Thursday, February 5, 2015

Linkedin Q4 2014 results

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

Linkedin results seem poor and on its continued path to collapse.  The were masked by a single area of US marketing solutions strength.


  • Break even net income of $3.7M for the quarter, and loss for the year of $15M
  • (at least) 12th consecutive decline in Quarter over quarter revenue growth at 44%.
  • Surprise rapid deceleration of Talent solutions (41% growth) and Premium subscriptions (38%).  Even faster deceleration in the US at 36% and 37% respectively.
  • Marketing solutions was a bright spot of 56% growth sustaining overall wall street expectations, but marketing solutions spike is more prone to be a one time spike in revenue.  The performance was almost entirely due to general US advertising strength. (72% growth)
  • Stock based compensation grew substantially higher (65%) than revenue.  As did depreciation and amortization (also 65%)
  • record low member (25%) and corporate solutions customer (36%) growth. 
  • substantial drop in revenue growth for every region other than US.  With APAC region even more pronounced decline than EMEA.
  • (More expensive) Field sales as a percentage of revenue reached a record high jumping to 64% of revenue  compared to annual average of about 60%.  Online sales channel showed a record low growth of  30% (compared to previous low of 37%)
  • Real operating cashflow (operating cashflow less purchases of equipment) for the year, fell over 80% to $20M from $160M.  That includes the insanely high $320M in stock based compensation that is excluded from cashflow.  So, Operating cash loss for the year was $300M.  The operating cash loss in 2013 was "only" $33M


  • Revenue growth forecasts in continuning substantial decline for the year to below 33%.  With break even $10M operating profit.
  • Revenue growth forecast for Q1 of only 31%, with operating loss of at least  $22M.
  • An extra 5%+ in share dillution is forecast for the year.
  • The break even ($10M) operating profit forecast is prior to $56M in financing costs, and $80M in taxes, and so a total loss forecast of $146M.  Over 10 times greater than 2014.

Difference with last year's guidance

Linkedin outperformed for the year relative to their guidance for the year.  They did so mainly by reversing the trends on monthly visitor growth and page views.  While guidance for next year is about the same as guidance was last year, all of their growth metrics (marketing solutions excepted) have deteriorated from last year.  So even if they beat their own guidance, there's no reason to expect growth above 40%.  They are still riding a wave of internet (and advertising rate) growth that should stabilize over the next couple of years.

The most important metric where linkedin failed, is they still had a loss for the year despite sales being 10% higher than their guidance.  Its proof that they have no profit margin, and may be simply buying sales.

Comparison to Google
Google had 20% growth this year.  Their market cap ($360B ) less net tangible assets ($85B) (=$275B) over sales ($66B) is 4x.  And google has an operating margin before R&D of ($26.3B or 40%), and total profitability.

Linkedin at 33% growth.  $30B market cap less tangible assets of  $2.4B = $27.6B over sales of 3B is over 9x times sales.  Its operating margin before R&D is only 25.7%, and not profitable.

Given that it is not profitable, its hard to give some value to the company, but if 20% growth at 40% margin is worth 4x, a decent way to value lnkd is to give it a sales assumption when its growth rate will drop to 20%.  This can very generously be 3 years from now, 

with 85% sales growth over the next 3 years would make sales $4.1B in 2017.  A 25.7% margin compared to 40% margin for google, would deserve a 2.57 sales multiple instead of 4x, and so generously under $11B market value instead of $30B.  At 130M shares, this means a price target of $80 per share.

But Google has a Price to earnings multiple of 25.  Backing out its $85B in net tangible assets, its a PE multiple of 19.  For LNKD to deserve an $80 per share valuation, in 2017, it would need $500M in "real" earnings per share.  There is no way that will happen, because all of their growth has been and will continue to be purchased at cost equal to sales, even as growth rates rapidly decline.

Linkedin discontinued Quantcast coverage

Linkedin is no longer having its web traffic monitored by Quantcast.  Prior to discontinuing in mid/late January, Quantcast was showing 40% drops compared to early december engagement.

Alexa,com shows a global rank drop to 14th from 10th in the fall.

Facebook competition
Facebook at work is likely to provide long term impact against linkedin growth and profitability.  The main reason to doubt any profitability potential from linkedin, is that if they ever show any, its relatively easy for existing and new competitors to take it away from them.  ie. LNKD has no technological moat that prevents less expensive job matching, nor any real engagement reasons that it doesn't overpay for to stimulate.

Comparison to Facebook
Just as the comparison to Google financials, Facebook is perhaps a better comparison.  FB had over 58% sales growth this year (LNKD 45%).  Net tangible assets of $14B.  And Price (less net tangible assets) to current sales of 15 just like LNKD's multiple to current sales.  The difference is both much higher growth at FB, and real profitability at FB.  FB also has a 61.4% operating margin prior to R&D.

