FinalReport

Genesis Equity Research

LinkedIn
[Initiating coverage for LinkedIn with a buy rating and a target
price of $608]
LinkedIn is expanding into the online recruiting business with support of
its member base growth and expansion of their services. LNKD does
not have a strong direct competitor providing the opportunity to be price
makers. The premium valuation reflects the strength of its competitive
advantage in connecting all professionals on one platform and creating
a social network for business.
[Pros: sustainable organic growth, no strong competitors, and
potential expansion in B2B segments]
(1) Revenues will grow at 51% CARG through FY 2018. (2) Increase in
number of customers by 27% CARG and 30% in price by 2018 will
drive Talent Solutions growth. (3) Registered members will totalize 837
million in 5 years making it the largest professional social network. (4)
Potential in B2B marketing segment with the acquisition of Bizo.
[Risks: competition, pricing strategy, poor mobile user
experience, and lack of engagement]
(1) Other players, such as Facebook or niche professional networks,
reduce LinkedIn’s market share. (2) Pricing strategy may not be
appropriate for certain markets. (3) With 47% of traffic coming from
mobile, bad user experience can prove to be costly. (4) Only 27% of
registered users are monthly active users, potentially limiting marketing
and talent solutions growth.
[Valuation: $608 PT with 30x 5-year forward P/E multiple]
LNKD will be fairly valued at 30 times P/E, which is the average of
more mature peers today. Our valuation reflects growth potential,
competitive advantage, and future pricing power.
Highlights 2013 2014E 2015E 2016E 2017E 2018E
Revenues (M) $1,529 $2,376 $3,923 $6,300 $9,255 $11,894
EBIT (M) $49 $122 $471 $1,197 $2,499 $3,806
Net Income (M) $191 $237 $306 $778 $1,624 $2,474
EBIT Margin % 1.7 5.1 12.0 19.0 27.0 32.0
Net Profit
Margin %
3.2 10.0 7.8 12.4 17.6 20.8
5-year rating Buy
5-yr tgt Price $608
Price $206.76
3-year range $79.03 - $203.57
Market cap $25,021M
Shares
outstanding
122M
Free float 97.80%
Avg. daily
volume
2.3M
Avg. daily
value
$464.8M
FY 2013 $1.93
FY 2014E $1.94
FY 2015E $2.51
FY 2016E $6.38
FY 2017E $13.31
FY 2018E $20.28
Equity Research
Americas
Internet - Professional Network
Market Data
EPS (US$)
0
500
1,000
1,500
2,000
2,500
0
50
100
150
200
250
300
S&P 500LNKD (US$)
Performance
LNKD S&P 500


2
Table of Contents
Business Description ....................................................................4
[The Power of Networking] .....................................................................4
[The Core Business] ...............................................................................5
[Potential for Faster Growth]...................................................................5
[Customer Segmentation].......................................................................6
[Individual customers].............................................................................7
[Talent Solutions Customers – Corporate Customers] ...........................8
[Marketing Solutions Customers]............................................................9
Sales Channels...............................................................................9
[Sales of different products]..................................................................10
[Monetization] .......................................................................................12
Competitive Position ...................................................................12
[Competitive advantage in a glimpse]...................................................12
[Publicly Listed Competitors] ................................................................13
[Level of Competition – Analysis] .........................................................15
Management .................................................................................16
Financials......................................................................................17
[Highlights]............................................................................................17
[Financial Analysis]...............................................................................18
Investment Thesis........................................................................18
[Talent solutions] ..................................................................................18
[Marketing Solutions] ............................................................................19
[Creating a B2B Platform].....................................................................19
[International Expansion]......................................................................20
[The company is investing in enhancing user engagement in both PC
and mobile] ...........................................................................................21
[Products and services expansion].......................................................21


3
Risks..............................................................................................22
[Competition] ........................................................................................22
[Lack of Engagement]...........................................................................23
[Mobile Platforms].................................................................................23
[Data security].......................................................................................24
[Cultural Differences in Networking] .....................................................24
[Cash and cash equivalents] ................................................................24
[Pricing Strategy] ..................................................................................25
Valuation .......................................................................................25
[Member growth]...................................................................................25
[Growth in Talent Solutions Fueled by Increased Number of Customers]
..............................................................................................................25
[Seats per customer increase]..............................................................25
[Increase Penetration in Internet Advertising Market]...........................26
[Efficient Cost Structure].......................................................................26
[Other Non-Operating Income or Expenses] ........................................26
Price Target ..................................................................................27
[294% Upside Potential] .......................................................................27
Consensus Expectations ............................................................27
Sensitivity Analysis .....................................................................27
Appendix A - Valuation................................................................29
[Projected Income Statement] ..............................................................29
[Revenue Growth and Assumptions] ....................................................30
[Vertical Analysis] .................................................................................31


4
Business Description
LinkedIn is the largest professional network in the World. As of June 30,
2014 members topped 313 million across 200 countries. LinkedIn acts as
a medium for professionals to stay connected with each other by creating
and maintaining a unique professional identity, making part of a
professional network. The company has developed a multi-sided platform
that caters the needs for different users.
LinkedIn has a differentiated value proposition for members and for
customers. First, for its members it is focused on:
• Professional Identity
• Network
• Knowledge
Second, for its customers consists of:
• Hire
• Market
• Sell
[The Power of Networking]
LinkedIn is a very good example of a freemium business model. The core
offerings are free for all members, thus encouraging fast user base growth
and network effects. Premium solutions are offered to enhance the
effectiveness of the service. These offerings include advanced search
filters, detailed profile views statistics, and InMails, a proprietary internal
messaging system.
Members begin with a free account but have the chance to upgrade at
anytime and without minimum commitments. LinkedIn offers one-time free
trials to encourage members to upgrade their accounts. The number of
members expands by word-of-mouth and through email invitations,
strengthening network effects. The primary focus of the company is to
reinforce its network, and incentivize members to keep updated profiles
and engage with the platform even when not being actively seeking for
jobs, therefore making it more attractive for LinkedIn customers. Premium
subscriptions currently account for 20% of total revenues.


