The Missing Link: An In‐Depth Analysis of LinkedIn Corporation By: Dan Grossnickle 7/15/2012
1) General Information LinkedIn Corporation (LinkedIn), incorporated in March 2003 and first publicly traded in May 2011, is the world’s largest professional network on the internet with more than 150 million members in over 200 countries and territories around the world. Through LinkedIn’s platform, members are able to manage and share their professional identity online, create and engage in professional networks, access shared knowledge and insights, and find career opportunities. LinkedIn separates their company into three different revenue segments: Hiring Solutions, Marketing Solutions, and Premium Subscriptions. Hiring Solutions (HS) aim to be the most effective way for companies to efficiently identify and acquire the right talent for their needs. There are a variety of tools which include advanced searches of user profiles that meet certain qualifications, direct communication with a user through “InMail”, job postings, professional referrals, and recruitment media. Marketing Solutions (MS) enables marketers and advertisers to reach and engage with relevant users and connect them with products and services. The platform enables advertisers to target their audience based on the information in the user’s profiles. Advertisers can choose to purchase advertising by cost‐per‐impression or cost‐per‐ click budget plans. Premium Subscriptions (PS) are for job seekers and job recruiters who pay a premium for a higher level of service. For a job seeker, the premium includes viewing profile statistics, introduction to companies of interest, and the user’s name will be moved to the top of the applicant list as a “featured applicant.” For a job recruiter, the extra services include additional candidate contacts through “InMail”, alerts when new candidates match position criteria, and viewing more candidates when using the search feature. LinkedIn is listed in the Internet Media industry within the Technology sector. The extremely high growth rates and lack of dividend payments would classify LinkedIn as a company in the growth stage of the life cycle. Yearly revenue growth has increased over 95 percent per year in each of the last nine quarters. Yearly earnings per share growth has followed a similar pattern and increased from $0.05 in 1Q2010 to $0.15 in 1Q2012. LinkedIn has continuously surpassed company guidance estimates as well as consensus market estimates since going public in May 2011. 2) SWOT Analysis Strengths World’s Largest Professional Network on the Internet LinkedIn has become a trusted name when it comes to career advancement. Many people personally know someone who has been hired through LinkedIn. The amount of registered users has grown by over 60 percent per year for the last three years. Wide Variety of Demographics People of all demographics are members on LinkedIn. Elder generations are reluctant to join social internet networks but are more inclined to join LinkedIn’s professional network and befriend their coworkers. Diversified Revenue Segments Many websites only generate revenue through advertising, but LinkedIn uses “InMail” communication, search tools, job postings and premium accounts to generate additional revenue. Weaknesses Limited Access to User Data Most users choose to make their information private. This blocks potential contact between users and corporations looking to fill a position. Advertising to the Mindset of the User LinkedIn is used primarily as a website to find a job. The user is likely to spend less time “browsing” a professional network as compared to a social network. Less time on the website will decrease profitability.
Low Level of User Engagement Users spend significantly less time on LinkedIn as compared to social networking websites. Opportunities Lower Unemployment in the Future As the unemployment rate begins to decrease, LinkedIn will be in prime position to match open positions with qualified candidates. Internet/Business Acquisitions LinkedIn is always looking for new utilities and tools to branch further into the business place. Their cash is accumulating and they are able to bid on innovative software. International Expansion International revenue increased over 150 percent in 2011. Threats Limited Operating History Unproven market may not develop as expected. Tracking of Performance Metrics are not Independently Verified The metrics which primarily drive revenue may be falsely or inaccurately reported. Illegally Using Private Personal User Information Networking websites have been known to access or sell user information illegally. Actual or perceived breach of trust could cause users to deactivate their membership. Increasing Competition Other internet networks, such as Facebook and Google+, have not efficiently expanded their job recruitment platform. The barriers to enter the job recruiting industry are very low for popular social networks. Increased competition cut into LinkedIn’s profitability. Efficiency of Internet Advertising Recent studies doubt the efficiency of internet advertising. “Ad‐Blockers” limit the number of advertisements seen on a webpage. Mobile Advertising Advertising through mobile devices is less efficient than personal computers because the screen size is much smaller. There is less room for ads in the user’s field of view. If mobile users continue to increase, advertising revenue will decrease.