If 58% growth and 61.4% operating margin is worth a price of 15x sales, then 45% growth and 25% margins would be worth at most 4.7x (15 * 45/58 * 25/61.4) sales, and again ($2.219B sales) a $10.5B value.

All of the social media companies enjoyed a good year in advertising rate growth.  Still, that source of growth is also decelerating rapidly for all of them, with 2015 social ad spending expected to grow 19% vs 65% in 2014)

Comparison to Monster Worldwide
MWW is a somewhat similar job matching platform.  It is guiding profitability for 2015, and excluding intangibles charge, lost less than LNKD in 2014.  It trades at approximately its net asset value.  While LNKD talent solutions growth has likely caused MWW's sales declines over the years, the fact that MWW can still be profitable while LNKD cannot, underscore's LNKD poor business model.

Significantly poor guidance

While LNKD usually beats its own guidance numbers, and so they may be set lower than what they will actually deliver, an even greater concern than the mere 33% growth they forecast is the 10x expanding losses, and the sharp deterioration in most of their business segments this past quarter other than US marketing solutions.

Thursday, October 30, 2014

Linkedin Q3 2014 results

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

Linkedin results seem poor and on its continued path to collapse.

  • 3rd straight quarterly loss
  • lowest ever revenue, member, mobile MAU, corporate solution customers, US, Europe, and APAC growth.  45% revenue growth.
  • While there was small growth in engagement (a sharp contrast to no growth in last 2 quarters), its total quarter over quarter revenue growth was under 6%.  Other social media stocks reported jumps in revenues per user/views.  Marketing solutions was under 3% growth over last quarter.  If LNKD executed as well on pricing as its social media competitors, these numbers should have been better.  Sponsored updates is a hyped product, and these results suggest it may be overhyped.
  • Operating expenses in the quarter grew faster than Revenue over last quarter.  Sales and Marketing having the highest growth, eating $15M of the $34M revenue growth.  Though all expense categories increased more than the 6% sales growth.
  • Continued shift towards more field sales (expensive) than online sales.  Staying at record high levels.
  • They claim 50% growth in Chinese users, but page views appear to be in the 10% growth range

  • They are forecasting a $10M loss next quarter.
  • They expect a record low 35% quarterly and 42.5% yearly revenue growth.
  • Depreciation and stock compensation estimates are even higher than they were forecast to be last quarter at $71M and $96M respectively.
  • Have increased the number of expected shares outstanding by 1M to 127M total.
  • Guidance includes more projects for costly field sales team.

An issue I added to the last quarter's report in early September is the heavy insider selling of shares particularly by the founder and CEO.  The founder is on track to sell all shares within 9 years.

2015 Guidance
Low to mid 30% growth for 2015 should be the expected announcement from Linkedin and path. Beyond 2015, $1B in annual sales growth is optimistic.

Company value
An optimistic forecast for the company is that 10 years from now it may reach  $10B in sales or $1B in profits, and stable at that level.  Such optimism would justify a $10B market capitalization.  At 127M shares outstanding, this view justifies a maximum value of $78 per share.

The company faces many risks though.  It is already close to saturating its easy markets.  If it stops its product development then it may grow stale and decline, and if it doesn't stop product development it can never have any profitability.  Linked in has never been able to show any sales growth without expense growth, and it is always possible to increase sales by $1T if you spend $1T.

The biggest reason to avoid owning Linkedin is that it has a dual class share structure.  Even if it one day has cash, it will never pay shareholders a dividend or consider reasonable takeover proposals (which would be around the $78 mark)

comparison to facebook
linkedin has 1/5th facebook's revenue.  Its sales and marketing budget is over half of facebooks, and its general admin expenses almost 40%.  It simply pays its insiders too much.  The nature of its business is not suited to ever growing to be as big and engaging as facebook is (what makes the $10B sales target optimistic), and it also cannot become as profitable.

The social media space in general has had unsustainably great ad price growth the last 2 quarters.

comparison to twitter

Twitter spends almost $1.50 for every $1 of revenue.  Linkedin isn't quite as bad, but they do spend $1 for every $1 of revenue.  While they set revenue and ebitda (fake profit) guidance 4 or 5% below what they typically achieve, their results (over guidance) are consistently accompanied by offsetting expense increases that keep the $1 cost for every $1 in revenue.

