous, and it is critically important that it is generous enough to eliminate all other social programs, and the need for them.  Others will have concerns about being too generous.  An appropriate compromise is to ensure a minimum standard generosity, while distributing further gains to tax payers.

UBI system federal marginal tax rates

no payroll surtaxes, and taxes are after the 7.5% employment income raise. So, all tax rates are effectively 7.5% less on comparable current employment income up to $50k.  Employment income above $50k would receive a statutory flat $3750 raise.
  • 38% on income from 0 to $40000
  • 28% on income from  $40000 to $44700
  • 35% on income from  $44700 to $89401
  • 39% on income from  $89401 to $138586
  • 42% on income over $138586 
One alternative use of the surplus would be to move the clawback range for the GMI from 0-40k to 10k-50k or 20k-60k.  While it makes the program more expensive, it reduces the marginal tax rate for the lowest income group to 28%.  Low wage and part time work is a gateway drug to higher wage full time work, but it has the largest discouraging barriers that include taxes, and also include transportation and other non-deductible unpaid time and monetary expenses that can make accepting a job expensive.  This or more generous EITCwould solve the issue.

Justifications for tax reform
We tax low employment income very regressively.  22% in federal and provincial income taxes + 15% (7.5% is hidden and paid by employer) in payroll taxes on income below $50k.  While income taxes rise slightly at 35k, the 15% payroll deductions vanish on income over $50k.  One motivation for UBI is to remove the welfare trap disincentives for work: high clawbacks on earned income that trap people in poverty by not seeing rewards for work.  Part of my objectives in reforming the tax code to accomodate UBI is to eliminate all of these tax code innequalities that are not justifiable.

Raising some taxes is necessary to pay for UBI.  Raising taxes on employment income over $50k (flat 13%) is appropriate because its not a net tax hike until a comfortable $93k income, and UBI provides considerable benefits to a non working spouse.   Whether conservative or liberal, family/couples can create happiness.  UBI achieves this through the tax code without rewarding traditional marriage.  A traditional women's issue of spousal independence is achieved.  A traditional men's issue of family law reform is possible.  UBI promotes family values through cooperation of individuals for advantage rather than trapped interdependence.

Raising taxes on investment income is justified in that the investor class is gaining a fantastic safety net from UBI.  Investment income is highly variable.  The $53077 breakeven (to existing tax code) investment income is reasonably achieved with assets of $1.9M.  The same spousal benefit options exist for investors. Income taxes can not be a disincentive to investing because it usually beats the return expectations of keeping money under a mattress.  A lower tax rate is offered on Canadian's foreign investment income, and so there is no reason for investor flight either.  Furthermore, higher taxes on passive investment income becomes an incentive to engage in active business income pursuits.

Raising taxes on business income is justified by UBI being an even more fantastic safety for business/entrepreneurs than it is for investors.  UBI can pay a business owner's and key employee/partner salaries while they grow the company.  UBI allows pursuing a business idea without obtaining funding permission first, or having the risk, delay and constraint of building up prior savings.  Businesses also already enjoy the tax advantage of being able to deduct expenses, and paying tax only on profit.  Cars, phones, home offices are tax deductible "perks".

Reminder of economic growth effect
14M Canadians currently earning under $40k receiving an average of $7000 UBI cash (higher income Canadians also see benefits from UBI) is a massive stimulus program.  Its also a stimulus program that involves no cronyism or contract bids, and no useless projects.  Businesses and those who want to work will have significant opportunity to collect Canadian's extra income one person at a time.

$100B distributed to Canadians earning below $40k will likely all be respent.  Marginal income for low income earners is almost entirely spent.  Whereas, wealthy individuals and corporations save significant portions of income... by definition, not spending.  If half of the $100B is respent, then half of  that respent, and so on, the total economic spending boost will be $200B.  Over 10% GDP growth, and 10%  tax revenue growth ($25B).

UBI is not just a poverty elimination program, its an economic growth program that includes giving everyone the tools to fund their own personal and economic development.

Saturday, October 31, 2015

The hamster wheel economy

This is a post about how inflation and the banking sector works, but more importantly is another example for how Universal Basic Income (UBI) solves everything.

The Goldilocks economy
A common buzzword heard on financial news media in the months preceding the 2008 financial crisis was that we were in a goldilocks economy, referring to the balance of inflation vs. non-inflation pressures being neither too warm nor too cool.  That turned out to be a euphemism for "all hell is about to rain down on us".  The slightest nudge of interest rates upward caused the dominoes of the mortgage securitization scams, the Lehman Bros. scam, and the Bernie Maddoff scam to unravel.

The reason a small interest rate hike was the first domino in that chain is that many mortgages had been given to subprime (least creditworthy) lenders at low teaser variable interest rates and the nudge up caused many unaffordable mortgage renewals at the teaser rate expiry.  Directly leading to bank troubles.

The importance of bank health
Banks are generally useful entities.  They let you buy homes with fairly little cash, and provide other useful credit services that can fuel a healthy and growing economy.  Bank failures do negatively affect the rest of the economy.  With that said, heavily regulating them to protect them/prevent failure is important, and ideally, grants by society towards bank profitability is worth avoiding.

The importance of housing
Keeping housing prices high and rising  is critically important to bank health, personal wealth sustainability, and adds economic activity towards home building and improvement.  Our societies have been in structural decline for several years, but this decline is masked almost entirely by the propping up of housing prices.

Everything you need to know about the housing market is in but the short version is that low interest rates is by far the biggest factor for boosting housing prices.  A 6% interest rate lets you afford a $100k home for just $6000 in yearly interest, but dropping interest rates to 3%, lets that same home have the same affordability if sold for $200k (double).  The danger is that if normal interest rates go back up to 6%, then housing prices would fall in half, and most banks would collapse.

The hamster wheel economy
The hamster wheel economy is one where
  • Housing prices must be sustained by
  • low interest rate fueled inflation that sustains
  • Banks, government borrowing, personal wealth, and stock prices (also helps banks and personal wealth) 
If you stop running in the hamster wheel, the hamster that is probably behind you will bite your tail off.

The link between low interest rates and stock prices is partly that profitability is enhanced by low borrowing costs, and healthy banks and personal wealth, but more importantly, from more recent year financial media buzzwords, there's nowhere else to put your money.

The hamster wheel economy is a super precarious state, where the economy is on the brink of collapse when interest rates are near 0, and cannot be increased, and the absurdity of negative interest rates appears not just viable but proposed as necessary.

low interest rate fueled inflation
Deflation has to be avoided because that ruins housing prices and  thus everything else.  Low interest rate fueled inflation is the primary anti-deflation tool, and is also the type of inflation that affects housing costs the most.