3) Revenue Drivers Hiring Solutions Hiring Solutions (HS) revenue is generated by companies purchasing LinkedIn’s job recruiting tools and becoming Corporate Solutions Customers (CSC). A CSC is a company that has an active account for posting jobs on the website. The initial cost starts with the price per job posting. As of July 2012, the price is $295.00. LinkedIn encourages bulk purchases of job postings and offers discounted “Multi‐Job Packs.” These job packs are good for 30‐day job postings, and any unused job postings will expire in 365 days. Even larger discounts are offered to large corporate accounts. The following table compares the price of job postings of LinkedIn and their biggest internet‐ based job posting competitor (Monster) in the Chicagoland area. LinkedIn Monster % Job Postings Price Per Job Posting Job Postings Price Per Job Posting Difference 1 $295 1 $365 23% 5 $230 5 $300 28% 10 $175 10 $230 26% LinkedIn prices their job postings very competitively and has undercut Monster by over 20 percent in each package. Monster is well‐known within the industry and is implementing a brand‐loyalty strategy, whereas LinkedIn is attempting to gain market share with their cost‐leader strategy. HS can be measured by two key metrics: 1. Corporate Solutions Customers (CSC) Number of corporations that have an active contract. 2. HS Revenue per Average CSC Measurement of HS revenue per average number of CSC. It is beneficial to see this number rising which translates into LinkedIn generating more revenue per CSC. Hiring Solutions FY2008 FY2009 FY2010 1Q2011 2Q2011 3Q2011 4Q2011 FY2011 1Q2012 HS Revenue 17.4 36.1 101.9 46.3 58.6 71.0 84.9 260.9 102.6 %Y/Y 132.4% 108.3% 181.9% 173.7% 169.8% 160.3% 136.2% 156.1% 121.4% % of Revenue 22.0% 30.1% 41.9% 49.3% 48.4% 50.9% 50.6% 50.0% 54.4% CSC (000s) 900 1,585 3,865 4,774 6,072 7,366 9,236 9,236 10,403 %Y/Y 76.1% 143.8% 161.3% 163.3% 158.5% 139.0% 139.0% 117.9% HS / Avg. CSC (Annualized) 29.1 37.4 42.9 43.2 42.3 40.9 39.8 41.8 %Y/Y 28.6% 8.1% 2.8% ‐0.1% ‐4.5% 6.5% ‐2.6% As of 1Q2012, the Hiring Solutions (HS) revenue segment generated about 55 percent of LinkedIn’s total revenue. HS has maintained over 100 percent annual growth in every quarter since 2009. It is the largest and fastest growing revenue segment of LinkedIn. It is important to note that the yearly growth rate in 1Q2011 (173.7%) declined over 50 percent in 1Q2012 (121.4%). These growth rates display excellent performance, but this may signal the start of future growth rate decline.
CSC yearly growth has increased by over 100 percent in each of the last five quarters. The extraordinary growth implies that the attainability and availability of CSC is high. LinkedIn’s ability to capture market share remains strong. HS per Avg. CSC illustrates a cause for concern. The growth rate fell over 20 percent between 2010 and 2011. In the third and fourth quarter of 2011, the metric decreased for the first time in LinkedIn’s history. In 1Q2012, the metric increased over the period, but it was below its value from the previous year. Unemployment rates are still extremely high, and a decrease in job availability leads to a decrease in corporations posting jobs. LinkedIn’s cost leadership strategy may have forced prices down which led to a decrease in the metric. As long as the increase in CSC is greater than the decrease in HS / Avg. CSC, HS should consistently increase revenue in the short‐term. The ability of LinkedIn to maintain the CSC’s satisfaction is directly related to the longevity of growth in HS.