Thursday, July 31, 2014

Linkedin results for Q2 2014

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

Linkedin seems to have benefited as other social media stocks from high advertising rates, and possibly benefited from a strong quarterly job market and economy, to post reasonable sales relative to expectations, but quarter highlights include:

  • Yet another loss in "real" income terms.
  • sharp drop in mobile unique visitor growth over the last 4 quarters from 129% to 46%
  • Member page views that they report are down 2% over last quarter, and up only 22% over last year.
  • 13% year over year growth in their reported unique visitors.
  • Numbers from quantcast show even poorer results.  They show 20% decline in year over year unique visitors, and over 1B fewer page views in the quarter, with over 15% decline in page views.  Quantcast also counts people as visitors in an attempt to not double count desktop and mobile.  There was 15% drop in unique people using the site over last year.
  • No noticeable stickiness reported by Quantcast, in terms of visitors and page views for the China launch.
  • Market Saturation and continued decreased growth rates were also shown in: Corporate Solutions Customers, Premium Subscriptions and Talent solutions especially in US, members, and surprisingly online sales (indicating that LNKD is working harder cold calling customers rather than raking in self serve customers).
  • LNKD continues to spend about double on new equipment than it depreciates per quarter, and so long term profitability is further inhibited.

  • 39% sales growth expected in Q3, and 33% sales growth in Q4.  Sharp deceleration.
  • Another loss is expected in Q3.  It is unclear whether they expect a loss in Q4.
  • For full year, depreciation will increase by 71% (10% of sales), and stock compensation by 57% (15%+ of sales), far outpacing sales growth and continuing to prevent profitability.  Purchases of new equipment is likely to be double the depreciation charge (increasing depreciation in next years substantially).
  • 126M diluted shares is going to be over 10% higher than Q3 last year, and 5% higher than Q4.

The core problem with linkedin is that they are not profitable.  Their sales growth is decreasing while their expenses are increasing at a faster rate.  If there isn't another world cup in Q3 2014, and/or job openings and advertising is impacted by sanctions with Russia, then next quarter could be the one where reality catches up to wall street.

I should mention the deeper problem of insider control, and the protection of Delaware laws, that prevents paying dividends, and any money to shareholders other than insiders, but getting back to the core issue...

Depreciation and stock based expense accounts for 25%+ of revenue.  Cost of revenue and sales/marketing at an additional $233M is an additional 44% of revenue.  At a 30% "contribution margin" (holding product development and general admin costs constant), it would take annual sales of $12B for a pretax profit of $3B.  $2B after tax.  But the thing is product and development and admin won't stay constant.  If they can be brought down from 29% to 20% of sales, then LNKD needs $30B in sales to make $2B of cash available to shareholders, which it will still choose to not pay them.  That is the type of sustainable future performance that would deserve a market cap of  $20B which it currently enjoys, but that sustainable future performance seems extremely unlikely and too far away.

September 2014 update: insider selling

Since the end of 2013, Reid Hoffman (Founder and Chairman) has sold 1.2M shares in 8 months (early august).  Leaving 14.489M shares held from 15.656M).  At this rate he will have divested entirely from the company in under 9 years.

Jeff Weiner (CEO) has recieved a mysterious 247k options in reference to a 2012 trust involving Reid Hoffman (dated filing Aug. 6), and received 93.2k employee shares/options in Mar. 4 filing.    Holds 1.027M shares/options as of Sept 3.  Down from 1.285M shares/options in Dec 2013.  He's sold about 600k shares, an amount that is  nearly 50% of his 2013 end balance.  As CEO he is most aware of the company's future prospects, and true current value.  And this amount of shares sold is an alarming divestiture over 9 months.

David Sze (Director) went from 167k shares in Dec 2013 to 65k on Sept 3 2014.   61% divestiture.

JK Scott (SVP engineering) On Aug 19, he had 58364 shares, and on Aug 8 had 37.5k options.   and received 57.4k shares/options on Mar. 4.  Held 121k shares/options in Dec 2013.  He has disposed of 83k  shares/options over the year.  Over 75% of Dec 2013 holdings.

Steven Sordello (SVP Finance) had 247.7k shares/options in Dec 2013.  Received 38.3k shares/options on Mar 4.  On Aug 19, he had 25917 shares and 194k options on Aug 14.  Compared to Dec 2013 balance, he has sold  26.7%.

Erika Rottenberg (VP GC & secretary)  had 30.9k B shares on Aug 19. and 43.6k A shares and options on Aug. 8. received 27.4k shares/options on Mar 4.  Had 86k shares/options in Dec 2013.  Disposition of over 45%.

Michael Gamson (SVP Global solutions) had 227k shares/options on Aug 19.  Received 38.2k shares/options on Mar 4.  Had 278k shares/options in Oct 2013:  Sold 32% of 2013 end balance in first 8 months of 2014.

Insiders have the best insight into the relative overvaluation of the company.  Insider sales were still quite strong during the 2nd quarter when the stock was around $150 or less per share.

Thursday, May 1, 2014

Linkedin and Twitter Q1 2014 results

Part of my running a series on linkedin results, updated each quarter, for the purpose of chronicling its eventual collapse.  Predictions from the last article mostly came true. Much of this article was written prior to linkedin's published results because the most relevant data is already known.

Linkedin will likely announce

  • 300M members (about 45% yoy growth)
  • decline in monthly visitors year over year.
  • 10% decline in page views
The above stats are sourced from quantcast, and translate into over 50% year over year decline in member engagment (pageviews per member).  An absolute disaster.