QE is a similar anti-deflation policy, that doesn't help housing prices as directly, but helps inflation of assets that help the richer members of society buy houses too... and financial institutions.

Causes of deflation
unemployment and low income employement is a primary cause.  Cheap imports, and productivity fueled cost cutting causing more unemployment and lower income occupations feed the cycle.

The evil of the hamster wheel economy
The hamster wheel economy selects winners.  Namely, those lucky enough to have already purchased a home and stocks, the financial sector, and public company insiders.  This is a demographic that heavily skews older, as well.  The selected losers are those who at best only have the option to buy such assets at precarious hamster wheel high prices (and at greater risk if they collapse).  Obviously, also, high home prices freeze out those still without a home.

Wage inflation (as opposed to low interest fueled inflation) resulting from economic booms significantly benefits the younger skewing demographic that seeks employment, both with better pay and easier work finding opportunities.

The age-based conflict is a topic well expanded in this essay, and an issue not peacefully resolvable without UBI.  But this conflict is made worse by intentional low tax policies eliminating jobs, welfare, education in order to increase hardship so that interest rates can stay low and homes and stocks high.

UBI as a solution to Technological displacement
UBI provides an obvious solution to technological employment dislocation.  Just tax robot owners profits, and distribute the tax proceeds equally to all adult citizens, and then have the citizens pay for robot stuff.  Robot owners get fithy rich.  Everyone else has everything they need, and less reason to complain about not having a job that is not necessary.  We don't need to wait until robots are everywhere for the advantages of UBI. UBI paid through taxes brings huge economic benefits to our society.

The only other theoretical solution to technological displacement is the theory that product prices will fall rapidly along with automation.  This is the deflation that causes our tail to get bitten off.  For one, if cars go down in price to $100, you still need $100 in income to buy one.  The other point is that no matter how much productivity increases, the price of land is not affected as much, and central banks will use every weapon in their arsenal to prevent a hamster flop in property prices.   So if everyone needs to make and sell 50 cars per year to just afford a place to live, and 100 cars per year to afford other basic needs,  its a big problem if everyone is not buying 100 cars per year.  50M cars per year sold in the US would support 500k workers (making an average $10k/year) through the full supply chain.

This theoretical alternative also skews the benefits of productivity increases to those who have accumulated savings in the past (those darn boomers again).

UBI can fight deflation and allow interest rate breathing room
There is irrational (at best) scaremongering that UBI will cause inflation.  If some people choose to stop working, it is likely to improve the job opportunities of those who want to work.  UBI also inherently increases spending and growth in the economy.  If their wages rise too high, then it improves the opportunities to develop automation that replace them.  Another reason that such inflation doesn't matter is any effect that increases spending in the economy increases tax revenue, and so the ability to fund higher UBI to match inflation.

To tie everything to the rest of this paper, UBI stops deflation by stimulating economic growth.  low interest fueled inflation has not stimulated growth and structurally never can alone anymore.  Investment is only made because an idea seems good, and good ideas exist when many people might be able to afford to buy the result of that idea, and do not exist if fewer people can afford anything.  Or the only ideas left are how to cut costs in the face of fewer customers... leading to fewer customers.

A primary cause for our economic decline being structural and permanent is lower birth rates.  Housing prices and economic activity (work) is sustained by increasing population.  Sustainably high birth rates not only create the sustainable housing price increases needed for credit based economy (without artificially low interest rates), but were fundamental assumptions in the creation of socialized retirement policies.

UBI helps banks too
The main reason your home values are staying high is that this is necessary to keep banks solvent.  UBI will help housing demand too, but there is room to raise interest rates to mitigate housing and other inflation.  High home values with higher interest rates is awesome for banks.  Bigger loans at higher interest rates, and a cushion to lower interest rates if home prices ever fall again.

UBI also creates better lending opportunities in general.  Borrowers with a guaranteed income level have much more borrowing security, and that means less risk and higher profitability to lenders.

UBI can't hurt stock returns either.

Recent tax focused analyses of UBI

My original philosophy

Another Central bank option
Another obvious option for (full or partial) funding of UBI is to print money and distribute it in equal share to citizens, as I demonstrated here.

An alternative that may be more palatable to central banks, is to simply issue more government debt to fund UBI, while the central bank repeats its past QE procedures.  QE helps banks and helps government, and central banks like helping both.  An accounting issue with imagining money to buy government debt (QE) is that the central bank is trading an asset (bond) for the imagined money (liability), and so it can pretend its books are balanced, and that when the bond is repaid it will then cancel the money instead of perpetually buying a new one.

If QE is credible, then this maneuvre is equivalent to direct printed UBI funding, without involving accounting deficits, providing free debt to governments, and helping bankers get rich by buying bonds ahead of the fed.

Thursday, October 29, 2015

Linkedin Q3 2015 results

Linkedin is a company worth fairly $5B today, that could one day hope to be worth $10B, if it performs perfectly.  Its market value is near $30B.

Continuation of my chronicling the eventual collapse of LNKD's stock value.  Previous entry