Marketing Solutions Marketing Solutions (MS) revenue is derived primarily from fees received from advertisers for display and text ads on the website. MS also provides a service that allows marketers to directly create and place ads on specific pages. Ads will be shown to the user based upon their location, user profile and keywords used in their search. Marketers can choose from two different advertising methods: Cost per 1000 Impressions (CPM) and Cost per Click (CPC). CPM is registered when the ad shows on the webpage, whereas CPC requires the user to click on the advertisement. LinkedIn charges a premium to advertise on their website. Data from user’s profiles and search keywords allow advertisers to efficiently reach their target market. The more data a user gives to LinkedIn, the more efficient the advertising. MS is measured by six key metrics: 1. Registered Members (RM) Number of users who have created a member profile on LinkedIn. 2. MS Revenue per average number of RM Measurement of MS revenue during the period per average amount of registered members. 3. Unique Visitors (UV) Number of users who have visited the website at least once during the last month regardless if RM. This number is presented as an average monthly number over the period presented. 4. MS Revenue per UV Measurement of MS Revenue per UV. 5. Page Views Number of page views over the period. 6. MS Revenue per page view Measurement of MS revenue per page view. Marketing Solutions FY2008 FY2009 FY2010 1Q2011 2Q2011 3Q2011 4Q2011 FY2011 1Q2012 MS Revenue 26.0 38.3 79.3 27.7 38.6 40.1 49.5 155.8 48.0 %Y/Y 233.8% 47.4% 107.2% 94.6% 110.7% 112.7% 77.3% 96.5% 73.2% % of Revenue 33.0% 31.9% 32.6% 29.5% 31.9% 28.7% 29.5% 29.8% 25.4% RM (Millions) 32.4 55.1 90.4 101.5 115.8 131.2 145.0 145.0 160.6 %Y/Y 93.8% 70.1% 64.1% 58.2% 61.2% 62.9% 60.3% 60.3% 58.2% MS / Avg. RM (Annualized) 1.1 0.9 1.1 1.2 1.4 1.3 1.4 1.3 1.3 %Y/Y 67.2% ‐17.3% 24.6% 20.9% 31.8% 31.2% 9.7% 21.5% 8.8% UV (Millions) 12.0 36.2 65.1 74.9 81.8 87.6 92.0 92.0 102.5 %Y/Y 201.0% 79.9% 64.2% 83.2% 64.4% 41.4% 41.4% 36.9% MS / UV (Annualized) 2.2 1.6 1.7 1.5 1.9 1.8 2.2 2.2 1.9 %Y/Y ‐26.0% 7.4% 18.5% 15.0% 29.4% 25.4% 25.4% 26.5% Page Views (In Billions) 6.1 11.5 18.0 7.1 7.0 7.6 7.7 29.3 9.4 %Y/Y 88.8% 57.0% 97.2% 79.5% 52.0% 38.9% 62.8% 32.4% MS / 1000 Page Views 4.3 3.3 4.4 3.9 5.5 5.3 6.4 5.3 5.1 %Y/Y ‐21.9% 32.0% ‐1.3% 17.4% 40.0% 27.6% 20.7% 30.8%
In 1Q2012, the revenue generated by MS represented approximately 25 percent of the total. The same quarter annual growth of 73.2 percent was less than the other two revenue segments (HS 121%, PS 91%). RM remained consistent and increased over 58 percent from the previous year. This implies that LinkedIn continues to attract large numbers of new users and gain market share. MS per Avg. RM increased over 8 percent from the previous year, but the value fell almost 13 percent from the previous quarter. This rate is historically lower in 1Q, but it shows that advertisers paid less for posting ads on the website. The user‐specific marketing data that is provided to its advertisers allows LinkedIn to charge a premium, but if companies are unable to effectively reach their target market, they will use a cheaper alternative. UV is more explanatory than RM because it is the number of users actually using the website. There are LinkedIn RM accounts that have not been used in over a year, but they still remain a portion of the total. UV is the users that visited the website at least once during a month. For example, in 1Q2012, there was an average of 102.5 million users per month who visited the website at least once. In 1Q2012, UV increased 36.9 percent over the previous year. The increase in MS per UV of 26.5 percent demonstrates the willingness of advertisers to pay extra to post ads on their website. The number of page views increased over 32 percent over the previous year in 1Q2012. It is important to note that the growth rate of page views is lower than the growth rate of UV. This implies that visitors are spending less time on the website. This is very dangerous for LinkedIn because less time spent on the website translates into fewer advertising opportunities. MS per page view increased by over 30 percent. This proves that LinkedIn is continuously able to increase their marketing accuracy throughout their website.