5
[The Core Business]
Talent Solutions provides subscription products for recruiters and job
posting tools. LinkedIn’s flagship hiring solutions empower human
resources (HR) professionals for finding, contacting and hiring the best
suitable candidates. Recruiters can also post and manage job
opportunities using self-service tools. Other tools include a referral engine,
which helps the organization to leverage their employees’ network to look
for qualified candidates, job recommendations to subscribed users based
on jobs you may be interested in (JYMBII) section on the home page.
LinkedIn carries an additional comprehensive set of solutions for hiring
managers and recruiters. This business line accounts for 60% of total
revenues, and there is no foreseeable reverse in this trend in the coming
years, in fact we believe that the company will continue to expand this
business in a faster pace.
[Potential for Faster Growth]
The third business line is Marketing Solutions. It enables marketers and
advertisers to engage with a professional audience, and the company is
showing efforts to strengthen this particular segment. Advertisers have
tools for monitoring impressions, clicks-through rates and cost per click.
LinkedIn has a special ads feature for the enterprise subscriptions, which
offers distinctive products such as sponsored content, custom groups,
display ads, recommendation ads and whitepapers.
The trend of moving towards highly targeted ads based on data analytics
could be a catalyst for an expansion in the usage of LinkedIn’s marketing
solutions. LinkedIn developer community consists of open API’s and
embeddable widgets, which provide access to the content in the database
and help developers to build a third-party applications by leveraging the
data from LinkedIn’s database.


6
Figure 1 Business Model Canvas for LinkedIn (Source: Understanding LinkedIn Business Model)
Customers
[Customer Segmentation]
LinkedIn’s customers are divided into three different segments: members
(individuals), enterprises, and professional organizations. However
customers must not be confused with users or members. As it was
mentioned before, the service for individuals is made through the
freemium model where members have the chance to access advanced
services by subscribing to the Premium services offered by the company.
The registered members are the individuals who have created a member
profile on the website.
As of June 30 2014, the total number of members totalized 313 million. It
can be noticed that its member base is highly concentrated in the US,
around 34%, though this represented a 200 basis point decrease as
compared to 36% reading at the end of 2012. With the recovery of the
American economy we could see a downside in the member growth rate


7
or in the total monthly active users as more members effectively exit
unemployment.
The number of members is a key indicator for the company’s network
growth. In short, the social network faces not only the challenge to acquire
but also to retain its members or engage them with the platform. As for
every social network, the number of members, particularly monthly active
members, is a crucial metric for monetization; more members will allow a
social network to generate more revenues.
To achieve a sustainable revenue growth rate LinkedIn must not only
attract new customers but also improve the average activity of its current
members and try to reduce the non-renewal rates. Their ability to achieve
the previously mentioned goals will depend on new product launches,
improved user experience, and a strong position in the mobile space. The
company is positively working to achieve these goals, however success
will only be determined as time goes by. In terms of corporate customers,
neither terms of sales are publicly available nor pricing.
[Individual customers]
An individual member can be any person with Internet access. Members
create an account, complete a personal profile and connect with its
professional or personal contacts through email invitations or direct
invitations via the platform. Most LinkedIn members use the site in a
professional setting, making a clear difference with how Facebook
(NASDAQ: FB) is used by possibly the same individuals. However, an
important part of registered users do not know or understand the potential
LinkedIn has to offer, thus underusing its capabilities.
To be able to fully take advantage of the LinkedIn experience, members
can pay to upgrade their account; premium features vary upon
subscriptions levels. LinkedIn accounts more than 313 million, with the
majority under the freemium model, it is believed that around 1% of total
members have a subscription. The revenue from the premium
subscriptions in 2013 was $306 million or 20% of total revenue. The
average revenue per member is around $1. We believe this is a very low
number, however the freemium model is known for the low conversion
rates from free riders to paying customers.


8
[Talent Solutions Customers – Corporate Customers]
Corporate solutions include LinkedIn Recruiter, Job Posting, LinkedIn
Recruitment Media and LinkedIn Career Pages, being all these part of
Talent Solutions. Customers of this segment are primarily corporations
and professional organizations (e.g. staffing agencies). Talent Solutions is
of particular interest for the company because it represents the largest
share of its revenues (i.e. ~60% of FY 2013 total revenues) and this is
expected to continue for the foreseeable future. Meaning that the firm’s
revenues will be highly dependent on the behavior of this market. %YoY
growth saw a drop from 78% in FY2012 to 49% in FY 2013.
Figure 2 Historical Number of Corporate Customers (Source: Company Data)
Talent Solutions is not only the largest revenue generator, but it is also
where customers pay the largest amount for the services rendered by
LinkedIn. The average revenue per customer in FY 2013 was $35,100,
i.e. $860 million in revenue divided by approximately 24,500 corporate
customers. On the other side, the average cost per seat (one customer
can buy as many seats as desired) is estimated to be $10,000. All in all,
corporate customers paid, on average, for 3.5 seats during fiscal year
2013.
9,236
16,409
24,444
78%
49%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
-
5,000
10,000
15,000
20,000
25,000
30,000
Jan-12 Jan-13 Jan-14
Number of Corporate Customers
customers Growth rate (right scale)


