- Talent Solutions revenue may be affected yet again due to a weakening global job environment.
- LinkedIn has some pretty stiff competition in its sponsored updates and advertising categories.
- User ad revenue growth will be the primary metrics that the street will go by for the LinkedIn's Q2 earnings.
LinkedIn (NYSE:LNKD) is set to announce its second quarter earnings on the 4th of August where the average EPS estimate is $0.78 on revenues of $888 million. With the Microsoft deal now firmly in the rear view mirror (should go through at the end of the year), LinkedIn has to hit its numbers, because even when it is finally taken over by Microsoft, it will continue to be run as an independent company. User growth and engagement will be watched. Revenue is expected to grow by 24% this year and a further 19% next year and these gains will be primarily on the back of more income from its "Talent Solutions", "Marketing Solutions" & "Premium Subscriptions" income streams. It is imperative that LinkedIn nails its top line guidance going forward as we have already seen how weaker than anticipated guidance can tank the stock (as it did last February - see chart). The company reported 433 million members at the end of Q1 and 106 million monthly users. The latter is the one we look at for engagement levels. Wall Street will be looking for a nice lift in this metric. Remember, as with all social media companies, Wall Street will need to see meaningful user growth to keep on valuing the stock higher. Can LinkedIn pull it off for Q2?
Talent Solutions Revenue Is Key
Firstly it's obvious that user growth has slowed at LinkedIn but this has probably got more to do with saturation levels in the US (presently 130 million) than anything else. India is the company's second biggest market and China has been growing well lately. However, investors will be tuning in to see if global macro headwinds will negatively affect LinkedIn's biggest cash cow - Talent Solutions. This division brings in well over 60% of the company's top line and will be crucial to the company's second quarter earnings.
One of the reasons why LinkedIn is doubling down on its initiatives to bring more users online is because Talent Solutions revenue has been falling off significantly - especially in international markets. This is definitely a concern going forward because if global job demand weakens, LinkedIn's overall growth in this segment could definitely be hampered. The company has tried to respond by introducing new functionality to make it easier for employers and recruiters to find people, but the jury is out there on whether these changes will work long term.
The "Marketing Solutions" segment which brought in 18% of the company's top line in the first quarter is also declining, which is a worry. Now this segment is all about engagement levels and traffic, so the street will definitely be tuning in to this side of the business to ascertain how "sticky" the site currently is. The company's focus on sponsored content means that competition will be elevated in this segment from the likes of Facebook (NSDQ:FB) and Google. However LinkedIn is undoubtedly a perfect match for many brands looking to get their message out. One would feel that Microsoft will definitely be able to help in this area, but until the deal goes through, LinkedIn will be expected to keep this segment growing.
LinkedIn Needs To Convince The Market That It Can Operate On Its Own
Thirdly, in the unlikely event that the Microsoft deal doesn't go through at the end of the year, LinkedIn investors will want to be assured that the company can stand on its own going forward and more importantly at its current share price. Shareholders will remember that LinkedIn's share price spiked by $60 a share when the news broke of the Microsoft takeover. Therefore, excluding Microsoft, what is the real value of LinkedIn? Is the company currently worth over $25 billion in market cap? Could it forge a solid future alone if the need be? The answer lies in the data and more importantly the value of the data but this may be the company's conundrum.
Users Need To Interact More
You see, you will be aware of the emails you get from LinkedIn such as "congratulate this person" or "find out who has been looking at your profile", etc. The sole purpose of these emails is to improve engagement and traffic on the site, but here's the problem. The vast majority of users on the platform are employees who have their profiles well scripted to attract potential employers. Now the interaction or engagement between employees is basically zero as there is no strategic advantage in conversing with employees of other companies. Facebook gets people interacting through friends and family engagement but LinkedIn struggles in this area. In saying this, LinkedIn has the potential to make its platform extremely engaged due to the high levels of data its platforms contains. The question is - can it make it happen?
To sum up, investors and shareholders alike will be looking for user growth, margins and revenue growth from the company's third quarter earnings. Guidance will be crucial despite the company's share price being temporarily protected from the pending Microsoft deal. Can LinkedIn turn around its earnings and revenue growth issues? All will be revealed on the 4th of August