Premium Subscriptions Premium Subscriptions (PS) revenue is primarily generated by online sales of LinkedIn’s premium memberships. The premium memberships are split into four different categories: Job Seekers, Recruiters, Sales Professionals, and Other. The “Other” category is a mixture of the packages and represents the largest number of premium memberships. Under each of the four categories, there are three tiers of premium service a user can purchase. LinkedIn offers discounted annual membership costs; therefore, most users sign up for an entire year. The following table shows the four categories and the annual price for each tier within the category. Job Seeker Recruiter Sales Prof. Other Tier 1 $191 $479 $191 $239 Tier 2 $299 $899 $479 $479 Tier 3 $479 $4,799 $899 $899 The benefits of “Other” premium memberships: Contact users through “InMail” (Varies from 3‐25 messages allowed per month) See more profiles when using search feature See expanded profiles of everyone on LinkedIn View list of users who have seen profile Introductions to companies of interest Additional premium member benefits throughout the other three categories include alerts when a new candidate meets the position criteria, move user’s name to top of list as featured applicant, and priority customer service. LinkedIn is very reluctant to give out details about PS. They not only refuse to disclose the breakdown of users per premium membership, but they also refuse to disclose the annual number of premium memberships. The lack of this disclosure makes it difficult to accurately portray the difference between periods. PS is measured by four key metrics: 1. Registered Members (RM) Number of users who have created a member profile on LinkedIn. 2. PS Revenue per Average RM Measurement of PS revenue during the period per average amount of registered members. 3. Unique Visitors (UV) Number of users who have visited the website at least once during the last month regardless if they are a RM. This number is presented as an average monthly number over the period presented. 4. PS Revenue per UV Measurement of PS Revenue per UV. Premium Subscriptions FY2008 FY2009 FY2010 1Q2011 2Q2011 3Q2011 4Q2011 FY2011 1Q2012 PS Revenue 35.45 45.71 61.91 19.92 23.85 28.41 33.28 105.46 37.95 %Y/Y 105.6% 29.0% 35.4% 46.9% 60.5% 81.2% 87.0% 70.3% 90.5% % of Revenue 45.0% 38.1% 25.5% 21.2% 19.7% 20.4% 19.8% 20.2% 20.1% PS / Avg. RM (Annualized) 1.44 1.04 0.85 0.83 0.88 0.92 0.96 0.90 0.99 %Y/Y 3.0% ‐27.6% ‐18.6% ‐8.7% 0.4% 11.8% 15.8% 5.3% 19.7% PS / UV (Annualized) 2.95 1.38 1.09 1.06 1.17 1.30 1.45 1.45 1.48 %Y/Y ‐53.2% ‐20.8% ‐10.6% ‐12.4% 10.2% 32.3% 32.3% 39.2%
Overall, PS is looking strong for the future. The 1Q2012 growth rate almost doubled the rate from last year. PS as a percentage of revenue has dropped over the years, but the segment as whole is still producing extremely high growth rates. The RM and UV metrics are displayed in the MS table. RM and UV increased 58.2 percent and 36.9 percent, respectively. PS per Avg. RM attempts to show the change in premium memberships compared to change RM. In 2008 and 2009, the value was higher than it was today, but the value has significantly increased since 2010. This is interpreted as premium memberships made up a higher percentage of RM in 2008 and 2009 as compared 2010 and 2011. PS per UV tells a similar story. In 1Q2012, PS per UV increased 39% annually. LinkedIn has enhanced their premium memberships by consistently adding new features and creating tiered levels of service to attract all segments of users. The success of PS is connected to the perceived value of the additional benefits of a premium membership. If users fail to see additional benefits, PS growth rates will fall dramatically.