9
Figure 3 Average Revenues per Corporate Customer (Source: Company Data)
[Marketing Solutions Customers]
Total revenues from the Marketing Solutions in FY 13’ were $362 million
or 24% of total revenues for the same period. However, LinkedIn does not
disclose any information regarding number of customers, or any detailed
information about the performance of this segment. Marketing Solutions is
set to compete with other social networks and Internet companies for ads
and sponsored content. In this space, LinkedIn appears to be
underutilizing its marketing platform, and we expect the company to
improve its market share of the 134-billion Internet Advertising Market.
Marketers and advertisers can target individuals based on its professional
information, but also with the acquisition of Bizo the door begins to open
to B2B marketing with LinkedIn’s platform.
Sales Channels
LinkedIn has two kinds of sales channels for generating sales: First, an
offline direct sales channel, and second, an online self-service channel.
The first one targets both large and small enterprise customers inside and
outside of the United Sates of America. The US field sales organizations
are based in Chicago, New York and the San Francisco Bay Area, while
additional field sales offices are scattered around the World, with
$28,247
$31,908
$35,169
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
Jan-12 Jan-13 Jan-14
Average Revenues per Corporate Customer


10
presence in Europe, Asia, South America and the Middle East. As for the
latter, the company is able to generate revenue from both enterprise
customers and individual members who purchase solutions directly on its
website; which is accessible 24/7 and only requires Internet access.
[Sales of different products]
LinkedIn sells Talent Solutions and Marketing Solutions through both
channels, while Premium Subscriptions are primarily available through the
online channel.
For Talent Solutions, its field sales organization is divided between
account executives and relationship managers. The former is responsible
for developing new business and the latter mainly focuses on maintaining
the existing customers, and upselling additional solutions. Some specific
Talent Solutions products are sold through LinkedIn website as well, e.g.
some subscriptions and online job posting.
Regarding Marketing Solutions, the field sales organization targets
advertising agencies, large brand advertisers, and performance
advertisers who may be interested in using LinkedIn as a platform to
develop advertising campaigns geared towards professionals, and other
businesses. The company provides an automated, online, self-service
system for digital marketers and advertisers for them to launch, manage
and track their advertising campaigns on LinkedIn.
In terms of Premium Subscriptions, given that the target users usually are
either relatively small-size companies, professional organizations, or
individual members, sales primarily rely on the online channel, i.e.
purchases are made through LinkedIn’s website.
Table 1 Sales Channels by Segment (Source: Company Data)
Talent Solutions
Marketing
Solutions
Premium
Subscriptions
Field
Sales
Yes Yes No
Online
Sales
Yes, some
products
Yes, some
products
Yes


11
[Characteristics]
Since the offline direct sales channel gives sales personnel and
customers the chance to negotiate price and other aspects, this channel is
characterized by a longer sales cycle, higher relative average selling
prices and longer contract terms. However, it results in higher selling
costs and a longer cash collection cycle.
Comparatively, due to the convenience of managing an online account,
and the standardized price provided, the online channel is featured by
lower average selling prices and higher rate of cancellations, i.e. low
customer retention. Besides, the costs associated to this channel are
lower because of the automated payment platform, which also leads to a
highly liquid collection cycle.
Table 2 Summary of Characteristics per Channel (Source: Company Data)
Field Sales Online Sales
Sales Cycle Longer Shorter
Average Selling Price Higher Lower
Contract Terms Longer Shorter
Cancelation Rate Lower Higher
Cash Collection Cycle Longer Shorter
During fiscal year 2013, field sales contributed 58% of total revenue,
whereas online sales represented the remainder 42%.
Figure 4 FY 2013 Revenues Composition by Sales Channel and by Geography (Source: Company Data)
Field
Sales
58%
Online
Sales
42%
FY 2013 Revenues
United
Sates
62%Other
Americas
7%
EMEA
23%
APAC
8%
FY 2013 Revenues


12
[Monetization]
LinkedIn needs to continue to expand the monetization of its platform. The
company plans to continue to grow its field sales team in the US and
internationally. This is a key aspect for the firm to ensure long-term
growth.
Figure 5 Revenues by Channel and by Geography (Source: Company Data)
Competitive Position
The Internet/technology sector is characterized by fierce competition.
However, all players compete neither in exactly the same markets nor in
the same business units. LinkedIn is no exception; therefore there is no
other company that, so far, has a very similar business model. But this is
exactly what makes LinkedIn so unique.
[Competitive advantage in a glimpse]
• A platform that connects the labor force with employers by
leveraging professional networking
• Freemium model that allows users to connect with their
professional contacts, plus offers subscriptions to additional
services (LinkedIn Premium, Job Seeker)
• Offers subscriptions for different types of users for reach a 313-
million, and counting, user base (Talent Solutions, Sales
$-
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2011 2012 2013
Millions
Revenue by Sales Channels
Field Sales Online Sales
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
United
Sates
Other
Americas
EMEA APAC
Millions
Revenue by Geography
2011 2012 2013


