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.