4) Geographical Segments LinkedIn’s headquarters is located in Palo Alto, California, and most of their revenue is generated domestically. Currently, over 200 countries and territories around the world are using LinkedIn. Most of their future growth will be determined by the success in foreign markets. There are many risks concerning foreign growth such as fierce competition and governmental regulations. The following table displays the growth of the different geographical segments. Please note “Total International” is a sum of Other Americas, EMEA, and APAC. Geo. Segments FY2008 FY2009 FY2010 1Q2011 2Q2011 3Q2011 4Q2011 FY2011 1Q2012 United States 61.21 88.49 176.94 65.11 82.73 94.00 111.98 353.83 120.82 % of Revenue 77.71% 73.67% 72.8% 69.3% 68.3% 67.4% 66.8% 67.8% 64.1% Other Americas 3.40 9.32 4.60 6.11 7.92 10.11 28.74 12.01 % of Revenue 2.83% 3.8% 4.9% 5.0% 5.7% 6.0% 5.5% 6.4% EMEA 24.90 47.40 19.71 25.90 28.90 35.50 110.01 42.83 % of Revenue 20.73% 19.5% 21.0% 21.4% 20.7% 21.2% 21.1% 22.7% Asia‐Pacific (APAC) 3.31 9.41 4.49 6.30 8.61 10.11 29.51 12.77 % of Revenue 2.75% 3.9% 4.8% 5.2% 6.2% 6.0% 5.7% 6.8% Total International 17.56 31.63 66.15 28.82 38.31 45.47 55.76 168.36 67.63 % of Revenue 22.29% 26.33% 27.2% 30.7% 31.7% 32.6% 33.2% 32.2% 35.9%
5) Financial Statement Analysis The income statement, balance sheet, and statement of cash flows are presented as an appendix to this report. LinkedIn is a young, healthy company within a new industry experiencing astronomically high growth. There are very few key competitors. Without experienced, direct competition, little insight can be gained from analysis of the financial statements, but there are still some areas of focus. LinkedIn is a 100 percent equity company. The value of their company is completely determined by the current value of their stock. In 1Q2012, stock‐based compensation (SBC) increased 228 percent over the previous year. LinkedIn executive salaries are highly weighted with stock options. If management is too focused on the short‐term stock price rather than the long‐term picture, a principal‐agent problem could occur. A loss of shareholder value would surely follow. Sales and marketing expense was 35 percent of revenue in 1Q2012. As the growth rate of CSC begins to decrease, LinkedIn will be forced to allocate more funds to attract new customers. In 2011, the sales and marketing growth rate was higher than the total revenue growth rate in every quarter. As additional companies look to fill job openings, the competition for market share will increase in the future. It is vital for LinkedIn to discover cost effective techniques to capture market share. Product development is at the core of LinkedIn’s business model. They strive to deliver the newest and most innovative services to their users and customers. If they fall behind on innovation, the company will get left behind. Product development expense increased over 90 percent annually in 1Q2012 and over 100 percent in each quarter in 2011. The two most recent developments for LinkedIn are the implementation of their mobile application and the acquisition of SlideShare. Advertising on mobile applications is not as effective as on personal computers. It was necessary for LinkedIn to meet the consumer demand and create a mobile application, but it will eventually lead to a loss in marketing revenue as more users shift from personal computers to mobile devices. SlideShare’s primary service is the ability to easily embed PowerPoint (Slideshow) presentations on a website. This could help LinkedIn enter new markets within the business world, but an acquisition price of over 118 million dollars is difficult to justify. Large increases in product development cost and few new value‐creating products may lead to a decrease in LinkedIn’s value and shareholder confidence. In addition to product development, capital expenditures need to be monitored. LinkedIn’s future goals revolve primarily around foreign expansion. Each new area requires a staff, offices, and computing equipment. Despite LinkedIn being a primarily online company, most of their sales are derived from field sales as compared to online sales. These foreign projects need to be separately monitored for profit or loss. In 1Q2012, the cash balance increased by over 200 percent. Most of the increase is attributed to the launch of LinkedIn’s IPO. LinkedIn does not plan to pay a dividend in the near future, so their cash balance will be used for foreign expansion and acquisitions. LinkedIn needs to properly weigh the benefits of costly acquisitions versus paying a dividend to their stockholders. Investors will typically stray away from companies that are not spending their cash effectively.