13
Navigator, Sponsored Content). Recruiters have access to active
and passive candidates, and sales professionals can target and
manage leads
• Job board with recruiting tools
• Members are incentivized to have a relevant and veridical online
professional profile. This information has the potential for being
monetized
[Publicly Listed Competitors]
Table 3 List of Selected Public Companies That Compete in One or More Segments
Name Revenues
1
EBITDA
1 Enterprise
Value
1
Monthly
Active
Users
EV/S¹
EV/
EBITDA¹
P/E¹ SN
2
TS
3
MA
4
CM
5
LinkedIn 1.53B 0.18B 22.20B 84.2M 14.51x 121.98x 134.7x ✓ ✓ ✓ ✓
Monster 0.81B 0.12B 0.76B 74M 0.94x 6.35x 15.8x ✓ ✓
Facebook 7.87B 3.93B 174.50B 1,320M 22.17x 44.4x 62.1x ✓ ✓
Twitter 0.60B -0.53B 24.10B 241M 40.5x - - ✓ ✓
Google 59.83B 17.93B 329.50B 540M
6
5.51x 18.38x 25.2x ✓ ✓
Yahoo 4.70B 1.20B 34.20B 800M 7.28x 28.5x 26.7x ✓ ✓
AOL 2.32B 0.43B 3.20B 310M 1.38x 7.44x 22.4x ✓
Salesforce.com 4.08B 0.28B 34.10B N/A 8.36x 122.66x 155.6x ✓ ✓
Microsoft 86.83B 33.10B 287.40B N/A 3.31x 8.68x 16.1x ✓ ✓
Oracle 38.28B 17.89B 162.40B N/A 4.24x 9.08x 13.7x ✓ ✓
SAP 22.32B 8.01B 96.30B N/A 4.31x 12.02x 18.5x ✓ ✓
IBM 99.75B 24.30B 222.30B N/A 2.23x 9.15x 11.5x ✓ ✓
¹Source: FactSet.
2
SN: Social Networking.
3
TS: Talent Solutions.
4
A: Marketing & Advertising.
5
CM:
Customer Management.
6
Google+ MAU
In short, LinkedIn’s competitors can be grouped by category as shown in
the matrix below. It is noticeable how different the sizes, and type of
companies that compete against LinkedIn, however none of these is a
strong direct competitor.


14
Figure 6 Competition Matrix (Source: Team Estimates)
Social Network
• Facebook
• Twitter
• Yahoo
• Google
Talent Solutions
• Microsoft
• Oracle
• SAP
• IBM
• Monster
Marketing & Advertising
• Monster
• Facebook
• Twitter
• Google
• Yahoo
• AOL
• Salesforce.com
• Microsoft
Customer Management
• Salesforce.com
• Microsoft
• Oracle
• SAP
• IBM
From the list of competitors, we have identified Facebook, Twitter, and
Monster as LinkedIn’s closest competitors, or at least with the highest
potential for becoming dangerous competitors. Below we summarize
threats and weaknesses for each of them.
Facebook
• Threats Largest user base, which remains very active and
engaged. Facebook’s Career Page could be easily scaled up for
serving outside employers. Successful advertising and marketing
network.
• Weaknesses Mainly focused on personal rather than on
professional relationships.
Twitter
• Threats The newsfeed of the World. Innovative data analytics
processes could be developed for matching users with
employers.


15
• Weaknesses Difficult to achieve user engagement. Relatively
high number of fake accounts. Shared content varies along a
wide variety of topics.
Monster
• Threats Totally focused on connecting job seekers with
recruiters. Possibly more robust tools for candidate matches, or
more effective ways for job seekers to reach recruiters. A “social
network” feature could be in the works.
• Weaknesses Registered users have no incentive to remain
active once employed. Lacks from reliable networking tools.
As it was mentioned before, and it can be clearly seen from the data
above, LinkedIn does not have a publicly traded direct competitor.
However, in the Internet and mobile space, one’s success can easily be
modified to meet new needs. For example, LinkedIn in China has only 4
million members, i.e. only 0.5% penetration of the 800-million labor force,
but the local version of LinkedIn, Daije, has already 25+ million members.
LinkedIn has on its favor that the Chinese Government, unlike Facebook
and Twitter, has not banned it but this may not be necessarily the case
on a looking forward basis. In France, Viadeo has more than 16 millions
users, meaning that it could be a strong competitor for LinkedIn on a
looking forward basis, especially in Europe.
LinkedIn has a strong presence in the business environment, and among
the so-called white-collar workers; LinkedIn was called “The Facebook
for Business”. But its brand is not applicable to other professions;
software engineers might prefer to join stackoverflow.com, or medical
practitioners would prefer to subscribe to Doximity, the LinkedIn for
Doctors, instead of to LinkedIn. The list could go on and on. In today’s
startup environment LinkedIn has become a model-to-follow, and the
firm’s strongest competitors are not top-of-mind companies such as
Facebook, Twitter or Monster, but small startups that advertise
themselves as The LinkedIn for whatever profession you can think of.
[Level of Competition – Analysis]
The Internet sector is defined by the creativity of its participants, thus it is
difficult to see successful companies with very similar business models.
Competition is fierce and even established businesses come and go. We


16
analyze the competitive environment for LinkedIn using the SWOT
framework.
Figure 7 SWOT Matrixes - Level of Competition
Strengths
• A platform where recruiting, sales, and
advertising are made easier
• A public, online professional identity, yet
built with users’ privacy in mind
• Facilitates professional networking
• Comprehensive free services for users,
including connecting with other
professionals, and applying for jobs
• Unique internal messaging system
• Encourages users to publish own content, or
share information
Weaknesses
• Less than 30% of registered users are
monthly active users
• Creating a profile can be a lengthy process
• Built under the American networking
concept, which is certainly different from
other cultures
• Little incentives for passive candidates to
maintain an up-to-date profile
• Does not have differentiated services for
specific professional groups
Opportunities
• 3.54 B labor force1
, 300K+ public
companies2
, and 10M+ monthly job
postings3
worldwide
• Expansion of paid services by leveraging
user profile data
• 4% and 0.37% market share of global
recruiting and Internet advertising
respectively
• Internet, cloud, and mobile expansion
• Network effects have not been fully realized
• Additional services can be acquired or
developed through internal R&D
Threats
• Other social networks have the capability of
up scaling their online infrastructure to
compete for LinkedIn’s market, specially
Facebook
• User privacy, and data security are a
sensitive issue
• Inability to enhance user and customer
engagement with the platform
• Small startup can differentiate themselves
from LinkedIn by entering niche markets
with specific solutions
1
CIA: The World Factbook. 2
The World Bank: World Development
Indicators. 3
Company data.
Management
LinkedIn’s management team is conformed by highly trained and capable
professionals. We do not see reasons for being concerned about the
executive team on a forward-looking basis. The company has beaten its
quarterly guidance every time since becoming public in Q2 FY 2011. On