Linkedin actually reported comscore-based results for engagement that show a 7% or so increase in visitors, and 3% increase in page views.  Comscore excludes mobile traffic, while the quantcast includes it.  Last quarter's drop in mobile use continued this quarter.

Financial results 

  • a record net income loss ($13.4M) ($0.11)/share.  Trailing 4 quarters are now a net loss.
  • First ever operating income loss.
  • Continued decelerating revenue of $473M.  A 46% yoy increase.
  • A 38% growth forecast for next quarter, along with expected $9M loss
  • increase in diluted shares to 124.8M 
  • record low corporate solutions customer growth of 42% yoy and 6% qoq. +1400 corporate solutions customers, lowest since +1300 in Q1 2012.
  • 28% yoy growth in marketing solutions revenue per 1000 comscore pageviews to $8.27
Conference call admissions

  • the next few quarters, we expect some year-on-year compression in engagement comps
  • revenue will continue to be primarily driven by further penetrating the existing customer base (in context of talent solutions

  • The above admissions confirm the company's relative market saturation, and expected continued growth decline.  The focus on existing customer leveraging suggests that relatively soon (less than 8 quarters) , near 0 growth could occur.  You can upsell a customer once in a while at best.  Certainly, sales productivity declines as you attempt more.  There is also a limit to revenue per 1000 pageviews growth, and all increases generally harm pageview growth.

    Further Quantcast data
    • Even further deterioration in April.  About 10% yoy drop in unique visitors.  15% drop in pageviews.
    • No lasting apparent engagement impact from press releases of China launch.
    • 33% or so decline in mobile pageviews.
    • something to keep in mind are that daily active users are over 50x more at facebook

    Stock valuation
    I previously issued a grossly optimistic price target of $80/share in terms of enterprise value.  This will be lowered in the next paragraphs.  Keep in mind that no one should ever buy linkedin shares as long as there is no possibility of takeover, dividends, and management continues to be empowered to pay themselves the legal maximum.  These cautionary statements also apply to FB, GOOG, TWTR.  Their stocks are worthtless even if they might be relatively close to true enterprise value.

    The $80/share optimistic enterprise value ($10B market cap) is based on some reasonable hope that LNKD can sustainably earn $1B in annual net income.

    Linkedin has achieved peak sheep
    The sheep came to linkedin's pastures with the promise of rams providing them with love and children.  The rams (employers) came because they like sheep.  From its market valuation, linkedin's business model intentions are to power fleese the rams and sheep.  With its sales navigator platform, the apparent intent is to provide access to the sheep for wolves (spam marketers).  With its university program, linkedin has begun letting lambs and goats into the pasture.  (a possible explanation for low engagement new users).  The sheep may be disappointed with the presence of wolves and lambs.  The gate is not locked/closed, and if the rams want to solicit the sheep, they can email without causing any meaningful engagement with the platform.

    A major reason for the downgrade in enterprise value is that or other job site can offer a platform for just sheep and rams.  The rams may prefer associating with a pasture that is more respectful of the sheep.  We should never value internet companies as if they were a 1980s cable TV monopoly with permanent sheep.  The number of sheep that have filled in signup forms in the last several years is not particularly relevant either.

    A $40/share or $5B enterprise value
    The extreme sharp drop in engagement raises significant doubt regarding the potential of $1B sustainable annual income.  $500M  may be more realistically optimistic.  There is now certainty that its model will eventually be disrupted, as it moves away from a job matching focus, and decline in engagement should seriously dampen any optimistic model.  

    LNKD cost structure
    Linkedin has no technology.  Meaning its systems are very simple to reproduce.  Every member it adds incurs database storage costs, and "relationship maintenance" costs.  Despite 5x growth since becoming public, it has never generated any material net income, and so the costs per user are not only constant worldwide, but if they provide no engagement, can contribute very little or negatively to the bottom line.  Using cost of revenue and depreciation numbers, it appears as though members cost LNKD $0.38 each per quarter.  Since Q1 2012, depreciation per member has risen almost 100% to 16.8 cents, and cost of revenue per member has risen 50% to 21.1 cents.  Even though technology costs (per storage size and speed) decrease over time, the cost of database operations scales between member growth and member growth squared.

    Linkedin's acquisition of Bright is to improve its job matching capabilities.  It may make the service better, but its unclear how it will improve revenues or profitability.

    If LNKD has already saturated its main target market of knowledge workers, then that cost per new user can mean very little future benefit to growth, if they will have low engagement and relevance.

    The similarities of Twitter
    Twitter also makes more sense at a successful $5B instead of its recent $25B.  While it doesn't have dual class shares that doom the stock to worthlessness, it still has concentrated ownership intent on paying itself maximum possible salaries, Delaware law, poison pill provisions to prevent takeovers, and predisposition to refuse takeovers.

