Friday, April 29, 2016

Linkedin Q1 - 2016 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 $16B.

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

results 

  • record low growth rate of 26%, excluding $55M in learning revenue that was not part of last year's operations.  $807M revenue.  Learning revenue was also 26% higher than 1 year ago's standalone Lynda.com revenue of $43.5M
  • record low mobile visitor growth.  Down to 25%.
  • record low US and Other Americas growth.  Even with learning revenue which has been explained as predominantly US focused, US talent revenue growth at lowest point since acquisition.  International talent solutions also show record weakness.
  • 2nd largest all time operating loss of $66M.  The record was Q2-2015 which included significant restructuring charges related to Lynda.com.  Its largest ever tax rebate keeps its net income loss to only its 3rd highest point.
  • 5th consecutive quarterly loss. At least, 9th consecutive quarter with income below $3M
  • Most expense growth matches approximately revenue growth.  30% or so.  The exception is depreciation and amortization which had over 95% growth.  Stock compensation up 40%.
  • Operating loss for the quarter increased $50M over last year.   Mostly due to the last 2 items outpacing revenue growth.  Equipment purchases were even higher than depreciation (assuring further increases)
  • record high depreciation ($95M  - 50% growth), amortization ($47M - 400% growth) and stock based compensation.($146M)
  • Free cashflow less stock compensation continues the negative quarterly string.  -$71M.
  • Comparing to Q4-2015 is appropriate because revenue was almost the same, but operating costs were $40M higher.  $10M more marketing spend to get the same sales.
  • Comparing to the entire fiscal year of 2013 is interesting because Q1 revenue is a little over half that of the entirety of 2013.  Depreciation and amortization in Q1 ($142M) was higher than all of 2013 ($135M) (still about 75% of 2013 without amortization).  Every other expense category is still a higher percentage of revenue than it was then.
Guidance
  •  $890M revenue guidancce for Q2 is $865M excluding partial results for last year's lynda.com operations.  Record low 21.3% core growth.  The same poor guidance tone as given last quarter.  Roughly the same revenue performance as this quarter, with $5M more SBC, and $2M less depreciation.  For $29M more revenue, $23M in additional other non-amortization operating expenses:  $3M extra "profitability".
  • Full year revenue guidance is increased by $9M compared to last quarter's announcement.  But full year ebitda (bs earnings) guidance is lowered $2M. (explained in call intentionally as increased "investment areas, and building product" platforms in all 3 categories.)
  • Forecasts compared to last quarer include: an increase of $15M in full year depreciation.  A decrease of $7M in amortization..  So, last quarter's dismal $400M+ forecast operating loss is increased by $10M.  Somewhat surprisingly, LNKD expects $50M less in stock compensation compared to last quarter's forecast, and so an offsetting expense increase is expected.

Still very bad
The high net income loss without a special reason given for the tax gift, and so high operating loss doesn't make up for the slight uptick in its marketing and subscriptions business.  It did some TV advertising that would explain an uptick in those segments with profit deterioration.  The core deterioration of hiring solutions, its main line of business, accelerated rapidly.  Hiring solutions not only showed a record low growth rate, it is 5% lower than last quarter's record low growth rate. (27%).  It can't talk about how great all of its products and platforms are being engaged, and show this deterioration.

Comparison to Q4-2015
Sales were almost identical:  861M vs 862M.  Noteworthy mix differences include $10M Sales cost increases.  $8M increase in SG&A with $4M stock based compensation increase.  $11M total stock based compensation increase.  On the revenue side, talent solutions dropped its QoverQ growth from 10% last year to 5%.  Tracking its main business line to drop to 20% growth for the year.

Plans for future cost containment
While committing to losing more money through investment this year, and through "late 2017", there's a $50M reduction (from plan... still increase) in this year's stock compensation plan, and an expectation for the year of "only" a 15% increase over last.  This is cost containment compared to 24% revenue growth.  I congratulate them for the comment in the cal: "SBC is a real expense/"

Its overall expenses are likely to still keep going up at least through 2017.  There is a vague (relative to my ability to follow) reference that at the end of their through-2017 investment program, 40% operating expense savings will occur in cost of revenue, which would be a 548 basis profit margin improvement.  The problem is that it has a -767 basis point loss margin, (906 basis point operating loss + other expense margin) and so even that plan together with 100 basis points of stock based compensation savings, it is not enough to reach profitability.  Furthermore, continued massive depreciation expense increases are assured through 2019 putting pressure on profits until then.