6) Revenue Valuation LinkedIn’s estimated revenue build, income statement, balance sheet, cash flow statement, and discounted cash flow projections from 2012 to 2016 are presented as an appendix to this report. Their success is driven by innovation and ability to generate consistent, increasing revenue. Total revenue is a sum of segments, and each segment is a sum of key parts. Each key part should be separately analyzed to predict the future profitability of LinkedIn. Hiring Solutions HS is separated into two metrics: Corporation Solutions Customers (CSC) and HS revenue per CSC. CSC represents the amount of total customers, whereas HS revenue per CSC represents the total revenue per customer. The growth of CSC will continue to drive revenue for LinkedIn in the future. Even in the midst of a recession, LinkedIn has continually increased CSC by over 100 percent annually. They have undercut the price of their competitors and will be in prime position when the economy turns around. More jobs available in the workplace will lead to more job postings. The CSC compound annual growth rate (CAGR) for 2012‐2016 is estimated at 44 percent. HS per Avg. CSC tells a completely different story. This figure experienced high growth in earlier years, but from 2010‐2012, the CAGR was only 2 percent. This is a direct reaction to their low price strategy. Competition will intensify and LinkedIn will be forced to lower the price of their services. Facebook and Google+ will eventually increase their job recruitment segment. Users of both social media and LinkedIn may prefer a one‐stop shop for their social and professional networking and could result in a decrease of UV for LinkedIn. The CAGR for 2012‐2016 is estimated at 0.2 percent. HS is projected to remain the leading revenue generator. In 2016, HS will generate over 70 percent of LinkedIn’s total revenue. LinkedIn’s primary niche is bringing together job recruiters with job seekers, and HS directly reflects that part of their business. HS revenue CAGR for 2012‐2016 is estimated at 48.7 percent. Marketing Solutions MS is the advertising segment of LinkedIn. Most of their revenue is derived from Cost‐Per‐Click (CPC) advertising contracts. For example, an advertiser sets up a $100 account at LinkedIn. Whenever a user becomes engaged with an ad and clicks it, the advertisers account is charged a fee. Fees vary depending on the demand for each target market. If ten insurance companies all want their ad to appear when a user searches for “insurance”, the CPC will be high because there is high demand. There is quiet, skeptical view on the efficiency of internet marketing. It is wishful to think the intended target market is always clicking the ad, but privacy settings can hide this information from marketers. Quite frequently, marketers have no idea who is clicking their advertisement. The term coined for illegal ad clicking is “click fraud”. Click fraud refers to companies maliciously clicking their competitor’s advertisements to drain their daily marketing account balance. Internet advertising leader, Google, claims that click fraud accounts for less than 2 percent of total clicks, but other sources claim as high as 19 percent (Forbes). Google was sued in July 2006 for lack of click fraud detection and they settled for $30 million (Google Settlement). In addition to the settlement, the court ordered an independent review of Google’s click fraud detection system. Professor Alexander Tuzhilin of NYU determined that Google’s detection efforts were reasonable, but he gave no indication that their efforts worked well. This report gives Google immunity against future lawsuits of poor detection systems. Google is currently the leader in click fraud detection and prevention.
