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.