 Results (see also)
  • $41M loss. Almost as high as Q1's record $42M loss, but lower than Q2's record $68M loss.  The $51M before tax loss is considerably higher than Q1's record $32M loss.  Q2's pretax loss was $93M.
  • Near or record low year over year growth rates for its 3 main revenue categories (33.6% hiring solutions (2nd lowest. previous quarter was 11th consecutive record. ), 28% marketing (3rd consecutive drop. lowest since q2-13), and 21% subscriptions (12th consecutive record drop).  Down from last quarter's growth of 32%, 32% 22%)
  • Record low growth rates in members (12th consecutive), unique visiting members,  mobile visiting members (12th consecutive), and corporate solutions customers (12th consecutive).  Its other user metric of member page views had lower growth than last quarter.  Mobile visitors in particular are just 55M monthly. 30% higher than Q3-2014, which was 45% higher than 2013, which was 129% higher than 2012.
  • Its overall revenue growth rate of 37% includes near 8% points from, and so without that acquisition, its growth rate would have plunged below 30% for the first time.
  • International marketing and subscription (12th consecutive record) growth is well below 20%.
  • After 11 consecutive record low growth in  Other Americas, Q3 matched Q1 growth of 19%.  After 4 consecutive record low growth in APAC, a slight uptick from 28% to 32%.  After 11 consecutive record lows in EMEA, growth went back to Q1 levels of 34%.  If all of's revenue was US revenue and did not help any of the above then US had 3rd consecutive sharp record low growth of 29%.  If its not fair to assume all lynda revenue is US, then all other regions did not really bounce from record lows.
  • US hiring solutions (relying on linkedin's claim that is mainly a US business) grew a record low 28.7%.  Its main business, and greater than all international revenue sources combined.  US marketing solutions growth lowest since 2013.  US Premium subscriptions 12th consecutive record low 23%.
  •'s Q3 revenues of $41M is lower than the standalone company's Q1 revenues of $43.5M.  And so a deterioration of, what was a 25% annual growth, business under linkedin management.
  • It did manage cost containment in its marketing and administrative functions.  Actually reducing the total compared to last quarter despite 10% sales growth relative to that quarter.  These adjustments just get it back to Q1-bad (instead of Q2-terrible) cost ratios.  34% sales and marketing costs, 15% in administrative costs.  Compared to Q1 levels of 36% sales, and 15% admin.
  • record level and sharp increase in depreciation and amortization to $118M.  Near 100% year over year increase and much larger than their revenue increase of 29%-37%.  All other cost categories increased more than 30%.  Cost of revenue increased 48%.  Growth in headcount was 44%.  Depreciation (without amortization) was $72M.  A 44% increase.
  • Loss before taxes was $51M.  Higher than the record at the time Q1 loss of $32M, but lower than Q2's.  Q2's results included one time adjustments from acquisition, and so a portion of that loss excusable.  But a continued deterioration trend from Q1 does exist.
  • Revenue per member was  $1.97.  Per monthly unique: $7.80 including lynda.  $7.39 excluding lynda.  In Q3 2014, this quarterly revenue per monthly unique visitor was $6.31.  Only 17% year over year growth.
  •  Linkedin increased their Q4 revenue guidance by $10M compared to last quarter.  This increase is entirely attributed to expectations.
  • Their projected operating loss is $56M for the quarter, and -$202M for the year.  This is an improvement to the guidance from last quarter for a $258M loss, though its projected ebitda of $148M less its projected other operating costs of $244M was an expectation of $96M loss.  Its results were ebitda of $208M and $245M in other costs, and so $59M of the lower full year projected loss difference of $56M (the portion related to Q4 expectations) comes from the beat on this quarter's guidance.  These guidance numbers may not all include the additional $16M in expected other expenses not included in their shorter guidance statements.  But overall a high record loss (excluding Q2) is expected for their most important quarter of the year.
  • is expected to contribute to ebitda losses until 2017. (excluding associated stock compensation and depreciation)
  • Shares outstanding will be 134M.  A 6% increase over last year.
  • With a $58M component to their revenue guidance, Q4 is expected to result in only 23% revenue growth over last year's buisness.
  • Depreciation is expected to be $78M for the quarter.  35% higher than last year.
  • The $58M Q4 guidance if annualized with 3 other quarters of $41M would be $181M total 2015 revenue.  2014 revenue was $153M.  Only 18% growth.'s 2014 growth was 25%. Masking poor results is contributing over 5% of their total sales, and 8% of talent solutions.  7% of previous year's comparable total sales, and 12% of previous year's talent solutions.  There is no turnaround occurring.  There's even decline in projected growth to 18% YoY from when it was a separate company last year.

There is no core buisness turnaround and a $51M pretax loss instead of the projected $100M+ loss.  Next quarter's guidance is only raised by a $10M bump to previous lowball estimates, and there is even a slight increase to projected losses for next quarter.  Guiding for a loss while projecting a nosedive core-organic growth rate of 23% is not reason for enthusiasm.

Shareholder performance margin
The core reason to be negative on linkedin is that it can't ever make money, and this is especially the case if its core (cost of revenue and depreciation) and other expenses grow faster than its sales.  Linkedin reaccelerated its equipment purchases by 38% over last quarter to $167M.  This will feed future depreciation growth well over its sales growth.

SPM is a metric useful in examining unprofitable companies, by giving them credit for R&D expenses helping them in the future, but then from that number determining how much each $ in R&D needs to create in revenue or savings to break even.

Linkedin's SPM in Q1-2015 was 10.6%.  Meaning that its R&D spending has to return 10x to be worthwhile.  Leading tech companies have 33% SPM, and their R&D only needs to return $3 to break even.

Linkedin's SPM in Q3-2015 is (-40.5(net income) + ((13 (other income loss) + 202 (R&D))*(0,65 after tax benefit of these expenses) =)  $99.25M, or as a percentage of revenue: 12.7%.  This is a small improvement over Q1, but excluding the benefit of other losses to this calculation brings their SPM ratio close to 11%.  Its terrible, and objectively stays terrible at any SPM under 20% (for an R&D tech company)

Free cash flow less stock-based compensation
Free cash flow at its core takes Net income, adds back non-cash stock compensation, amortization and depreciation expenses, but because depreciation is a real cost that must be accounted for somehow, subtracts the equipment purchased during the quarter.

Stock based compensation is a real cost that negatively affects shareholders by diluting their interests and handing out the future benefits of the company to insiders.  Amortization is understandably intangible, and it is quite reasonable to prefer tracking actual equipment spending to depreciation.  That spending does create more expenses in future quarters.

FCFLSBC has been negative every year since 2013 and all but 2 quarters.  -$298M in 2014.  -$279M in trailing 4 quarters up to Q3-15.  Equipment purchases in Q3 were 38% higher than last year (ahead of revenue growth), and FCFLSBC was -$54M.  I believe these numbers also excuse plausibly-excusable items such as currency losses, its interest expenses related to shareholder dilution (convertible notes) which are new this year and I have not added these back in, even though there is very good reason they are included in GAAP earnings.

The bottom line is that this performance is very poor and has been at this poor level for at least 7 quarters.  Cummulative FCFLSBC loss since Q1 2013 is -$408M.

Future guidance
At the beginning of the year, I thought there was a good chance they would increase sales by $800M.  They are still likely to come close to that, but with $111M of those sales coming from the acquisition.  So, organic sales increase a touch below  last year's $690M increase.  Its fair to use $700M/year for future year growth.

That would put it at $10B sales at the end of 2025.  With its high R&D, marketing and admin expenses.  From there it might be able to figure out how to make $1B in profits, and if it does, then in 2025 it might be worth $10B market value.  With less than 7M new shares per year, there would be 200M shares outstanding by then.  Expected optimistic value in 2025: $50/share.

Linkedin is involved in a sales intensive business that also happens to be an R&D intensive business.  It has been blessed by story telling allies that the key to success is chasing sales.  Its pretty much an impossibility to reach $30B in inherent value for linkedin. has the same defect. 

Partly related topics

Google announced a $5B stock buyback this quarter

Google's stock structure permits its insider owners to never repay the muppet stockholders, yet a stock buyback does make it possible for a muppet to actually receive cash from a google action.  Muppets are the outsider public clients of the financial industry.  The financial industry itself are not muppets because 1. they can gain from the relationship with insider owners through delivering muppets to them, and more importantly, 2. They have complete awareness of every muppet's pulse and sentiment and acceptance of any story-based buildup of a company's future.  The financial industry knows how well any story is selling at any time, and so can trade ahead of that story.  For the muppet, confidence in the story teller is not likely to increase wealth.

