What Does The Tepid LinkedIn Q1 2015 Estimates Convey To Shareholders?

  • LinkedIn management provides conservative guidance for Q1 2015.
  • Growth can be seen in all the segments.
  • The entry of Facebook and Twitter in the professional networking space worries LinkedIn.
  • LinkedIn is spending a lot of money to accelerate growth, which is a great goal.
linkedin

LinkedIn (NYSE:LNKD) reported blowout Q4 earnings in which revenue rose 44% to $643.4 million, and earnings came in at $0.12 per share, all above a year ago and the consensus estimate numbers. However, the company went on to provide what appears to be a lukewarm forecast for Q1 2015 stating reduced SKUs, de-emphasized email marketing efforts and typical seasonal blip amongst the contributors to the same. However, the company believes that these efforts would lead to increased “lifetime value per subscriber” and would boost net revenue in the long-term.

The development has caused uncertainties among investors, but does it mean LinkedIn’s best moments are over?

The professional networking company guided Q1 revenue in the range of $618-$622 million, below the consensus estimate of $645 million. While LinkedIn has previously provided more ambitious forecasts, something interesting happened in the last quarter – Linkedin Q4 2014 earnings. The company not only guided revenue below the consensus estimate, but also its forecast which was in sharp contrast to its typically solid performance.

Here's what LinkedIn's management had to say in LinkedIn's earnings call:

First quarter guidance includes the following impacts. We expect approximately $20 million related to Marketing Solutions, as the integration and training of our sales force will push revenue to future quarters. $4 million of this impact also relates to shutting down the Bizo data product. We expect approximately $5 million related to changes in premium subscriptions, slightly more than Q4 given higher seasonality in signups. And finally, we expect approximately $10 million in impact related to the headwind from foreign exchange rate volatility.

LinkedIn's guidance has typically been conservative in the past, with revenues overshooting its guidance by 5% on an average over the last 8 quarters. However, LinkedIn's revenue guidance for Q1 2015 indicates a sequential drop in revenue, a first for the professional networking site.

The company seems to have chosen a conservative approach whereby it under promises and over delivers. That is why the tepid Q1 forecast should not be taken to mean that things have started falling apart for LinkedIn, but the company is allowing itself flexibility.

Spending Money To Generate Growth

LinkedIn enjoys a comfortable lead in the professional networking field. The company has shown steady growth in the recent past, and its expansion abroad is also quickly gaining traction. Startup acquisitions and launch of apps for iPhones and Android-based smartphones have also helped the company to grow its mobile popularity. The bottom line is that LinkedIn is interested in expanding and diversifying its revenue sources which means it will be spending a lot of money. LinkedIn’s total spending in 2014 was 50% more than in the previous year. The company spent about $2.2 billion last year, but spending is not slowing down anytime soon.

However, it is important to remember that as the company increases spending to expand and diversify revenue streams, there will be some impact on its profitability in the short run. The good news is that the huge spending that the company is making will lead to more users, better engagement and higher revenue in the long run.

Key Concerns For LinkedIn

LinkedIn is certainly on the right path to the future, shuttering estimates along the way. However, investors should be aware of certain issues that could slow down the company's growth.

Competition is one of the few major issues currently facing LinkedIn. While the company enjoys a comfortable lead in the professional niche, Facebook and Twitter are not giving it enough breathing space. The two social media companies have also shown interest in the professional market as they seek to reboot their tapering growth. The entry of the two competitors into the professional networking field could put more pressure on LinkedIn, leading the company to spend more on brand promotion thereby trimming its profits. LinkedIn could also face intense revenue competition.

Facebook is testing a feature known as Facebook at Work, which aims to give organizations to have more efficient internal communications. (Also See: Facebook presents an attractive investment opportunity, watch Facebook stock analysis)

The other areas of concern for LinkedIn that investors should know about is that as the company expands internationally, revenue from abroad is not growing as fast as the number of the international members. In Q4, the company reported that nearly 70% of its users are outside the U.S. However, international revenue accounted for only 40% of the total revenue during the same period. International revenue rose by a tad 1% from the year-ago period. The priority here for LinkedIn is to monetize its international user base.

lnkd quarterly revnuelnkd of net revenue

LinkedIn Mobile Traffic

LinkedIn is transitioning to mobile at the same time it is expanding abroad. The company said 48.3% of its Q4 traffic was mobile. The average unique visitors to the site during the fourth quarter were 93 million. Out of that number, mobile unique visitors were 45 million, up 45.1% from the comparable quarter a year earlier.

lnkd quarterly unique visitors

The company finished Q4 with 347 million registered users, representing an increase of 25.3% over the same period a year ago. LinkedIn made significant membership gains in China where user numbers doubled to about 8 million. The strong penetration of Linkedin in China was driven by the launch of localized version of LinkedIn.

Acquisitions Could Drive LinkedIn Growth

LinkedIn has been pushing out new features and making strategic acquisitions to expand and diversify its revenue streams. The company’s acquisitions of Bizo and Newsle have the potential to impact its performance positively in the long haul. Bizo is a business marketing service that LinKedIn acquired for $175 million last July. LinkedIn plans to roll out a slate of new B2B solutions around Bizo to improve its advertising revenue. In Q4, LinkedIn's advertising revenue came in at $153 million, up 56% from a year earlier. Bizo contributed $16 million during the quarter.

On the other hand, Newsle is a news alert service. The technology notifies about news items that mention the people that a user may be interested in. Newsle is a powerful tool for LinkedIn to track users even when they are outside its platform.

These acquisitions will allow LinkedIn to improve user experience and also attract additional dollars through targeted marketing.

Bottom Line

LinkedIn is an amazing networking company that has continued to beat estimates by significant margins. The company’s popularity abroad and expansion on mobile are laudable. The issue that the company is spending a lot of money currently may raise a few short-term concerns, but it is important to remember that LinkedIn is building for the future. LinkedIn finished Q4 with $460.9 million in cash and equivalents, which should eliminate cash shortage concerns.

However, for LinkedIn to continue posting solid results, the company needs to continue improving its product offering to attract more users and enhance user-engagement.

To know about Linkedin watch our LinkedIn stock analysis.

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