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 lynda.com, 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 lynda.com'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 lynda.com 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%.
  • lynda.com'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 lynda.com 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.
Guidance
  •  Linkedin increased their Q4 revenue guidance by $10M compared to last quarter.  This increase is entirely attributed to lynda.com 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.
  • Lynda.com 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 lynda.com 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 lynda.com guidance if annualized with 3 other quarters of $41M would be $181M total 2015 lynda.com revenue.  2014 revenue was $153M.  Only 18% growth.  Lynda.com's 2014 growth was 25%. 

Lynda.com Masking poor results
lynda.com 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 lynda.com 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 lynda.com 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 lynda.com 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.  Lynda.com 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)

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