Its also hard to understand that their equipment/datacenter investment program results in switching on a cost of revenue savings of 40% starting in 2017, rather than the less generous understanding that they have been benefitting all along from the equipment/datacenters they have spent a lot on, and the 40% savings is just the total cummulative benefit going forward.  ie. not 40% savings from current levels, but 40% from what it would have been had they done nothing, and so may be 20% or so from current levels, and offset by higher depreciation expenses.

Shareholder Performance Margin
SPM is a performance metric that gives credit to a company for its R&D spending excluding it from expenses.  LNKD's poor results this quarter can't really be blamed on R&D (expense did rise a bit more than revenue), and so its SPM even worse than if its loss was due to intense R&D spending.

LNKD's SPM this quarter is Net income (-$45M) - Other expenses (12M) + after tax(35%) cost of R&D ($154.7M) = $97.7M or 11.3%.  This is deterioration over Q3-2015 (12%), but an improvement over Q1-2015 of 10%.

One interpretation of SPM is the imaginary profit ($97M) that would have resulted if 0 were spent on R&D, but the more useful interpretation is that the SPM determines the break even revenue benefit required for each $ spent in R&D.  At 10% SPM, each $ of R&D must create $10 in revenue.  11.1% SMP: $9 revenue.  12.5% SPM: $8 revenue.   Companies such as FB, GOOG, and MSFT all have SPMs above 30% which means they only need $3 in extra revenue to break even for every $ spent on R&D.  LNKD is a sales intensive company with no profitability potential, and so a much higher bar for its R&D efforts.

LNKD's SPM isn't even as good as calculated if we consider their mysteriously large income tax benefit.  In fact, the company has warned that it will take a $100M tax charge next quarter.  The default explanation is that previous tax deductions were overstated.  So, its tax policies aren't necessarily sustainable.

An alternate way of calculating SPM is to do it all pretax, and then take the normalized (35%) tax rate off the total to get a shareholder relevant result "exclusive of tax games":  Operating income (-66M), other expenses (-12), R&D (238) total:  $160M.  $104M after tax.  12%.  This looks better than the initial calcualtion but compared to Q4-2015, (0.65*185/862 =) 13.9%, and Q1-2015: (0.65*134/638 =) 13.65%, it is a significant deterioration to both.

Innovation
Companies such as Twitter can have hope that their platform catches on more, but also have imaginable monetization of products such as periscope.  LNKD, however has no major growth drivers or potential.  Similar to YHOO, EBAY, YELP.  It can iterate new versions that drive engagement in the short term, but it has to keep loosing money to get these pops, and even if it makes the service better, its unclear how it drives revenue and profitability . Its low SPM means its innovation efforts have to have big payoffs, but none of them appear to have that potential.  Though Twitter is still losing money, it has shown a pretty consistent trajectory of losing $80M less year over year.  So it is getting useful growth.  LNKD is going in the wrong profitability direction, with no growth headroom.

Valuation
Last quarter, I calculated an optimistic $7B 2027 valuation based on annual sales increases of $600M, and after tax profit increases of $35M per year starting in 2018.  $7B valuation is based on $350M annual profit ($500M pretax) with 6% sales growth.  Without sales growth, double the profitability is needed to have the same valuation.  I was assuming cost general containment similar to what was announced.

Information provided this quarter suggests that there is at best a delay to profitability start.  Its possible that the steps they announced eventually are part of a higher profitability plan, but it will be 2019 to more likely 2021 before depreciation expenses come down enough for break even without other measures. (this conclusion is based on tea leave parsing of comments and not completely reliable).  8 years of $50M profitability increases ($75M pretax) is an $8B valuation.

The case against such a success story is the sales expense growth it has pursued to achieve its current struggles.  It must find 1267 basis points of profitability from here to get to a $7B valuation on $10B sales.  1767 points to get to $14B.  Sales expenses will be a headwind in this as it expends more chasing higher hanging less ripe fruit.  The most generous possible reading of their 40% cost of revenue improvement would still have high continuous equipment replacement capex, and the announced "plans" only create 648 profitability points of improvement.

There's no information given this quarter to materially change previous valuation.  LNKD is stepping up its futile overspending efforts.  Though it claims investment in some future cost savings, it is also overspending in sales and administrative categories.  In my opinion, the company is trapped into chasing growth in order not to be perceived like Yahoo (stagnant money loser), but Yahoo's problems are also based on seeking not to be perceived like Yahoo.  They have to promise something and then spend to achieve it.


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