    The most striking problem with Twitter is cost of revenue and marketing amounting to nearly 80% of sales.  (Its unclear if they include depreciation (which all internet companies should due to recurring computer costs/purchases).  LNKD is a more reasonable (but still high) 58% including depreciation, while facebook is at 40%.  

    Not only does twitter have massive losses, those metrics indicate that it needs to raise revenue by 400% before it breaks even.  It may be a great service with significant value to the world, but it may even be more easily disruptable than LNKD, and it has an even greater lack of technology.  

    While Twitter claims that its current massive stock based compensation is "only" related to its IPO, and will decrease in the future, Linkedin's executive compensation committee recently provided a generous increase, and we should have every expectation that Twitter will create a similar outcome.

    Can Linkedin ever make money for public shareholders?

    • It won't be in 2014.
    • If it pursued its objective of signing up all 1.5B global workers, (5x growth) It will increase its costs per user (depreciation + cost of revenue) by 5x to 8x to $1.90-$3.  If each user views 30 pages per quarter, and LNKD earns $10 CPM, then its potential marketing revenue is only $0.30 per user.
    • The above point casts the most serious doubt over its eventual profitability.  Its stated strategy is guaranteed to lose money.
    • Its certain that growing up to that point will take significant sales and R&D effort certain to prolong losses.  The marginal value of those 1.2B new users is certain to be lower than the existing 300M, and so even if sales and R&D are drastically cut after the goal achieved, no obvious prospect of profitability exists.  Sales and Marketing increased 150bp this quarter to 35.2% of revenue.
    • More generally, cutting sales and R&D after it has finished growing is going to signal competing ventures to take its share more cheaply than LNKD built it.  For example Mopub (owned by twitter) is competing with google's mobile ad network by not charging publishers anything.  It doesn't matter if there is no hope of profitability if investors are willing to pay Twitter founders so much for the illusion there might be.  Cutting sales and R&D at Linkedin would bring its price multiples down to MWW (Monster Worldwide (which used to be about 10)).
    • The only real possibility for Linkedin profitability is a cut in executive compensation.  The prospect of that is the same as Congress voting itself a 94% pay cut based on its 6% approval rating.  Linkedin executives have complete control of the company, and compensation committee, and will continue to pay themselves near the legal maximum.
    So, given its strategy and current deterioration, indicative of the saturation of its targetable market, there is a reasonable expectation that it will never be profitable.

    We should expect continued deterioration, and in the upcomming quarters it will probably miss its forecast, which will provide market realization of its value and potential.

    Thursday, February 6, 2014

    Linked in Q4 results - Should see collapse in stock price

    I am running a series on linkedin results, updated each quarter.  Predictions from the last article mostly came true.

    Q4 results

    • Revenue growth fell under 50% at 47%
    • Profit almost breakeven at $3.8M
    • Drop in Quarterly comscore pageviews and unique visitors
    • Year over year page views up only 8%, and unique visitors year over year up only 20%
    • Diluted shares outstanding skyrocketing to 125M.  Up 10M from last quarter.
    • Linked in recognizes premium subscription fees over 4 quarters from time paid, and this quarter marked the first sharp drop in growth rate, and so signals further decline.
    2014 guidance
    • Revenue growth of only 30%
    • Loss of over $60M
    • 65% increase to stock compensation over already absurd $194M level to $325M
    Comscore vs. Quantcast data
    • Unique visitors per week were, as with comscore, slightly higher than 2012 in the quarter until december, but up less than 20%, and down considerably from this summer.
    • Page views were down sharply for most weeks.
    • For January, visitors are down slightly from last year, and mobile visitors are down 25%.
    • For January, page views are down over 10%, and mobile page views down 40%.
    The worrying point for declines in January and Q4 is that at the end of Q4 2013, LNKD has 37% more members than it did at the end of 2012.  So visits and pageviews per member is collapsing.

    Linkedin's troubles and future strategy
    Linkedin was designed for professionals, and nearly all professionals have made a linkedin account, and so it has limited growth opportunity in the segment of people that have some use for linkedin.  Even with those people that have some marginal use for it, many are disappointed by linkedin's aggressive marketing email policy, and not clearly understood use of their contacts.  Joining linkedin can feel like handing over your contact information to viagra marketers.  Just like growth in a viagra email list doesn't provide any obvious profits to the viagra emailer

    Because their market is saturated, they are now padding membership numbers with kids (so they may link to universities).  They have committed themselves to try to sign up all 3B labour force members of the world, at great expense and yet another year of no profitability.  The strategy will not only be expensive, but its not clear that linkedin will provide any value to non-professional members, even if they are tricked into signing up, and its not clear that employers of non-professional fields will find any value in conducting hiring through social media. 