Google’s revenue is primarily driven by CPC advertising, so they are directly profiting from illegal clicking. Highly demanded ad locations can be priced over $100 per click. The profit potential of fraudulent clicking is limitless. The facts are simple: click fraud is nearly impossible to enforce, the leader of monitoring and prevention has a monetary conflict of interest, and click fraud has potential to be highly profitable. History shows when poor enforcement, biased prevention, and profitability merge together, something just isn’t “clicking”. MS is separated into three different metrics: Registered Members, Unique Visitors and Page Views. The growth rates of each metric are estimated as well as the growth rate in MS per metric. Each metric is a component of total MS revenue and is weighted for significance. Page views offer the highest insight, followed by UV, and lastly RM. These metrics are only as useful as their ability to track usage and the public’s knowledge of the website. Total MS revenue is weighted between calculations of Page Views, UV, and RM at 50 percent, 35 percent, and 15 percent, respectively. RM will continue to increase at a decreasing rate. LinkedIn’s growth in foreign markets should offset the decreasing growth of new members in the US. Users enduring a job search are easily influenced to sign up for a free membership to view job postings, so growth is expected to remain high. RM will grow at an average of 30 percent per year from 2012‐2016. The growth rate of UV has decreased dramatically in each of the last three years. In 2009, 2010, and 2011 the growth rates were 201 percent, 80 percent, and 41 percent, respectively. In LinkedIn’s defense, the unemployment rate is high, and without open jobs in the market, the website is expected to lose visitors. Based on the expectation of slow economic growth, the CAGR of UV per year will be 15 percent over the next five years. Page views is the best indicator of website usage. Each page visit presents a possible advertising opportunity, so higher usage translates into greater MS revenue. Page views increased annually by 32 percent in 1Q2012. The annual number of page views will continue to increase around 15‐30 percent for a five year CAGR of 19 percent. The change in MS per Avg. RM displays the change in the price that advertisers are willing to spend per ad. Historically, this figure is higher in the fourth quarter because companies have extra marketing funds to spend. Also, there are typically more jobs available during the fourth quarter, so more users are on the website. MS per Avg. RM increased 21.5 percent in 2011. In 1Q2012, LinkedIn started strong with an increase of 8.8 percent, but this growth will not continue in the future. Increasing competition from other social and professional networks will force the growth of MS per Avg. RM to zero and will eventually begin to decrease. The CAGR for 2012‐2016 is negative 3 percent. MS per UV displays the amount of MS revenue each UV is generating for LinkedIn. Typically, this metric is higher towards the end of the year. Advertisements are more effective if the user has made an account, so MS per UV offers insight on the amount of UV that are also RM. Increased competition and a slow decrease in unemployment will slow growth and generate a 2012‐2016 CAGR of 3 percent. As additional users sign up for memberships, the advertising per page will increase. When a user signs up for a membership on LinkedIn, they display very useful marketing data about themselves. MS per page view is derived from LinkedIn’s ability to accurately advertise to the user on each and every webpage. In 1Q2012, LinkedIn’s MS revenue per page view increased by almost 31 percent. Growth will continue, but not at their current rate. The five‐year CAGR will be around 5 percent. Overall, MS is looking very positive in the future. MS revenue increased over 73 percent in 1Q2012. MS currently generates about 25 percent of total revenue. The 2012‐2016 CAGR is 26.6 percent. The success of MS all depends on the willingness of advertisers to pay a premium for placing ads on their website. It is vital for LinkedIn to manage their user’s data to create valuable marketing segments.
