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:LNKD   00:00AM GMT
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What We Must Know About LinkedIn Going into Earnings



The most important thing to know about LinkedIn's (LNKD) earnings release (which is today after the close) is how it has successfully differentiated itself from the Faceboook (FB), Twitter (TWTR) and Google (GOOGL) and the rest of the Global Social Media realm (SOCL). In fact, two of the three revenue streams for the company are totally outisde of other social media companies' reach and non-advertising based. We'll discuss those revenue drivers in detail, below.

At the same time, with over 360 million users and a substantial international presence, the company also benefits from actually being in the social space, even if it's on the fringes. It's quite the perfect storm the company has created for itself.

Of course, since LNKD does exist outside the mainstream of social media, that also means it may not benefit from the overwhelming growth in the segment as a whole. We saw that reality in last quarter's debacle of an earnings release, where the quarterly numbers were just fine, but forecasts were taken massively (massively) down.

LinkedIN (LNKD) last reported earnings on April 30th after the close and the stock reaction was a rather abrupt collapse, with the stock falling nearly 20% the next day. The company reported better than expected revenue of $638 million versus $636 million estimates, but the most important number of them all is forecasts, and those fell short (a lot). LNKD estimated this quarter's revenue to be in the $670M - $675M range, way below the consensus estimates of nearly $720 million. That report marked a first for the company -- a revenue miss. The EPS forecast was also brought down to $0.28 from consensus estimates of $0.74. I will note later that those forecasts from LNKD in have been raised by Wall St. in terms of expectations.

The silver lining (if there was one) to the lowered forecasts was that it surrounded a deeper investment by the firm into R&D and ambitious spending to grow its sales force. Further, costs associated with integrating, currency exchange rates and finally advertising rate drops in Europe did the company in.

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LinkedIn falls into the social media category, but it does offer a different and compelling use case for the space. While Twitter battles to show advertisers a value proposition that is differentiated from Facebook and Google, LNKD has clearly set itself apart. It has become the de-facto business card for individuals and the de-facto job search platform. We could just as easily call its competitor Monster Worldwide (MWW). We'll dive deeper into this in the body of this article, but LNKD makes money in three different ways and two of them are totally separate from the world of Google and Facebook; the two-headed behemoth that own nearly 90% of on-line advertising. That is very compelling and very differentiated.

One breathtaking image that illustrates LNKD's differentiation from the rest of essentially all of technology is through gross margin %. Below we have included all technology companies above $25 billion in market cap, equal space the x-axis (rank) and plotted gross margin % on the y-axis.

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We can see that other than Priceline (PCLN), LinkedIn has the largest gross margin %, even better than Facebook (FB).

Interestingly, LinkedIn is the least "liked" social media company, presumably because people expect more out of a professional based service than they do from one that's more personal. Here are the rankings (Source: MarketWatch.

LNKD's revenue (TTM) has risen for every quarter since its been public, making eighteen consecutive quarters (that's the annual number, not the quarterly number). While earnings are negative and falling huge, free cash flow has steadied and is now positive. There's no doubt that the fundamentals look weak, but the growth story is compelling. And, in comparison to Twitter, which is showing essentially no growth, LNKD looks quite strong.

Earnings Estimates

Revenue: The consensus estimates for revenue range between [$662M, $694M], with the average coming in at $680. Keep in mind, LNKD forecasted revenue between $670-$675 million, but the firm has a history of guiding low and then beating its own guidance.

EPS: The consensus estimates for EPS range between [$0.24 $0.51], with the average coming in at $0.30. Again, keep in mind, LNKD forecasted EPS of $0.28 for the quarter when it lowered its guidance on the prior earnings call.

Technicals   |   Support: 218.54   |   Resistance: 231.05   

Death Cross Alert:
The 50-day MA is now below the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

LNKD has a three bull (middle of the road rated) technical rating because its trading above its 10- and 50-day moving averages, but below its 200- day moving average and the stock is down on the day.