    How to value LNKD
    Linkedin is worth far less than the $25B reflected in a $200 share price.  In order for it to be worth as high as $10B ($80/share), you need a theory that it can make $1B/year in profits sustainably for say 50 years.  Such a theory could support a leveraged buyout at around $10B.  Without such a theory, that LNKD is one day profitable, then it's a mere stock scam, since its corporate structure has no accountability to outsiders, and it will not choose to pay dividends.

    Before it can make $1B sustainably, it needs to make $1B, and the next question is at what sales level it could achieve such a target.  Note also that profit means GAAP profit.  Not EBITDA bs.  Depreciation is a constant expense for LNKD associated with data servers.  Its generous stock based compensation has no reason ever to be reduced because insiders own most of the shares, and they enjoy unopposable great benefits from the policy.

    LNKD's current income from operations margin is 3%.  It was 6% last year.  Maybe they could cut a bit of marketing and G&A costs, and achieve a 20% margin, and so $5B in sales could support a $10B company value.  If sales go up 500M per year after 2014, the the sales level could be conceivable in 2020, but its most likely those sales will be achieved, as usual for linkedin, at maximum aggressive expense. 

    So, if everything goes well, it will take a few more years past 2020 for LNKD to reach profitability close to supporting an $80/share price.  The sustainability for a web site to maintain that profitability is questionable.  There was arguably never anything wrong with Monster Worldwide.  LNKD just outspent it to take its market share, riding the coat tails of a stock scam.  If it one day makes money, a fresher stock story will be appealing to take it down.

    Back in the distant past of Q4 2012
    After Q3 2012 results showing 81% sales growth, and the same to better profitability than it has been showing recently, the stock hovered around $100/share for the next 2 months.  LNKD does not appear at all to be healthier than it was then.  Whatever optimism supported $100/share then shouldn't support a higher share price today.  Especially not with 10% more shares outstanding.

    The only reason for enthusiasm back then was the belief that sales growth for LNKD would be perpetual and easy.  With a 30% growth forecast this year, a 15%-20% growth forecast for 2015 is optimistic, and  an expectation of return to high growth, completely unreasonable.

    Wednesday, October 30, 2013

    Linkedin Q3 earnings results

    This post is part of a series of documenting the eventual implosion of Linkedin's stock price, updated on a quarterly basis.  Last quarter's post

    Q3 results

    • It lost $3.4M in the quarter.  About what it guided last quarter.
    • While it beat its own revenue guidance by $20M, it provided no benefit to its income.
    • Page views and visitors dropped despite a 17M increase in members
    • Its slideshare subsidiary had an even sharper drop in visitors and page views..
    Q4 guidance
    • It is guiding only 40% increase in revenue over last year for the last quarter.
    • The lowered guidance from Q2 for Q4 is restated.
    • It expects a drop in page views and visitors again.
    • It expects another loss in Q4
    • Full year earnings per share will be lower than last year, despite a >50% full year revenue increase.
    • It will have increased total diluted shares to over 120M, from 112M last year (~8%)
    Speculating on why it remains unprofitable no matter its sales.
    • Many of its new members may be ghosts.  
    • Lawsuit this quarter alleges what is already widely known:  Linkedin hacks into your contacts and spams (sends) invitations on your behalf to everyone there.  
    • The spam can trick children into signing up with some difficult red tape to removing the account.
    • It has lowered its member standards to target 14 year olds so that they may link with colleges.
    • Even with its poor reputation for email ethics and privacy and systems safety, it has launched a mobile email service that grants linkedin full access to all of its users incoming and outgoing email
    • That it beats its own guidance for EBITDA but never for income effectively proves that it is either padding its revenue, or just pays its employees larger stock bonuses as a function of that increased revenue.
    The shady marketing practises exposed this quarter would be a likely explanation for an increase in members without an increase in visitors and pageviews.  Arguably, assuming the 17M new members all were unique visitors during each month, then linkedin lost 17M unique visitors from its previous members.

    Revenue per user dropped to $1.52 from the previous quarter.  That further supports the premise that they are running out of marketable new users, and perhaps just padding their user numbers with shady practices.

    Market cap of $30B is impossible
    120M shares at $250/share is not sustainable, because it presumes an evental $3B annual profit.  It previously stated its addressable member market as 500M members.  It is over 50% penetration.  While many of its members view it as legitimate as viagra penis enlargement ads, the first 50% penetration is necessarily easier and more potentially profitable than the last 50%, because the first 50% include those that find the service obviously useful.

    There is still no evidence that the recruiting fees market worldwide is over $4B in sales.  This also acts as a significant barrier to its future earning potential.  Until proven otherwise, its sales potential should be limited to 2 or 3x current levels.  Even if it stopped paying its management so much, and tripled its non-GAAP profit, as profit available to shareholders, $600M per year, is $5/share in EPS.  A $50/share price target.

