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.