The inherent value of any investment is the return paid by the time that investment is forced to sell.  For bonds, its the coupons and principal repayment.  For stocks, its dividends and buyout price.  Even if you can resell a stock at anytime, the inherent value calculation remains for the buyer, and so counting on short term price spikes is fundamentally the same calculation you could make for investing in pyramid/ponzi schemes.  You can hope that someone stupid will buy it after you at a higher price, but such investments are manipulation psychology based rather than based on the inherent value of the contract.

A stock buyback does not change the inherent investment value.  It increases risk to the company by using its cash to buy out those who no longer wish to be invested in its future.  A key point about Google's buyback is that it is below the amount of new shares it is handing out to insiders.  Buyback announcements also are not binding commitments to actually go through with the buyback.

Another point is that the stock price reaction this quarter was very enthusiastic likely based mostly on this buyback announcement.  This quarter was not as good as Q2, but the enthusiasm over results was much higher, especially considering that the main effect of price enthusiasm after Q2 was to increase expectations for Q3.

My reason for mentioning Google in a post on Linkedin, is that both companies share a dual stock structure where the real insider owners do not have any accountability to muppets.  These companies/insiders never needed capital cash infusions, and so the terms under which they took muppet money was to their advantage.  Google as a company, and black box for its insiders, is generating substantial real cash and profits.  Unlike Linkedin.

I am surprised that Google is making it possible to transfer cash from it to a muppet.  It never has to from a purely selfish perspective.  Its understandable as an enthusiasm generator though.  That helps the insiders sell their stock too.

Twitter comparison to Linkedin
This quarter Twitter had the noteworthy, but not that impressive, accomplishment of having a smaller loss than its after tax R&D spending.  Just slightly.  While losing money is something it has in common with Linkedin, the rate at which it is losing money is improving every quarter, and its growth rate is much higher.  It's likely to have more revenue than Linkedin in 2017.  It has significantly leapfrogged it in comscore US monthly visitor metrics.  Impressive considering last year it was a full year behind.

Not that I am endorsing Twitter, but the fact that it is not in a sales intensive business does mean there is a possibility of success.

Ebay has averaged 20% growth over last 5 years
Linkedin is entering the 20% target growth circle.  Ebay is profitable, though its 20% sales growth has been much faster than its profit growth.  $13B in tangible net assets prior to paypal spinoff.  Earnings multiple (after backing out tangible net assets) under 20, and going forward looks pretty close to 10x. (though more modest growth this year)

Comparison to Facebook
 In Q3-2014, Linkedin had profit before taxes of $9M.  About break even.  In Q3-2015, if R&D expenses would have been fixed to 2014 levels, but they still got all of their sales, then their pre-tax profit would have been   $15M (-$51M + $66M extra R&D spent).  While that is a little better, $212M (37% higher including lynda 31% without) extra sales resulted in only $6M extra contribution excluding R&D.  $6M / $212M suggests 3% pretax profit potential.  If R&D is expected to grow more than 3% of sales, then there is no profit potential.

FB's 3Q results, for comparison, had $1.3B increased sales, and $760M increased contribution excluding R&D.  The pretax profit margin on those extra sales 58.5%.

Other comparable metrics:
  • US advertising revenue growth:  FB 56%, LNKD 36%.
  • 3 quarter average compared to Q4-2014 US advertising revenue:  FB: +$137M/quarter (10% better), LNKD: -$8M/quarter (compared to $71M Q4`14 revenue... over 10% worse).  In 2014, LNKD managed +$9M for same metric.
  •  Total advertising growth:  FB 45%, LNKD 28%
  • 3 quarter average compared to Q4-2014 advertising revenue: FB + $220M/quarter (6% better).  LNKD: _$20M quarter (compared to $153M Q4`14 revenue...  13% drop)

Tuesday, October 20, 2015

Whale oil history as an incentive to destroy the world.

As far as I know, whale oil was primarily used in house lamps, and alcohol, starting in the 1830s was a significantly cheaper fuel source.  $0.50/gallon vs $1.30+/gallon for whale oil.
image is from Wikipedia article on whale oil, and Walter S. Tower, 1907 book.

The mystery then, is why would whale oil imports surge 1000% over the next 20 years?

Economic strategies available to dominant but declining industries
Those in declining industries will see reason to worry, and likely foretell, the eventual decline.  If burning fossil fuel will destroy the planet, but make you money in the process, then you will tend to value the making you money part than whatever that first part said.

If you see competitive alternatives to your energy source that are cheaper and cleaner, and you know they will eventually displace your energy product, then you:
  1. overproduce your energy product to bring its price down while making the alternative challenger less profitable and less capable of encroaching on your marketing, distribution,, and political monopoly. 
  2. Use your marketing, distribution, and political power to spread the wealth from your energy product to existing and new friends, to extend your dominance as long as possible.
  3. Management corruption of corporate interests further ensures evil, because their interests are not to preserve shareholder wealth through prudent investment, but to maintain as powerful an empire for as long as possilbe.
From axiom 1, kill all the whales was an ensured outcome.  Prior to alcohol competition, sustainable whaling made whaling easy and more profitable by restricting supply.  Overproducing became necessary to make it easier for consumers to choose murdered whale byproduct for their lighting needs.

Axiom 2 and 3 could explain the eventual 1860 $2/gallon tax on alcohol.  A theory would be that politicians after being lobbied for 30 years on shutting down alcohol would be eventually pursuaded even if all of the benefits of alcohol destruction went to the new fossil oil industry.

I'd appreciate any Historian's input as to specifics in how the 3 axioms influenced the peak whale oil transition.

Analogies to our current energy tipping point
Renewables are competitive purely on energy price, and with climate and pollution costs, obviously preferable.  The assured reaction by dominant incumbents though is rapid desperate overproduction, and the need for political allies at any cost to preserve incumbents positions.

A history of whale oil and how the industry managed to increase production so much in the face of better competition is a very important illumination to the corruption alternatives that the planet destroying energy incumbents have and will use to preserve their lifestyles.

Random bits of evidence

A not so illuminating whaling history,  though a point I ignored in comparing whale oil to alcohol is the potential differences in energy content.  A gallon of gasoline for instance has more energy capacity than a gallon of alcohol, and so a gallon of whale oil could have burned brighter or longer than a gallon of alcohol. Estimates are that whale oil has the same energy density as kerosene, and less than 30% higher than ethanol. Though energy density does not mean a bright flame.  It appears as though camphene (alcohol mixed with turpentine) was  brighter than kerosene.

 this reddit discussion has additional info on the uses of whale oil and relative lighting properties of alternatives.  Specific support for marketing awareness of pushing whale oil as the "civilized" lighting alternative

“Great noise is made by many of the newspapers and thousands of the traders in the country about lard oil, chemical oil, camphene oil, and a half-dozen other luminous humbugs,” The Nantucket Inquirer snorted derisively in 1843. It went on: “But let not our envious and — in view of the lard oil mania — we had well nigh said, hog-gish opponents, indulge themselves in any such dreams.”