    For the first time in their conference call last night, they mentioned thinking about the full 3B workers in the world as opportunity.  They are not making a profit on the core 250M people that currently find their service worthwhile enough to sign up, and are generally (higher paid) knowledge workers.  Theoretically these members should be more profitable than the marginal new member.  They currently earn $6/revenue (annual) per member, and 0 profit.  Acquring 3B users will be a significant cost, and continuous reinvestment of any contributions from profitable members into storing new accounts that are likely to just take up server space, and be annoyed by emails filling their viagra box.  It expects $135M in depreciation costs this year.  This is mostly computer and technology infrastructure costs.  Increasing users 10 fold will increase those costs 10 fold beyond LNKD's already steep user acquisition costs, and by doing so, it will arguably be chasing users that are even less profitable than its existing user base.  Furthermore any future reduction in costs/performance of future computers is offset by the database operation (computing time per operation) costs that will typically rise 100 fold with a 10 fold increase in database size.

    EBITDA and NON-GAAP earnings is not a useful metric
    Financial analysts that place any weight on non-GAAP earnings or Earnings Before Income Tax and Depreciation for linkedin make a grave error.

    Unlike capital intensive companies such as airlines,  mineral extraction, or car plants, which generally pay a large amount to start a project whose costs get depreciated slightly each year, Linkedin's depreciation expenses is for ongoing computer upgrades and expansion, and these costs are generally depreciated very quickly, and in some jurisdictions are allowed to be expensed.  Unless we expect it to stop renewing its computer infrastructure, their depreciation costs should be a core part of their operations and earnings.

    Linkedin also adjusts EBITDA to exclude the significant stock based compensation it awards itself.  Almost $200M this year, leaving profit for the year of a little over $20M.  The dilution this stock compensation creates directly harms any shareholder who is not receiving compensation from LNKD.  Because of the dual share structure that keeps solid control of the company with insiders, there is no possible pressure that would change its compensation policies.

    Other anaylyses on LNKD
    Commenting after LNKD issued over 5M shares in a secondary offering this quarter, was this detailed long term projection for the company and a resulting company value of $12B and $106/share.

    Most of the numbers are quite fair and optimistic at the same time.  The one major error in the analysis is assuming only 112M shares outstanding over the next 20 years.  LNKD is already up to 120M shares, and an optimistically low number of new shares would be 1M per quarter, and that results in 200M shares outstanding in 20 years.  So a $12B eventual company value is only worth $60/share.

    The other major issue with the $12B valuation is relying on operating income that excludes depreciation and stock compensation, and so for the next 5 years overestimates earnings by 7x.  So the $12B valuation relies on income that is likely to never be available to shareholders.

    The major issue with social media valuations
    Assumptions of $10B-$30B valuations on social media companies like LNKD or Twitter assume a world where users are monetized aggressively, and the users don't mind being monetized.  There also tends to be an assumption of a world where advertisers want to pay very high prices, and sell themselves on spending their money, and the social media company just has to staff enough people to answer phones and return email in order to collect all of that money.  Analyst valuations should be more considerate of the uncertainty of these assumptions.

    A followup with Facebook (FB) confirming the above point
    FB reported earnings a day after LNKD.  Impressive sales growth of over 60%, based on the strength of growth in its mobile advertising.  Much better than LNKD, However, they warned that there is not much more advertising that they can show users, and so their future growth is limited.

    Friday, August 2, 2013

    Linkedin in Q2, 2013 earnings (LNKD)

    Linkedin reported Q2 results last night, and the results should be interpreted negatively considering that there is no improvement since the previous quarter.  This is an ongoing series of articles where each quarter I track LNKD's results in an effort to chronicle its eventual collapse.  Here was last quarter's article.

    The one positive aspect of their results is that user growth and views was steady, and revenues were a few million higher than they told us to expect.

    Real earnings vs. Adjusted EBITDA
    Real earnings, GAAP net income, was about break even, and the same as last year: $0.03 per share.  The company, and analysts, like to focus on adjusted EBITDA instead of earnings, but depreciation is a real expense for the company as long as it will replace its computers one day, and the even bigger expense they "hide" through adjusted EBITDA is the massive stock based compensation.  Both its compensation program and depreciation are expected to continue, and they affect shareholders.  Only GAAP net income should be considered.

    Of note, it had forecast a profit of 0 for the quarter.  With revenue of $16M higher than forecast, it only made $3.7M.  Another reason to consider only net income as relevant is that it is always possible to increase sales without making any money.  Income from operations was down 35% from 1 year ago.

    Growth slow down
    Year over year revenue growth dropped to 59%.  It was 72% the previous quarter, and 80% the one prior.  This type of slow down should be reason for a drop in stock market price.

    Lowered guidance for rest of the year
    The high end of its guidance for Q3 is for 48% year over year revenue growth.  The high end of their earnings expectations is a loss of $4M in Q3.  These are poor expectations that should reflect poorly on the stock price.

