Thursday, February 4, 2016

Linkedin Q4 -2015 results

Linkedin is a company worth fairly $5B today, that could one day hope to be worth $7B-10B, if it performs perfectly.  Its market value is near $27B.

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

Results  (see also)
  • record low growth rate of 26% excluding sales (not part of last year's quarter). 34% growth with  Only 1% above last quarter's typically conservative guidance.
  • record low growth in marketing and subscriptions business.  Mobile visitation growth hitting a saturated-like 26%.  < 4% quarter over quarter.
  • Estimated sales for for the year (including 1st quarter standalone) was: 43, 41,41,49 = $174M.  Less than 20% growth  over 2014 sales.
  • Significantly missed their begining of year revenue guidance for 2015, after taking out the $114M contributed by that was not part of last year's plan.
  • 4th straight quarterly loss.  $8M (including $24M tax refund).  Q4 is historically a profitable quarter.
  • Sequentially flat monthly visitors, and decline in page views.
  • record low growth for member, visiting members, mobile, corporate customers, hiring revenue, marketing solutions revenue, premium revenue, US marketing revenue, US premium sub revenue.
  • Compared to 34% revenue growth, costs: Depreciation and amortization up 83%.  Sales and marketing up  30%, cost of revenue up 37%, GA up (good job) 24%, headcount up 36%.
  • Free cash flow negative $1M despite no special puchases.  10th straight quarter that free cash flow less stock based compensation is negative.
  • Flat deferred revenue excluding lynda. (confirms structural decline in premium subs)
  • Dodged request/opportunity to discuss China progress.
  • Field to online sales ratio worsened to record 64-36%.
  •  Only $660M more revenue forecast for 2016.  They added $690M in 2014, and $780M in 2015.  This includes with 1 and a half quarters not included in 2015.  So, core business sales increase forecast is $580M (assuming 0 growth from lynda).  This is below 20%.
  • record low 21.7% revenue growth forecast for Q1 2016 (with lynda standalone comparison).  Still record low 28.5% with 0 comparison.
  • Q1 forecast loss of $116M.
  • 2016 forecast loss of $408M.
  • Continued deterioration in the only segment that is working, talent/hiring solutions, to "mid-20s"% growth
  • If "high teens" means 17.5% then capex of $638M will be a 27% increase.  Potentially larger than revenue growth, and ensuring future depreciation growth outpaces revenue.  $630M in stock compensation is a 21.4% growth over 2015, about the same as core revenue growth.
  • There is a good chance that marketing revenue for Q1 will be lower than the cost of (all) revenue expense for the first time.  (both marketing and subscription revenue have each been lower than cost of revenue + depreciation since at least 2013)
  • They will be trashing their bizo acquisition purpose (lead accelerator) and giving up on banner ads starting in Q3.  This is likely to reduce losses, but also growth.
  • single digit growth rate in self serve (online) sales, which is the only part of their business with reasonable margins.  They blame the excellence of 2015 results for this low projection.
  • field sales 20%~ growth for the year.

comscore and engagement
comscore showed a sharp decline in monthly visitors for december in the US.   Comscore data matches linkedin's report in showing flat usage compared to 3rd quarter.  In 2014, December and the quarter had fairly solid increases in visitation rates for the month and the quarter.  These results included new (presumably improved) versions of its mobile apps suite.
2014 results for this company were sales of $153M with 40% loss of $63M, not including an additional $10M in capitalized software and production costs.  Its growth rate was only 25% or $32M (in 2014).  By estimate, less than 20% over that (only $21M) in 2015.

discontinuing corporate solutions customer reporting
LNKD will stop reporting its recruiting customer counts.  The necessary presumption is that it would look bad if they kept reporting.  Throughout the first 3 quarters of the year, their hiring revenue growth was about the same as corporate seat growth.  Meaning, hiring revenue per customer (both field and online) was stable.  In Q4, hiring revenue growth was 200bps lower than corporate seat growth.  Q4 has historically been the renewal annual contract timing for the company.  This shows declining hiring revenues per corporate customer.  Previous years showed increased revenue per customer.