The Whalemen's Shipping List, a journal devoted to the whaling industry, was particularly notable in pushing the anti-camphene agenda. In one issue, it claimed:
"We have often thought that the State, which recently seems to take such care of what we shall eat, and what we shall drink, ought to interfere in this matter. We have statutes for the storage of gun-powder. It is put away, out of the reach of hap and hazard. Yet every day we hear of this house burned, of that child killed, by the explosion of what is called 'camphene.' It seems to us that the State might find some ground for its legislation, even here."

These types of "You wouldn't want your children to use lead-enriched Chinese toothpaste, would you" appeals are a strong implication of desperation and marketing push.  Despite any claimed superiority of whale oil, the industry would have needed to ramp up production considerably to keep the price premium over camphene "reasonably small".

In the web of links here and in reddit thread, the main historical debate so far has been between the oil industry claim that it saved the whales through kerosene, and the claim that alcohol saved the whales 30 years later.

To me, the truth appears closer to the whalers tried killing all the whales as a response to alcohol fuel competition.  Kerosene did gain quick dominance in lighting applications around 1860, but in the US, this was due to taxes on alcohol, though it also likely had convenience advantages as well, including a lack of denigration history by the whaling industry.

A price correction: lists prices paid to ships for whale oil.

From a 1955 Yale Professor's book , Camphene was 68 cents per gallon and produced 11 candle powers at 4 oz per hour... vs sperm whale oil $2.50/gallon producing 7 candle powers at 2oz per hour.

 Shocked... Shocked! that Exxon would know about destructive climate effects of its production
Recent revelations show Exxon knew about CO2's effect on climate change as early as 1981, despite contributing to creating social and political doubt for these effects.  I actually don't blame them for such a position.  Rather our entire political systems are broken and corrupt for being susceptible to their influence for this long.

If someone told you that a $100 bill you own may be counterfeit, your first reaction would not be to throw it in the trash.  Human nature would compel you to look for facts that suggest it is not counterfeit.  The entire value of Exxon's property is tied up in the premise that it contains oil and that oil is beneficial.  Their opinion that oil is beneficial is certain regardless of truth behind the claims, and therefore the opinion is worthless.  The only problem is entirely within a political system that can side with such opinions.

A carbon tax and dividend scheme (revenue from carbon tax is redistributed equally to all citizens) is absolutely necessary to curb destructive climate effects of fossil fuel use.  It is especially appropriate now that renewable power has achieved cost parity with high CO2 and pollution producing fuels.  I suggest enough taxes to create a $4000 per person (US consumption) dividend.

The effect of a carbon tax is that individual people can:
  • Make no change at all in behaviour:  On average, dividend received will pay exactly for extra taxes paid.
  • Invest in efficiency and alternatives:  A high tax on energy greatly enhances the payback period of any efficiency/alternative energy investment.
  • Reduce energy use:  Allows on average each person to pocket the profits of energy conservation.
A tax and dividend plan is automatically progressive as the rich are more likely to use more energy than the poor.  Heating 10000 square feet costs more than 800 square feet.  It gives every individual the option of making no change, and so only provides more choice to everyone.

A carbon tax and dividend plan can also be a component in a greater UBI program.  $4000 of UBI coming from a carbon tax greatly reduces the funding requirments from other sources, and more easily allows a UBI threshold that is sufficient to eliminate all other social assistance programs while permitting a self-development budget (education but not limited to institutionalization) for every citizen.

Friday, July 31, 2015

Another financial metric: Useful sales growth

In my latest critique of Linkedin results, I introduce the concept of useful sales growth.  This can be understood as simply growth in gross profit less marketing and depreciation expenses.

Useful Sales Growth
If a company increased sales by $100M in a quarter, but its costs of revenue went up by $50M, and its marketing expense up another $50M, then that company had no useful sales growth at all.  It did not make any extra money availble to pay for other expenses.  It probably "bought" all of its sales growth by extra spending on marketing.

The metric is critically important in detecting poorly performing companies.  If I have a $1T bribery slush fund (marketing budget), then I can easily increase sales by $1T.  Spending $1 in advertising to get $1 in revenue is inneffective, except for padding revenue numbers that may deceive investors into seeing growth.

The reason for including depreciation expenses in the formula
For a mining operation, where equipment is built and purchased at the begining of a mine opening and is likely to last for the life of the mine, depreciation would not be considered, as that buildout is a one time sunk cost.

Similarly, old economy factories, have considerable depreciation attached to large buildings and repairable long lived machines.  Much of the depreciation in those operations is one time sunk costs.

For tech/web companies, however, their depreciation expense is entirely tied up in recurring computer equipment expansion and replacement.  For growing companies, the amount usually increases every quarter.

That depreciation expense for tech companies, is in fact a cost of revenue.  Increases in those costs are costs that increases in gross profit must cover in order to make that gross profit growth useful and attractive.

As an alternative, it would be possible to take property and equipment purchases as the more relevant deduction, but that number is not guaranteed to be exclusively computers or quick depreciable items, and it can be more variable as purchases are deferred for a quarter. So the long term smoothing benefits of  depreciation writedowns are more useful for this reason too.

(increase in sales less increase in cost of revenue, sales&marketing, depreciation) / last period's revenue.

Useful Gross Margin, or Beneficial Margin
A similar metric using the same 3 components relative to revenue.  What is left over after paying for the 3 components.  It can also be captured as Gross Profit (including depreciation) less Marketing expenses.

The term Beneficial Margin is used.

LNKD (Q2-2015) increased revenue by $178M over the same quarter last year.  The increases in cost of revenue ($30M), Sales and Marketing ($77M) and depreciation ($21M) total $128M.  Useful sales growth was thus $50M.   9.36% useful sales growth rate over Q2-2014 revenue of $534M.

Linkedin's Beneficial Margin dropped from 43.3% the previous quarter to 39.4%.  A 9% drop in "beneficial profitability of sales"  FY-2014
208M revenue increase.  CoR change of -9M. S&M change of -4M, depreciation change of 20.5M.  Useful sales growth of $200.5M.  8.6% useful sales growth rate over FY 2013 revenue of $2.319B.