    Linkedin lowered (slightly) its guidance for Q4 compared to guidance at the time of last quarter's results.  Previous top end revenue guidance was $1.46B, but after beating this quarter's revenue estimate by $16M, it raised its full year revenue guidance by "only" $15M to $1.475B.  Its forecast for Q4 is revenues of $413.7M is only 36% YoY growth.  Q4 top end expected profit is (Adjusted EBITDA is expected as $100M) $14.7M, with full year expected profit of $37M.  $14M of that profit will be from special tax rebates from Q1.

    These are very poor forecasts compared to its valuation approaching $28B, and a very rapidly declining growth rate.

    Under best scenario, LNKD is worth $10B ($90/share) in 10 years
    If Linkedin is ever to deserve a market value of $10B, it will need to one day reach net income of $1B.  In 2023, that means 20 to 30 times its 2013 income.  To understand why that would be an exceptional success you have to ignore growth rates.  Using its peak growth rate, we could project that the roman empire would cover earth 20 bazillion times by now.

    For Linkedin to triple its sales to $4.5B in 10 years would be a spectacular success.  Not only is that higher than the $3B total recruitment market estimated in 2011, which I addressed last quarter, there is a couple of other reasons to see it as a ceiling.

    Jeff Weiner (LNKD CEO) said yesterday that the company has a 600 million user addressable market of knowledge workers.  That is its maximum number of users.  As of this quarter LNKD is already past the 1/3 point with 238M users.

    MWW (Monster jobs) reported earnings in the morning, and though its revenue keeps dropping 10% YoY, it made 3 times the earnings of LNKD ($9M).  For what is likely the first time, LNKD's talent solutions revenue has surpassed MWW's revenue.  While its reasonable to hope that LNKD will continue to grow at the expense of MWW, that growth will get even more difficult and expensive.  If it already has half the market share, hoping that it can grow much more than double is too optimistic.

    Even if it manages to increase sales 3 times, it would still need to increase profit margins another 6-10 times in order to successfully hit a $10B market value.  It would do so through some price increases, firing sales people, stopping its content purchases, user acquisition costs, server infrastructure, service improvements (development), huge stock compensation, and funding whatever mysterious force keeps their stock price up.

    The problem that occurs for LNKD whenever it actually does make money, is that someone else can start a stock hype scam that offers recruitment services without making any money.  The someone else can be fired salespeople, and developers disgruntled they are no longer showered with stock option candy.

    Its also possible to get an optimistic 3 times sales rate in 10 years by projecting LNKD's growth rate out.  A flat 30% annual growth from 2013 levels will hit exactly 300% in 10 years.  That is a reasonable projection of its ongoing growth decline.  Because LNKD has been spending so heavily to chase its existing growth profile, its hard to see it achieving these growth levels while also becoming profitable.

    Linkedin's sales are almost 7 times what they were in 2010.  Its profitability this quarter was less than in Q2 2010, and its unlikely that next quarter will beat 2010 either.  Its fine to hope that the next 3x in sales growth leads to at least 3x income, but its hard to see LNKD's culture change to stop paying its insiders so much.  It needs to raise income by 30x, not just 3x, in order to justify a $10B market value.

    Market reaction to results
    All of the issues with LNKD's slowing growth (among others) were apparent last quarter, and the company provided no guidance of any improvement in the next 2 quarters.  After last quarter's results the stock fell to about $170/share.  So, there is no coherent explanation for it to trade near or over $200 after these results.

    2013 may reach close to triple 2011 sales for LNKD.  Excluding the Q1 tax breaks it received, LNKD is projecting full year net income below that of 2011.  Just because it may beat low expectations doesn't mean its stock price should be rewarded when they are set that low, and fundamentally, we need to wonder what sales levels might lead to profitability.

    DICE holdings
    DICE (DHX) is also in the online professional communities business with a focus on recruitment.  It is about 1/7th the size of LNKD, but its Q2 profit was more than double that of LNKD ($8M).

    The stock based compensation issue
    LNKD had expected $49M this quarter, and came in just under that by less than $1M.  It expects Q3 stock compensation of $49M and Q4 of $52M.

    The headline (non-gaap) earnings exclude these expenses and look better because of it.  But it is a cost paid by existing shareholders.  The $10B optimistic future market valuation worked out to $100/share just last year, when there were 100M shares outstanding.  Current shares outstanding are near 117M.  If somehow shares stop growing past 120M (around the end of this year), a $10B total value would mean $83/share.

    There is reason to believe that stock based compensation will never come down.  Linkedin has a dual-class share ownership structure where only the insiders have voting power.  There is strong incentive to award themselves extra stock.  While the company is projecting stock compensation to grow slowly, this is still growth in stock compensation while the company's sales growth is rapidly declining.  The best we can expect from Linkedin's management is for stock compensation to plateau.