17
average, the company beats the quarterly guidance by 7.68%. We believe
this signals accounting conservatism from management’s perspective, but
also the management’s ability to constantly obtain better results.
Financials
[Highlights]
• LinkedIn measures its performance based on non-GAAP numbers,
and focuses its guidance on these
• Cash and marketable securities represent ~64% of total assets
• Major concentration of business is in USA. Although the member
base is increasing outside USA
• Mobile traffic topped 47% of total traffic on FY 2013
• Revenue from the subscribing members has been almost constant
at 20% of total revenues for last 3 years
• %YoY revenues growth rate has been decelerating, possibly
caused by the growing scale of the company
• There has been an important increase in working capital of the
company as well. A big portion of it are cash and marketable
securities
• The company has been growing in the international market and
expanding into developing markets
• Strong cash generation from operating activities
Figure 8 Revenues Growth Rate by Segment
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Growth Rate
Talent Solutions
Marketing
Solutions
Premium
Subscriptions


18
[Financial Analysis]
Profit Margins show different patterns. First, gross profit margin
remained at about 87% with up scaling sales, a positive sign. However,
SG&A costs have been on the rise for the past 3 years, and this is
impacting into the operating profits.
Tax Expenses reflect a high effective tax rate, higher than the corporate
35% rate. This fact has negatively impacted margins, and raises some
might be due to lack of options for availing tax benefits.
Research & Development has been about 26% for last two years. This
shows the interest of company in organic growth.
Foreign Exchange loses increased due to foreign exchange fluctuation,
showing growing activities outside the US.
Interest Income saw a steep increase in the interest increase this is due
to investment in marketable securities, which are mostly government
bonds and bills.
The Statement of Cash Flows reflects healthy cash from operations,
which seems to be sufficient for fulfilling the investment and financial
needs. LinkedIn has collected funds from issue of shares and invested in
marketable securities.
Stock-based compensation was about 194 million dollars. This is
diluting the interests of the equity shareholders.
Deferred Revenues seem to be growing at a slower rate than the growth
in revenues from the product, as the contract period of LinkedIn’s best
product Talent Solutions is only one year.
Investment Thesis
[Talent solutions]
Talent Solution is the largest segment for LinkedIn and accounts for
about 60% of total revenues. Today LinkedIn charges around $10,000
per user account to its customers. According to the data for Q2
FY2014 each customer has on average 3.5 user accounts. We believe
the company will be able to double this number, i.e. 8 seats per
customer, in the coming 5 years as companies will begin to use the


19
platform for its specialized hires instead of going through staffing
agencies or head hunters.
On the other hand, the firm is in a strong position to leverage pricing
power on its favor. We do not see in the coming 5 years a company
that will be able to replace LinkedIn as the top talent sourcing solution.
We expect the price per seat to increase to $13,000 per seat by 2018.
Figure 9 Projected Revenue Composition
[Marketing Solutions]
LinkedIn is starting to monetize the huge network of member base. As
the revenue generated by Marketing Solutions increased by 40%
comparing to 2012. Besides, as a social network website with a
freemium model, Marketing Solutions represented only 23.7% of the
total revenue generated by LinkedIn in 2013. This presents great
opportunity for LinkedIn to expand.
According to an independent study eMarketer, Internet Advertising
Market was worth $98.6 billion in 2013 and increasing. We believe the
company will be able to gain a market share of 1.25% by 2018, i.e.
almost tripling the current reading.
[Creating a B2B Platform]
As a professional network website, LinkedIn has great potential to
build connections and corporate relations between businesses. With
the acquisition of Bizo Inc. in July 2014 intending to create a
56.2%
69.8%
23.7%
19.6%
20.1% 10.6%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
FY 2011 FY 2012 FY 2013 FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E
Revenue Composition
% of sales talent solution % of sales Marketing solution
% of sales Premium subscription


20
comprehensive B2B marketing platform. This will enable marketers to
reach their target prospects.
B2B e-commerce global market was worth $1 trillion in 2012 and still
growing. This shows both a huge market and a large growth
opportunity available for LinkedIn. With new acquisitions LinkedIn is
preparing to earn market share of this global opportunity.
[International Expansion]
LinkedIn currently has 67% of US labor force as registered members,
i.e. 100 million members. LinkedIn is aggressively seeking
international expansion. Which led to a growth rate of 37% in total
number of registered members during 2013 compared to 2012.
Meanwhile, the growth in the US stood at 28% in 2013.The number of
members in other Americas, EMEA, APAC grew 46%, 43% and 39%,
respectively, which are the major force to enlarge its member base.
LinkedIn increased its international revenue by $233.6 million
representing 38% of total revenue in 2013. It is evident that US is still
the largest revenue source, but we believe the revenue will be
gradually diversified by the increase of international customers.
LinkedIn has an aggressive policy for increasing field sales
internationally. With acquisition of Bright Inc. job postings on LinkedIn
have increased from 300,000 to 1 million per month. There is still a
potential of increasing jobs postings, as we estimate that there are 10
million job postings per month.
[Profit Margins]
LinkedIn has been able to maintain its gross profit margin at 87%, with
revenues growing by 115%, 86% and 57% in 2011, 2012 and 2013
respectively. Net operating profit remained fairly constant at about 14%
in FY 2011 and FY 2012, and fell to 12% in FY 2013 due to an
increase in SG&A in an effort to boost international sales. We believe
that the company’s efforts for expansion will breakthrough by FY 2015
where we will see an important increase in EPS. We see EPS growing
by 52% in FY 2018.
SG&A expenses grew by 65% in FY 2013, representing 48.9% of
sales for the same period. We believe the company will be able to
bring this item gradually down to 30% of sales by FY 2018. This is
based on the assumption that the company will have a more efficient
sales force as its product gains more traction, especially in