The remarkable point about these 2 companies useful growth rates is that if they are about the same, the companies should be valued the same.  AOL is also profitable.  While its top line growth is about 9%, it has much lower incremental direct costs and marketing expenses than linkedin, which makes most of linkedin's 30% top line growth, fake and useless. Q1-2015
From its last report included in my linked analysis, $8.7M increase in revenue.  +$0.9M CoR, +$6.7M marketing.  $1.1M useful sales growth, 3.1% useful sales growth rate.  Beneficial Margin went from 53.2% in q1-14 to 44.8% in q1-15.  A 16% drop in "beneficial profitability of sales"

An example of fairly inneffective marketing overspend.

Facebook Q2-2015
1132M increase in revenue.  $195M increase in cost of revenue.  $268M increase in marketing.  (depreciating unclear).  $669M useful sales growth.  23% useful sales growth rate.

Roughly same top line sales growth as LNKD but created a surplus effective in covering other expense growth instead of creating a large loss.

FB's Beneficial Margin is 68%

Twitter Q2-2015
190M incremental revenue.  Incremental CoR of $67M. Incremental Marketing of $61M. $62M useful sales growth.  About 20% useful sales growth rate.  While growth is declining and marketing expenses might not, it is so far being relatively responsible in its chase of growth.

For FY-2014, $739M delta-rev, $180M delta-CoR, $298M delta-marketing = USG of $261M or 39%.  So Twitter's useful sales growth while still reasonable is deteriorating considerably.

Yelp Q2-2015
$45M delta-rev.  $7.2M delta CoR.  $20M delta Marketing.  $3M delta-depreciation. USG of $14.8M or 16.8%

As bad a quarter as Yelp had, its not nearly as bad as linkedin's.  Expense growth was below revenue growth, and margins are relatively reasonable (though hard to hope for better than break even expectation).

Google Q2-2015
1782M delta-rev.  $469M delta-CoR.  $138 delta-marketing.  USG of $1173M or 7.35%.

While useful sales growth% is lower than linkedin's.  Its over $1B, and achieved with improving margins.  The %increases in CoR and marketing were less than revenue growth, and contributed to enhancing already solid core profit.

Low USG companies masquerading as high growth companies

  • Growth rates of companies slow as they saturate their target market.
  • The saturation portion of growth is the temporary short term (a few years) process.
  • Other sources of growth include specific market growth (internet penetration), population growth, inflation, and market share fight.  The first 3 can be called ambient growth.  Specific market portion can become a declining force eventually.  
  • Saturation growth declines rapidly and never comes back.
While its ok for an early stage (startup) company to lose money or break even as it captures early (saturation) growth, detecting the end of that saturation phase is relatively easy:

Useful Sales Growth showing growth equivalent to ambient growth (for internet companies, the growth rate of mature companies that don't have much hype or excitement to them (ie. while losses accelerate is a completely foolproof indicator that the company does not have any useful growth whatsoever.

Hoping that such companies reinvent their value proposition is the only remaining hope, but joining in such hope as a shareholder should be only at rock bottom prices.

Thursday, July 30, 2015

Linkedin Q2 2015 results

Linkedin is a company worth faily $5B today, that could one day hope to be worth $10B, if it performs perfectly.  Its market value is near $30B.

Continuation of my chronicaling the eventual collapse of LNKD's stock value.  Previous entry

Linkedin results may seem to be better than expected, but are fundamentally poor and keep its continued path to collapse.  The results surprisingly include revenue.


  • Record loss of $68M.  (even without ~$22-40M expense spike that might be optimistically attributable to acquisition).  This figure is after tax credits.
  • Continued growth deceleration to 33%.
  • Record low growth rates in its core hiring and premium subscriptions business (Extreme downward growth of 32% and 22% respectively), with a 7 quarter low growth rate in its ad business to 32%.
  • Record low corporate solutions customer growth rate of 33%.
  • Though last quarter's guidance did not clearly include performance, they have included it in sales results.  $18M of sales are from, and so growth rate overall would have been under 30% without this inclusion.
  • $18M revenue is a sharp drop from its $45M Q1 revenue.  Possibly partial quarter data, though unclear due to $24M loss attributable to lynda.
  • Sharp Record low growth rates in every geography except the US, and still year over year growth decline in the US (growth that includes revenue)
  • Every cost category grew sharply faster than revenue.  
    • Cost of revenue 42.8%
    • Sales and marketing 41.8%
    • R&D 47.2%
    • Administrative 75.3% (only partially non-recurring hope)
    • depreciation 76.8%  (no excuse for alarming rate)
    • Stock based compensation 93%
  • In their fake EBITDA earnings, operations lost the company ~$24M.  "Much better than expected"
  • An increase of only $72k in deferred revenue compared to an average of $60M in last 2 quarters suggests more deterioration in its premium subscription business.  Its unclear how $5-6M deferred revenue balance from last quarter was incorporated.
  • International marketing solutions revenue was a nearly flat 3% growth.  With very sharp growth declines in the other 2 segments internationally.  Record lows in all 3 categories.
  • US growth was down in all 3 segments except for marketing solutions.  Most of's 18M revenue should be assumed to be in US talent solutions, and it would cause both it and premium subscriptions to have record low growth rates for 10th quarter in a row.

Guidance by manament
  • Lower full year revenue guidance (exluding 40M beat to this quarter's previously stated guidance).  Despite the contributions they will be including from, and despite raising those revenue expectations by $50M.  It appears as though they lowered their core business guidance by $50M
  • Going forward, they expect to cost them ~$28M next quarter (not 100% clear "4% impact on ebitda")
  • Forecasted record loss of $112M, (before interest) and flat quarter over quarter fake-earnings, for Q3.  Revenue Growth a record low of 32%.  Next quarter will not include any "one-time" acquisition costs.
  • Forecast $318M loss for the full year (pre tax and interest), and record low growth rate of 33%..
  • $30M higher full year loss than they forecast last quarter.
  • Considering the $112M previous quarter forecasted loss for this quarter, and 31M lower operational loss than forecast, the additional forecasted operational loss for the full year is $61M higher loss than they forecast last quarter.
  • While Average revenue per user is slightly down, management is "very pleased that we can keep it near the record levels"
  • Deterioration (30% decline this quarter) in its display advertising business is expected to accelerate.
  • Full year share count will be 133M.  Close to 10% yoy increase and 20% increase over 2012

I wrote an article last month about the overpayment of the acquisition.  
The performance that linkedin is including in its results is much lower than I expected because the revenue they are including is lower than last year's revenue as a standalone company.  They are turning a company that was losing $3-5M per quarter (including capitalized expenses) and making it lose $25M+ per quarter.

One serious explanation for why the loss would be so high is that they will pad advertising revenue from ads?  One of the synergies with the 2 companies may be to mask the core deterioration of linkedin's core business with revenue padding, but also loss growth.  They appear to be forecasting extreme short term destruction of the business (which did not look amazing from disclosed financials)

Negative operating cashflow less depreciation and stock compensation
Although its been negative in all but one of the last 5 quarters, the stockholder relevant cash flows were -$20M compared to -$2M last year.  This included a benefit of $56M in higher accounts payable.