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 2,383 1,677 1,109

Operating Margin (QTR) 0.974 1.00 1.08 FALLING

Net Income (TTM US$ Millions) -45 -9 39

Levered Free Cash Flow (TTM US$ Millions) 92 28 123 RISING

Research and Development (US$ Millions) 166 121 81

Research and Development Expense/Revenue 0.260 0.255 0.248 RISING

Stock Returns and Chart

LNKD is down -11.7% over the last three months and up +1.8% over the last six months. The stock price is up +26.4% over the last year. Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom). The chart shows us a stock that is range bound right now. Of course, earnings events can break all ranges.

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Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 2,3831,6771,109

Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (eighteen in this case). LNKD is growing revenue by 42% year-over-year and 115% over the last two-years. That's huge. Any number over 20% for a one-year change has an added impact on the fundamental (star) rating.

One thing to note before we look to the chart is that for the first time ever, LNKD showed a quarterly decline in revenue, but oddly that was known well ahead of time and had nothing to do with the stock drop. It was the guidance that killed the stock.

So how does LNKD make money?
This is the beautiful part. LinkedIn makes money in essentially three ways: (1) Recruitment services (sold to both professional recruiters and employers) (2) Advertising (3) Premium subscriptions. This is beautiful because items (1) and (3) are totally different from all other social media. Other than on the fringes, LNKD doesn't have to deal with Google and Facebook, the two companies eating Twitter's lunch. It's also beautiful because there is now pricing pressure for on-line advertising, something is critical to Google (GOOGL), Facebook (FB), Yahoo (YHOO) and Twitter (TWTR). While it's certainly an issue for LNKD, it is not the end-all-be-all focus for this firm.

What do all these numbers mean?
LNKD's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Net Income (TTM US$ Millions) -45-939

For the bulls, this is going to be a tough section to read and is also where I disagree rather vehemently with some reports that claim LNKD has the best fundamentals of all social media stocks. That's just absurd. Facebook has the strongest fundamentals and any argument to the contrary is simply in error.

Net Income (after tax profit) over the trailing twelve months (TTM) for LNKD is falling and is now a loss of $45 million. In fact, net income (TTM) (aka annual earnings) is trending lower meaning that annual earnings have decreased for at least five consecutive quarters (eight in this case). Even further, the $45 million annual loss is essentially all due to last quarter's result of -$42 million. It gets worse, yet if we include the EPS guidance that was taken down from $0.74 to $0.28 for this quarter.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. It's pretty hard to miss that ugly line going straight down.

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Levered Free Cash Flow (TTM US$ Millions) 9228123RISING

Levered Free Cash Flow (FCF) (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For LNKD the metric is up 233% year-over-year. The company has recovered from a string of negative FCF numbers and does seem to have this critical measure back under control. We note that this cash metric is down from two-years ago.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time.

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Research and Development (US$ Millions) 16612181

This is a pretty cool measure for LinkedIn. Research and Development (R&D) (US$ Millions) is trending higher meaning that for at least five consecutive quarters, it's been rising. In fact, it has risen for 23 consecutive quarters, each time to a new all-time high. R&D is up 37% year-over-year and 105% over the last two-years. The company has places to invest, and that means places to grow. Let us recall that the disastrous guidance from last quarter surrounded, in large part, investment in R&D.

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and R&D per dollar of revenue in the gold line.

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LinkedIn finds itself growing revenue in multiple ways outside of any social media or advertising giant's reach. At the same time, with over 360 million users and a substantial international presence, the company also benefits from actually being in the social space, even if it's on the fringes. It's quite the perfect storm the company has created for itself.

The bullish thesis for LNKD lies in the reality the firm lives in a differentiated social sphere that it has created around jobs, employment and training is unique, sustainable ways that have room for yet more growth.

The bearish thesis is the reality of the company today, which includes collapsing earnings, falling operating margins and falling forecasts.