21
international markets, which is expected for company the size as
LinkedIn.
[The company is investing in enhancing user engagement in both
PC and mobile]
To give customers better user experience and enhance user
engagement, LinkedIn is continuously increasing its product
development expenses. This expenses increased $138.5 million and
$125.0 million in 2013 and 2012 respectively. The increase was due to
the increase in headcount related expenses, and the increases in
facilities and web hosting service expenses.
LinkedIn is committed to becoming a leading professional publishing
platform by allowing users to publish their own content, and sharing it
through its online platform. We believe that this movement will help the
company to maintain the current retention rate of Premium customers
but this will not lead to an increase in this metric. We estimate that 1%
of total users have a premium account and the average revenue per
subscription is estimated as $110. We are confident that the average
revenue per subscription will reach $150 by FY 2018.
In FY 2013 38% of LinkedIn’s traffic came from mobile, LinkedIn’s
CEO Jeff Weiner projected 50% mobile traffic by 2014
(http://venturebeat.com/2013/10/23/linkedin-ceo-by-next-year-50-of-
our-traffic-will-be-mobile/). In addition, LinkedIn is pursuing a strategy
of “multi-app strategy”, which means it splits its core desktop service in
to a selection of specialized apps for mobile users.
[Products and services expansion]
Advertising
The global advertising market was worth $117 billion in 2013 and is
expected to increase for the next years. LinkedIn is a small player in
the market and it has launched a set of tools that will allow them to
expand its presence. If the social network taps 1% of this market they
would be able to double their revenues. Even as the Internet
advertising market is highly competitive, we believe that LinkedIn has
the potential to attract more marketers and increase its ads inventory.
LinkedIn’s member base will continue to grow and will become more
attractive for advertisers.


22
B2B E-Commerce
Another source of revenue growth is the B2B e-commerce. The global
B2B market was worth $1 trillion in 2012 and will grow through 2018.
Clearly a potential growth is available for LinkedIn. The acquisition of
Bizo in 2014 is in line with the B2B advertising strategy.
Figure 10 Members and Revenues by Geography (Source: Company Data)
Risks
[Competition]
LinkedIn currently faces a stiff competition and it is expected to grow in
future possibly affecting the firm’s market share. The recruiting and
professional networking industry is growing rapidly and becoming more
competitive due possible entrant players into the market. Other
companies with a large user base could up scale their services and
compete for LinkedIn’s market.
But also smaller companies have the ability develop competing
applications and/or services that could be easily accepted by the market
and may affect the operations and market share of the company. The
growing popularity of talent solutions and marketing solutions leads to an
increase in competition. LinkedIn may face a potentially dangerous
competition from Facebook as it is the most recognized social network in
the World, and they could use it as an advantage to develop a
professional network on top of the actual service. Associations of widely
popular companies like Google, Facebook and Microsoft with other
0
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United
Sates
Other
Americas
EMEA APAC
Millions
Members by Geographic
Region
2011 2012 2013
$0
$100
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$500
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$700
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$1,000
United
Sates
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EMEA APAC
Millions
Revenue by Geographic
Region
2011 2012 2013


23
companies to develop solutions for a professional network would harm the
business of the company. LinkedIn also faces competition from
international market from companies like Xing, Viadeo, Tianji, Daije that
are also gaining fast recognition as online professional networking
solutions.
[Lack of Engagement]
LinkedIn has only 27% of its total members who are actively using the
service as a medium to stay connected and the major part of page views
comes from the minority members. The business of LinkedIn is affected
due to lack of engagement and the company may not able to retain
members who actively use LinkedIn. A failure from LinkedIn to improve
user engagement and retain active members could severely impact our
forecasts.
[Mobile Platforms]
The trend is moving towards mobile, which now accounts for 45% of total
traffic, and is expected to constantly increase. However the current
experience has not received positive feedback from customers.
Continuous development in new platforms for mobile imposes a challenge
for the company and it becomes difficult to predict whether these efforts
will be successful or not. Dependence on platforms such as Android and
iOS, plus any subsequent change in system designs and terms could
adversely effect user engagement and monetization on the mobile
platforms. The failure to effectively improve and maintain a good user
experience could result in drawbacks for our projections.
Advertisement act as a source of revenue for the company but shift from
desktop using to mobile makes it difficult for LinkedIn to develop solutions
to advertise on mobile as the company has just invaded the advertising
business. This generates a huge risk for the advertising business as well
of the company. LinkedIn need to make the user experience more
engaging and develop solutions to market and advertise on the mobile
space by then it’s the most significant risk for the company.
There has been a constant increase in the jobs posting but there are no
entry levels jobs posting on the website which reflects mismatch in the
audience to the jobs available. LinkedIn has been highly used for jobs
search by recent graduates but there are very few options available,
which may result in, lose of existing users of the company. It signifies high
risk potential, which may reduce the existing user base of the company.


24
[Data security]
For all tech and web companies security is an important issue. Hackers
constantly try to beat security systems, and they are as smart as the ones
who create them. A security breach not only implies possible data theft,
but also may prove costly for brand image, possible lawsuits, and
moreover for the confidence that users will have on the company. In June
2012 hackers attacked LinkedIn and they published the passwords of 6.5
million users. It resulted in a class action against the company that cost $5
million dollars. Usually after a security incident a company will take all the
measures to make sure that it does not happen in the future. However,
technologies move so fast that LinkedIn faces the risk of experiencing a
new data breach, and the effects of the same would be very difficult to
predict.
[Cultural Differences in Networking]
Users on LinkedIn are attracted by its professional networking capabilities.
However, LinkedIn is an American company and was developed based on
the American “Networking culture” and the approach varies from country
to country. For example in China Dajie (the Chinese LinkedIn) has 24
million users whereas LinkedIn only has 4+ million. For example, Chinese
networking culture is very different from the American counterpart, as
people don’t get in touch with each other as easily as in the US because
there is a proper, and complicated, code of conduct to follow. Usually, a
proper introduction is required before getting in touch. This situation will
vary across countries and a failure from LinkedIn to market itself as a tool
suitable for every culture may negatively impact its international growth.
[Cash and cash equivalents]
Thanks to a stock issuance in September 2013 the company’s cash
position totalized $2.3 billion. This large amount of cash is whether sign or
an opportunity for the company to grow through acquisitions. It has to be
taken in account that external growth can be useful and faster than
internal development. However, acquisitions are risky processes,
especially during the integration process and not every company
succeeds in integrating the target company into their business. The
acquisition of Pulse in April 2013 was successful according to LinkedIn.
The risk for future acquisitions is latent, and it is not dissipated by past
successful acquisitions, but by due diligence from management.