Comparison to last quarter
Linkedin slightly beat their guidance of 112M operating loss for this quarter (in part by having fewer accounting write downs than they expected).  But their expected losses for the next 2 quarters have increased compared to last quarter, and from last Q4.  Revenue expectations then did not include any contributions.  $61M higher expected loss for next 2 quarters than was expected last quarter.

Whatever moment of clarity let wall street zombies see $190 price last quarter should make them see a much lower price this quarter. integration is terrible.  Linkedin's core business even without lynda is terrible.

The core problem with linkedin
Its just a poor advertising proposition compared to even Twitter.  Worst than Yelp too just because visitors there are in buying mode.  FB and Google are showing that they are the preferred advertising medium, and as internet saturation continues, they will be powerful competitive forces that contain LNKD's potential.

Its talent solutions business shows saturation, simply from the declining growth rates that are fully meeting management's expectations.  The average revenue per user is fully expected by them to decrease due to this saturation.

Member and revenue expansion costs LNKD much more than the revenue generated.  Having members that don't click ads means database records and links and other hardware.  The cost of revenue(+depreciation) number per member is $0.447 this quarter.  Up from $0.38 last year.  Another way to look at these costs is that for 16M in new members, they spent $72.5M in new equipment.  Over $4.50 per new member.  Sales and marketing is also a very expensive function in their business compared to simple (automated) web advertisers.

To highlight the high costs of linkedin compared to other internet companies.  Despite similar sales to, linkedin has 4x the depreciation expense (mostly obsolete computers).

Its Even worse: revenue increase compared to sales, cost of revenue and depreciation
LNKD increased revenue by $178M over the same quarter last year.  The increases in cost of revenue ($30M), Sales and Marketing ($77M) and depreciation ($21M) total $128M.  Useful sales growth was thus $50M, and less than 10% growth over Q2-2014.

By contrast, AOL had over 10% sales growth in FY 2014, and accomplished this while decreasing cost of revenue, marketing, and depreciation, and so has even higher useful sales growth than linkedin.

Engagement and costs per engagement
Engagement was up this quarter compared to last year's.  Pageviews per member 92 per quarter vs. 80 last year.  Pageviews per monthly visitor, 120 per month vs 99.  But cost of revenue(+depreciation) per 1000 pageviews $0.584 vs. $0.472.  (cost per monthly user of ~$5.50) The cost per pageview grew at a higher rate (23.7%) than the engagement per monthly visitor.  Its necessary to include depreciation in these costs, because web companies will buy/replace servers on an extremely regular basis.  For reference, google's cost per engagement lowered this quarter.

Costs of revenue(+depreciation)  $170M was $30M more than marketing solutions revenue.  Last year's cost of revenue ($113) was "only" $7M more than marketing solutions revenue.  For the whole year, 2014 had a net loss in this metric while 2012 and 2013 had a small surplus.  The extreme acceleration of deficits on this metric seems irreversible, and is a clear sign of struggling for revenue.
Deficits in this area mean that marketing solutions revenue per 1000 pageviews is less than the costs: $0.481 revenue per 1000 page views.  ($0.06 marketing solutions revenue per MAU per month)

Twitter by comparison has $0.55 per MAU per month in revenue.  $0.50 of which is advertising.  FB ARPU is $0.92 per month.  $0.87 in advertising.

The bigger than core problem
Out of control stock based compensation, and diluted share growth.  There is no reason to ever pay shareholders, and no reason to even be profitable if stock compensation can grow in unlimited bounds, or just faster than revenue.

Only $17M (based on next quarter's guidance) of stock based compensation appears to be a one time event related to acquisition. 

More on the acquisition
This was a bad purchase even if the operations could stay at low losses.  Its unclear why they have to cost LNKD so much going forward, but they appear to be ripping out the core of the operations to having just bought a video library and some use for their advertising inventory.  Also a pad for their deteriorating revenues.

I am not that optimistic in the potential for a video library to generate meaningful recurring revenue.

Price target lowered
There is no reason to increase the optimistically high $10B valuation for the company.  ($75/share)  If LNKD is lowering revenue forecasts at every increasing loss levels this year, that necessarily accompanies headwinds in future years.  They will need to maintain or increase large losses in order to just maintain the current deterioration levels.

Reaching $10B seems less realistic than before.  The only bright spot of US marketing solutions is a small fraction of its business, and there is an expectation that other platforms are just better, and if fighting for advertiser market share becomes more prevalent with internet saturation, LNKD will lose the fight or lose tons of money staying afloat.

Its unclear that should have much if any positive value credited to the company.

At any rate the $10B optimism should be lowered to $9.5B optimism.  $71.42  per share value, that could possibly returned to shareholders (in the far future)

Shareholder Performance Margin and Twitter
SPM is a metric I use that determines what net income would have been with 0 R&D expenses, and expresses it as a percentage of sales.  The number not only assumes generously that R&D spending is a reasonable use of company cash but the inverse (1 divided by) SPM ratio also tells us the multiple that every $ spent on R&D must return in increased lifetime revenue or cost cutting.

Compared to last quarter, LNKD's SPM deteriorated from 16.6% to 14.2%,  SPM will keep going down as long as expenses rise quicker than revenue.  This is complicated by some one time expenses, but this deterioration is large.  Going from 6x required return on R&D to 7x.

I mention twitter because it loses so much money ($1.26 in expenses per dollar of revenue) that even if it did not spend anything on R&D, it would still have losses and thus negative SPM (every dollar it spends on R&D at current margins lead to losses no matter how much increased revenue it might create).  But twitter's SPM is at least improving from -8.9% last quarter to - 1.4% this quarter.

Google, FB and Microsoft all have SPMs above 30%, and so their required revenue return on R&D would be only 3x.  Which is approximately the ROI that allows for generally sustainable and profitable R&D.

Linkedin's higher forecasted loss for next quarter on increased sales, means that its SPM will decrease even further without any of this quarter's one time expenses.  The one thing that SPM does not capture is the possibility that Sales and Marketing expenses can have long term sales benefits.  What we can conclude from LNKD's results and near term forecasts is that past sales and marketing overspending has been grossly inneffective.

Monday, July 27, 2015

The economics of Gay marriage and Polygammy

This is actually about basic income, but it is an economic lesson on choice and freedom.

Civil unions fundamentally equivalent to marriage
The differences are that marriage has a more expensive party.  Any gap in laws that treat civil unions and marriage differently, tend to be oversights, and have no basis not to be normalized.