Premium Subscriptions PS consists of users paying an extra cost for additional services. The million‐dollar question: Are the benefits of a premium membership worth the price? There are only a few circumstances when purchasing a premium membership is justifiable. The following is an analysis of LinkedIn’s primary premium benefits: Contact users directly through “InMail” Users can “Google search” the person’s name and locate their contact information for free. InMail is useful when personally contacting the job poster, but most Human Resource representatives post their contact information freely on the web. Observe more profiles when using search feature LinkedIn freely gives a huge amount of search results and offers free advanced search tools used to find specific users. View expanded profiles of everyone on LinkedIn Users can already see expanded profiles of other users in their network. If a user simply asks to “connect” with another user, they can view their extended profile. Display a list of users that have viewed user profile “Who is spying on me?” This is an excellent feature for the egotistical user. Introductions to companies of interest The introduction is just a message with the user’s picture and some data from their profile. Most job recruiters would not be impressed by a computer‐generated message. A personal message sent by the user is more effective. LinkedIn actively advertises to every user a “free month” of their premium membership. After the “free month” is over, the membership converts into an annual contract. LinkedIn’s premium membership price structure is very persuasive to choose an annual contract, especially for a user desperately looking for a job. Premium memberships are meant to help users who are unemployed. After a user finds a suitable job, their job hunting on LinkedIn usually stops, and their premium membership is rendered useless. Except for rare circumstances, the entire PS revenue segment does not pass a simple “benefit and cost” test. PS revenue is split up between PS per RM and PS per UV. PS per RM and PS per UV increased 20 percent and 40 percent, respectively. These numbers are skewed due to user’s free trials switching into long‐term memberships. LinkedIn is still relatively new and exciting, so some users are able to justify spending extra for a premium membership. This trend will not continue in the future. The 2012‐ 2016 CAGR for PS per RM and PS per UV are negative 3 percent and 0 percent, respectively. Even with the decrease in percentage of premium memberships, PS will remain highly profitable due to the increase of users in foreign markets. PS increased over 90 percent in 1Q2012 and revenue growth will remain strong for 2013 and 2014. There will be a huge drop off in later years, but the 2012‐2016 CAGR is 26.4 percent.
7) Analysis and Recommendation The present value of 2012‐2016 unlevered free cash flow (FCF) is used to value the share price of LinkedIn. All cash flows were discounted back to end of year 2012. The discount rate is calculated using the WACC method. LinkedIn’s beta is estimated at 1.75 due to high positive correlation to economic health. The risk free rate of 3.5 percent and a market risk premium of 4.5 percent calculated a discount rate of 11.4 percent. Terminal value in 2016 is calculated using a two‐stage FCF growth model (H‐Model). The 2016 FCF growth rate is 34 percent. In 2017, the high growth rate period will start at 25 percent and gradually decline over 8 years to the long‐ term growth rate of 7 percent. The net present value of future cash flows and terminal value, plus cash on hand, is equal to $9.26 billion. There will be roughly 116 million common shares outstanding at the end of 2012. The FCF per share at the end of 2012 is equal to $79.57. At close on July 16, 2012, the value of LNKD stock was $103.21. Comparing the current stock price with FCF valuation, LNKD is currently 23 percent overvalued. The value of LinkedIn will continue to increase in the short‐run. Around 1Q2014, consensus revenue forecasts will dramatically decrease. The inadequacy of LinkedIn’s premium memberships, increased competition from social networks, and inefficiency of internet marketing has yet to be understood by technology industry analysts. Premium memberships will continue to grow for the next 3‐6 months, and annual agreements will expire at the end of 2013. It is recommended to remain neutral with LinkedIn and undertake a short position shortly after the 2Q2013 earnings release.
Date: 7/16/2012Update: Model CreationLinkedIn, Inc.(LNKD)US: Internet MediaDan Grossnickledan@grossnickle.com815‐236‐5309