25
[Pricing Strategy]
LinkedIn is global company and its products are open for everyone.
Nevertheless, not all companies can afford a $10K-per-year price tag. The
company may be to attract smaller customers by further segmenting its
customer base through a different set of subscriptions with a lower price
point. However, this strategy can cannibalize its current Talent Solution
sales, as new subscriptions can be more attractive for current customers,
and instead of bringing on board new clients, LinkedIn will be lowering its
revenues.
Valuation
[Member growth]
As of June 2014 LinkedIn had 313 million members. This number is
expected to grow rapidly we estimate a 25% annual growth rate. The
number of member registered on the social network will approximate 840
million by the end of 2018. This number will represent 25% of the global
labor force, which we see it as a possible goal in 5 years.
[Growth in Talent Solutions Fueled by Increased Number of
Customers]
Talent Solutions is LinkedIn’s most significant segment, we expect this
trend to continue. We expect the customer base to grow by 39.29% in
2014 and gradually slow down the increase to maintain a growth rate of
20% in 2017 and 2018, ending FY 2018 with customer base totaling
79,857.
[Seats per customer increase]
At the end of FY 2013 the average seats per customer totaled 3.5. We
consider that this average will grow rapidly in the coming 5 years to reach
8 seats per customer on average. This is supported in the fact that many
corporate customers are using LinkedIn as “try before you buy”. We
expect to see an increase in the number of seats from the current
customers, and to add more seats from new customers. This will have an
important upside potential for LinkedIn.
As of today, the average cost per seat is $10,000. We see that the
company will be able to raise this price by steps, as there is no real
competition against it, and may have some pricing power. We expect to
see an average cost rising to the mid-tens range; we use for our model a


26
price of $13,000 per seat on average. It must be highlighted that LinkedIn
increased the price from $8000 to $10,000 per seat without impacting the
number of customers in the past and we are confident that the company
will be able to do it again in the future.
Table 4 Talent Solutions Revenue Assumptions (Source: Genesis Estimates)
FY 2013 FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E
Seats per customer 3.5 4 6 6 7 8
Sales per seat $10,000 $11,000 $12,000 $13,000 $13,000 $13,000
Customers 24,500 34,127 44,365 53,238 61,224 70,407
Customer Growth Rate 39.29% 30.00% 20.00% 15.00% 15.00%
[Increase Penetration in Internet Advertising Market]
Marketing Solutions is the other segment where we believe LinkedIn will
be able to gain more traction. We estimate the global Internet advertising
market will be worth $134 billion by 2014. Currently LinkedIn is making the
effort to attract more marketers to its platform, however it still needs to
further grow its user base, especially to increase the monthly active users
metric. This will ensure that when companies advertise on LinkedIn they
would be reaching out to bigger audience, on a very targeted basis. As
per FY 2013 year-end, LinkedIn only had 0.37% of the total global market.
With the introduction of new products and the efforts to grow and engage
the member base, we see LinkedIn capturing a market share of 1.25% by
the end of FY 2018.
[Efficient Cost Structure]
We strongly believe that the current cost structure is only a momentary
situation, and that LinkedIn will be able to achieve a more effective cost
structure in the future. Gross operating margin is expected to remain at
87%. SG&A and R&D expenses are projected to gradually decrease to
meet 30% and 15% of sales by FY 2018. We believe that depreciation
and amortization will slightly increase to 10% of sales by FY 2018.
[Other Non-Operating Income or Expenses]
We expect the company to be able to achieve an effective tax rate of at
least 35%, which is the corporate tax in the US. We do not see LinkedIn
incurring in any interest expenses, as we do not think the company will
use any debt through FY 2018.


27
Price Target
[294% Upside Potential]
We valued the company on a relative basis using P/S and P/E ratio, and
our target price is the average of the two. We have estimated a 5-year
forward target price of $608.
Table 5 Genesis Valuation
P/E
2018E EPS $20.28
P/E Multiple 30
Price per share $608
Shares Out. (M) 122
Target Price $608
With a closing price of $206.76 on August 7, 2014 we see an upside
potential of 294% by the end of 2018. This is implies a compounded
annual return of 27.76%.
Consensus Expectations
The market consensus is that LinkedIn will outperform the market in the 2-
year period ahead. Our expectations are above market expectation. It
must be noticed that our investment horizon is 5 years, whereas the
majority of analysts have a 1 or 2-year horizon. Consensus expectations
through FY 2016E were obtained from FactSet.
Table 6 Consensus Expectations and Genesis Estimates
LinkedIn (LNKD) FY 2012 FY 2013 FY 2014E FY 2015E FY 2016E
Sales (million)
Estimation $ 972 $ 1,529 $ 2,376 $ 3,923 $ 6,300
Consensus $ 2,177 $ 2,905 $ 3,744
Non-GAAP EPS
Estimation $ 0.93 $ 1.69 $ 1.77 $ 2.51 $ 6.38
Consensus $ (0.40) $ 0.39 $ 2.12
Sensitivity Analysis
We believe that a 30x P/E multiple implies a fair valuation of LinkedIn
by FY 2018. We estimate that EPS will grow at 52% from FY 2017 to
FY 2018. The current average for other Internet companies is 28x P/E,
and these are more mature companies than LinkedIn. We are confident