Permitting gay marriage will cause more gay unions
Of course it will.  While this is often used as an argument by opponents of gay marriage, there is no reason that this is automatically good or bad.  In fact:

For men:

  • More choice on who they can bond with without cultural/legal punishment is more choice and freedom for them.
  • If other men choose to bond with men, then that leaves more women available to bond with you, and enhances your competitive position to complete heterosexual relationships.
  • Forcing other men to marry women reduces the supply of women available for you to marry.
For women:
  • The same freedom and competitive advantages apply to you.
  • But, if there is more cultural stigma for male homosexuality, then oppressing men into being forced to marry women, is coercive market power forcing demand bias towards you.
Permitting gay marriage will lead to permitting polygamy
It should.  Economically again,  assuming there would be more one man to several women unions.

For men:
  • If they can support many wives and children, then it enhances their choices and freedom to do so.
  • Restricting the freedom of polygamy, can force women to bond with only the most desirable unattached male, and so enhance the "market value" of those without the financial power to support many wives and children.
For women:
  • Substantial increase in market value if attached men are available men.  The choice and freedom to join a polygamous union.
  • Restricting polygamy can coerce and limit your existing husband's choices.

The morality of coercion vs freedom
Through prohibition and coercion some people can get what they want (coercive happiness) at the cost of making other people less happy.  But the total number of happy vs unhappy people is likely at least as high, with freedom, without having any evil (coercive) sources of happiness.

The specific failure of coercive marriage policies
Prohibiting certain types of civil unions does not affect the choice to terminate marriages and make other bonding choices.  Outlawing polygamy, does not prevent a husband from leaving you and marrying someone else.  Forcing the choice of them or you, is of no inherent advantage to you.  The additional option of a 3 person marriage is something that can make the 3 of you have increased total happiness.

Similarly coercing men to choose women does not stop your husband from waking up one day and choosing something else.  You would prefer that the man who chooses to marry you does so for reasons that you are capable of fullfilling.  A man marrying  a women would similarly prefer that she does so without hoping that better options come along later.

The relationship to basic income
UBI (unconditional basic income) is providing an equal cash dividend to all adult citizens ($15k/year from federal sources for Canada) where the amount is at least sufficient to ensure the survival of every recipient.

The common fear-based criticism of UBI is that it will cause an increase of people who refuse to work.  The next section is the typical argument that this supposition is mostly false, but the much more important argument is that this fear is a non-issue even if it were true.

People will still choose to work, if UBI is implemented
  • Unlike welfare, you keep all of the earnings that you earn.
  • More money is better than less money
  • You may take a month long vacation, but the drive to self-actualize is stronger if your basic needs are met, and there is no loss in benefits to self-actualize.
  • Any job offer with sufficiently high pay and work conditions will find someone to fill/accept it.  So all needed social and economic functions will be completed.
Work as an analogy to gay marriage
Consider work to be equivalent to the proposition of men (labour force) searching for bonding with women (employers), or choosing homosexuality (remaining unemployed).

It is a tremendous advantage to every person seeking employment if as many people as possible reject employment.  It furthermore enhances the salary/conditions negotiation position of those with jobs the fewer people want to replace them.  That employees are happy enough with their employment so as to not seek a reason to be terminated or are simply waiting for a better offer directly means better productivity and value from that employee.

UBI creates a non coercive labour market where the refusal to participate enhances the fair bargaining power of all sides in the market.  The desperate need for permission to survive is no longer the driving force for accepting employment, and so employment becomes a fair mutually beneficial non-coercive negotiated agreement between parties.  With the removal of minimum wage laws, obtaining employment is as easy as you want it to be based on your ability to bid any wage knowing that your survival is ensured independently.  If you want an internship, a low pay internship can replace forced no pay internships.

Opposition to UBI is morally equivalent to pro-slavery
This statement will get its own article at one point, but this intro to understand the link is a good start.  The systemic fostering of desperation for free servant/slave class to find a kind benevolent master to satisfy their desperate need to survive is a strong systemic bias empowering the master class to coerce minions into accepting their rule.

Our modern democracies all have regulated slave labour markets.  Welfare, minimum wage, and labour regulations exist only because without them, the resulting master-servant relationships would be more nakedly-equivalent/similar to slavery.  But those regulations are always either too biased towards employers or employees.  Either employers are deprived of the ability to divorce from employees and create genuinely mutually beneficial employment agreements, or the regulations are an unenforced sham of pretense-of-non-bias that favours the master class's oppressive bargaining power in having servants systemically compete aggressively among themselves for the "privilege" of serving.

Regulation is always out of balance because it is slow response to squeaky wheels and obstruction-based response to master class political control meant to make apparent reforms as meaningless as possible.  

The response to automation
Under the regulated slave model of labour markets, all responses to automation are terrible.  Outlawing workforce displacement is terrible because it deprives society of always beneficial efficiencies.  We want every automated efficiency for the same reason we want machines/pipes to deliver our water and heating fuel.  It would be exhausting to spend 6 hours per day obtaining these manually.

No regulatory bias adjustment is equally bad to any regulatory adjustment.  The more workforce displacement, the stronger the competition among the servant class and the greater desperation becomes as a motivator to beg masters for minimal survival at ever increasing rates of effort.

UBI as the perfect solution
If UBI leads to increased wages, that also leads to increased desire for automation freeing more people from necessary social work functions.  The profits from the work of the machines goes towards paying taxes and the displaced's UBI, which is then paid to the machine owners that offer wanted goods and services.  UBI solves the problem of companies needing to sell their goods to employees of other companies, under the spiral of massive society wide worker displacement.  Companies just need consumers to have money (not employment) and the power to trade with them in order to prosper.

The more machines can do for us, the more we can all have, and the more we can all have the greater the relative and absolute wealth of workers and machine owners obtain in providing it for us.

Inflation fears as the other non-argument
That there may be inflation as a result of UBI is also a non issue.  Believing that such inflation is a concern is also morally equivalent to pro-slavery.  An economically prospering society will have inflation.  More demand for goods and services means more demand for servants to help collect money from all those people who can buy.

Treating such inflation as a negative economic impact is wanting more oppressive poverty, and more culling of the poor through policing, emprisonment and execution of the poor to enhance their desperation while channeling it only towards servitude.  We can keep inflation low by keeping an underperforming economy that makes life harder for the portions of the servant class unable to obtain servitude contracts.

The tie back to marriage regulation
Opposition to UBI is pro-slavery for the same reason that forcing people to get married (with narrow gender parameters) to someone, would be systemic oppressive coercion decidedly purposed to ensure a power bias with whatever side (known at time of oppressive law) is less numerous.

As a man, lowered stigma for homosexuality, gives every man more choices that advantages every other man.  Ideological coercion for gender relations or for work, detracts from every person's morally selfish interests, and so necessarily, collective interests as well.