Yahoo and
Both companies did poorly this quarter, and are forecasting sharply down for next quarter and 2016.  Yahoo's issues are mostly that it is paying a lot for traffic acquisition for very little growth. has declining revenue per user.  In an internet world separated between FB/Goog and losers, LNKD is firmly in the loser camp, and it is probably a good move for it to get out of the general advertising market.

LNKD has benefited from 3+ years of tailwinds from growing Apple iphone and ipad unit sales.  That trend stopped this last quarter, and Apple expects a sharp decline in iphone units next quarter.  Not that LNKD ever had any genuine engagement, but we all enjoy a honeymoon period of playing with a new toy and installing many apps and games, before we crawl into the box it came in.  Both any genuine engagement growth, or one time honeymoon engagement inflation, will not have the tailwind from growing device sales.  This in fact becomes a headwind for the future.

Q4 - 2012 Linkedin results
Febuary 2013 was the last time LNKD climbed over $15B in market value.  They had a minor profit and 85% growth rate at the time.  The issues I pointed out at the time  (saturation and shareholder unfriendly corporate structure) still plague its future, and cummulative net losses over 3 years, with a growth rate of 20% on core business next year and increased losses, and discontinuation of traditional advertising services, there can't possibly be the same value now as then.  Their addressable market has only become more saturated since then.  At the time, I did expect they could grow $1B in sales per year.  $580M core growth next year, makes $600M/year thereafter a generous assumption.

2014 results
In my review of 2014 results,  I expected $800M in core revenue growth instead of the $690M they achieved, and thought that could be sustainable through 2016, for a high 20s% growth rate.  If that doesn't continue deteriorating, it will be 2027 before they hit $10B in revenue.  But there is a substantial risk of further deterioration.

20% growth is what google does
To keep 20% growth past 2016, they will need to increase sales $600M, $700M, $800M... per year.  To have any significant value they would need to contain expenses including depreciation and stock compensation.  But none of these metrics are showing improvement, and field to online sales ratio is going the wrong way.

There is actually no way for LNKD to stay a 20% growth company, and there is no way that they will have $500M profit while doing so, which would justify a $15B "Google-like" (based on PE) valuation.  LNKD is too sales (winning and dinning) intensive, and dropping the parts of its business that aren't.

Long term optimistic forecast for Linkedin
Grow $600M in sales for 12 years, and profit to $350M in 2027 ($30M per year excluding screw ups).  That would leave it with a 6% growth rate in 2027, and 8% profit growth, so perhaps an 18-20 PE.  That is a $7B company in 2027.  Not worth more than $5B today due to time and uncertainty.
$5B/135M shares = $37/share today target.  $51.85/share optimistic 2027 share target value.

Comparison to twitter
Based on Q3 projections and performance, twitter is worth more than linkedin.  I may amend this after their results though, as they have had much drama since Q3.  Though twitter shares linkedin's shareholder abusive corporate structure, and is therefore never investable, it may be appropriate as a long/short pair.

Twitter is worth more than LNKD because it has higher growth, lower saturation level, improvement potential, decreasing losses, and most importantly is not as sales intensive.

Likely fraudulent analyst activity after Q3-2015
Linkedin reported poorer results than Twitter in Q3.  The reporting though blatantly ignored that the results included that were not in previous comparable.  The company announced that its results would be similar to what they turned out to be.  While twitter price during the quarter went to a reasonable $12B, several linkedin research reports put a $45B price target on the company, and justified it with drool.  If they are capable of tieing their shoelaces, then assuming there are agencies charged with being interested in such behaviour, investigation into alternate reasons for both the analyst and stock pump are worthwhile.  There is a long term trend in the manipulation of reaction to the company's results.

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