28
that LNKD will be able to achieve our projected growth numbers, but
we also understand that the company will be more mature by FY2018,
thus its fair valuation cannot be above 50x P/E. We support our 30x
P/E multiple valuation in a conservative approach considering LinkedIn’
growth, its maturity stage and other Internet companies’ valuation.
P/E multiple and projected EPS have a positive correlation with price,
and number of shares outstanding has a negative correlation.
Figure 11 Sensitivity Analysis Graphs
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Price Vs. FY 2018E EPS
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Price Vs. Number of Shares
Outstanding


29
Appendix A - Valuation
[Projected Income Statement]
FY 2013 FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E
Revenue $1,530.00 $2,374.69 $3,921.40 $6,298.41 $9,253.68 $11,893.78
Cost of Revenue 202.91 308.71 509.78 818.79 1,202.98 1,546.19
Gross Operating Profit 1,330.00 2,065.98 3,411.62 5,479.61 8,050.70 10,347.59
Selling, General, and Administrative Expenses 747.67 1,160.51 1,764.63 2,519.36 3,238.79 3,568.13
Research & Development 395.64 569.92 784.28 1,133.71 1,388.05 1,784.07
Operating Income before D & A (EBITDA) 182.33 335.54 862.71 1,826.54 3,423.86 4,995.39
Depreciation & Amortization 134.52 213.72 392.14 629.84 925.37 1,189.38
Interest Income 2.90 - - - - -
Other Income - Net -1.48 - - - - -
Special Income / Charges - - - - - -
Total Income Before Interest Expenses (EBIT) 49.23 $121.82 $470.57 $1,196.70 $2,498.49 $3,806.01
Interest Expense - -
Pre-Tax Income 49.23 121.82 470.57 1,196.70 2,498.49 3,806.01
Income Taxes 22.46 42.64 164.70 418.84 874.47 1,332.10
Minority Interest - - - - - -
Net Income From Continuing Operations 26.77 79.18 305.87 777.85 1,624.02 2,473.91
Net Income From Discontinued Operations -
Total Net Income $26.77 $79.18 $305.87 $777.85 $1,624.02 $2,473.91
Add Back: Amortization of Intangible Assets 16.40 24.07 - - - -
Add Back: Non-controlling interest - 0.45 - - - -
Add Back: Stock-based compensation 193.92 171.12 - - - -
Income tax adjustments -45.20 -59.48 - - - -
Non-GAAP Net Income $191.92 $215.38 $305.87 $777.85 $1,624.02 $2,473.91
Non-GAAP EPS 1.69 1.77 2.51 6.38 13.31 20.28
Basic Weighted Shares Outstanding 113.64 122.00 122.00 122.00 122.00 122.00
Diluted Weighted Shares Outstanding 118.94 127.30 127.30 127.30 127.30 127.30
In Millions Except Per Share Data


30
[Revenue Growth and Assumptions]
FY 2011 FY 2012 FY 2013 FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E
Sales $522 $972 $1,529 $2,375 $3,921 $6,298 $9,254 $11,894
Talent Solutions $261 $524 $860 $1,502 $2,662 $4,326 $6,488 $8,305
Marketing Solutions $156 $258 $362 $496 $745 $1,223 $1,760 $2,333
Premium Subscriptions $105 $190 $307 $377 $515 $750 $1,005 $1,256
Registered Users 145M 202M 276M 343M 429M 536M 670M 837M
Non-GAAP EPS $0.48 $0.95 $1.69 $1.77 $2.51 $6.38 $13.31 $20.28
Assumptions FY 2013 FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E
Seats per customer 3.5 4 5 6 7.5 8
Sales per seat $10,000 $11,000 $12,000 $13,000 $13,000 $13,000
Customers 24,500 34,127 44,365 55,456 66,548 79,857
Customer Growth Rate 39.29% 30.00% 25.00% 20.00% 20.00%
TAM Marketing Solutions (M) $98,600 $134,000 $149,000 $163,000 $176,040 $186,602
TAM Marketing Solutions Growth 36% 11% 9% 8% 6%
Marketing Solutions Market Share 0.37% 0.3700% 0.5000% 0.7500% 1.0000% 1.2500%
Registered Users Growth 24.3% 25% 25% 25% 25%
Average Revenue per Subscription $110 $120 $140 $150 $150
% of Subscribed Members 1% 1% 1% 1% 1%


31
[Vertical Analysis]
FY 2012 FY 2013 FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E
Revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Revenue 12.91% 13.26% 13.00% 13.00% 13.00% 13.00% 13.00%
Gross Operating Profit 87.09% 86.93%
Selling, General, and Administrative Expenses 46.58% 48.87% 48.87% 45.00% 40.00% 35.00% 30.00%
Research & Development 26.45% 25.86% 24.00% 20.00% 18.00% 15.00% 15.00%
EBITDA 14.06% 11.92%
Depreciation & Amortization 8.21% 8.79% 9.00% 10.00% 10.00% 10.00% 10.00%
Interest Income 0.00% 0.19% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Income - Net 0.03% -0.10% 0.00% 0.00% 0.00% 0.00% 0.00%
Special Income / Charges 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
EBIT 5.87% 3.22%
Interest Expense 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Pre-Tax Income 5.87% 3.22%
Income Taxes 3.65% 1.47% 35.00% 35.00% 35.00% 35.00% 35.00%
Minority Interest 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Net Income From Continuing Operations 2.22% 1.75%
Total Net Income 2.22% 1.75%

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