Linkedin Corporation (LNKD)Q42012 Earnings Call

February 7, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to LinkedIn fourth quarter 2012 earningsconference call. At this time, all participants are in listen-only mode. Later, we will conduct aquestion-and-answer session and instructions will be given at that time. (OperatorInstructions) As a reminder, this conference call is being recorded.

I would now like to hand the conference over to Mr. Matt Sonefeldt, Head of InvestorRelations. Sir, you may begin.

Matt Sonefeldt - Head of Investor Relations

Good afternoon. Welcome to LinkedIn's fourth quarter 2012 earnings call. Joining me todayare CEO, Jeff Weiner and CFO, Steve Sordello.

Before we begin, I would like to remind you that during the course of this conference call,management will make forward-looking statements which are subject to various risks anduncertainties. These include statements relating to expected member growth andengagement, our product offerings including mobile; results of our R&D efforts, including theacceleration of our product deployment process; revenue, including revenue growth rate,adjusted EBITDA, depreciation and amortization, stock-based compensation, share dilution,taxes, the product mix between online and field sales, churn rate and expenses.

Actual results may differ materially from the results predicted and reported results should not

be considered as an indication of future performance. A discussion of risks and uncertaintiesrelated to our business is contained in our filings with the Securities and ExchangeCommission, in particular, the section entitled Risk Factors in our quarterly and annualreports, and we refer you to these filings.

Also, I would like to remind you that during the course of this conference call we may discusssome non-GAAP measures in talking about the company's performance. Reconciliations to themost directly comparable GAAP financial measures are provided in the tables in the pressrelease. This conference call is also being broadcast on the Internet and is available throughthe Investor Relations section of the LinkedIn website.

With that, I will turn the call over to our CEO, Jeff Weiner.

Jeff Weiner

Thank you, Matt, and welcome to today's conference call. I will start by summarizing theoperating results for the fourth quarter and full-year, and I will recap some of the highlightsand key milestones since our last call and for 2012. I will then turn it over to Steve for amore detailed look at the numbers and outlook.

2012 was a transformative year for LinkedIn. We exited 2011 having successfully revampedour underlying development infrastructure. Based on that investment, we said that 2012would be a year of accelerated product innovation, and it was. The products we deliveredthroughout the year drove member engagement and financial results to record levels in thefourth quarter.

For Q4, overall revenues grew 81% to a record $304 million. We delivered adjusted EBITDA of$79 million translating to non-GAAP EPS of $0.35. For the full year of 2012 revenues were arecord $972 million up 86% and we delivered adjusted EBITDA of $223 millions or a non-GAAPEPS of $0.89.

At the end of the fourth quarter cumulative membership grew 39% year-over-year and inDecember we passed the 200 million member milestone and in the year with nearly 202 millionmembers. We continue to add approximately two member sign ups per second. With regard toengagement as measured by comScore, LinkedIn averaged to 155 million unique visitors in Q4when including SlideShare. And in December, we were in 25th most visited web property inthe world. When excluding SlideShare, we averaged 116 million monthly unique visitors duringQ4, growing 26% year-over-year. Additionally, we generated 9.8 billion pages excludingmobile growing 28% year-over-year.

Our internal engagement metrics, which include mobile also showed strong growth. Overallunique visiting members grew approximately 29% year-over-year versus 22% in Q3. Moreimportantly, member page views grew approximately 67% in Q4, our highest page viewgrowth quarter in 2012.

Our internal unique visitor in page view metrics showed accelerating year-over-year growthin Q4, indicating that members are becoming increasingly active on LinkedIn. One year ago,we undertook project InVersion in effort to re-architect our software in development

process. Our success enable us to materially accelerate the speed with which we release thenew products from once every two weeks for the entire site to as much as twice per day foreach individual product.

Our product innovation strategy has been built around themes of simplify, grow and everyday. Over the last four months of 2012, we introduced more new products than during anyother similar timeframe in the company's history. These new products had significant impacton our members' engagement with the platform.

Simplify is all about making it easier for our members to unlock value from the core productsand services we offer. In July, we redesigned our homepage to enable our members todiscover, share and discuss the professional information that is most relevant to them.

Homepage page views are now up nearly 70% since the introduction while status updatesand social gestures, such as sharing, liking and commenting are at all-time highs. Also in July,we made it simpler for members to access professional content on the platform with deeperintegration of LinkedIn Today into the homepage. Since that upgrade, traffic to third-partypublishers is up nearly 60%. In addition, we made it easier for SlideShare users to seamlesslypost their presentations to their LinkedIn accounts. Even prior to this integration, SlideSharewas already seeing record traffic reaching over 47 million unique users in Q4, representing68% growth versus 2011.

In the fall, we introduced the new version of LinkedIn profile, the professional profile ofrecord. The new profile makes it easier for members to build their professional brands,discover new people and opportunities and engage with their networks.

In the fourth quarter on average, the number of members updating their profiles doubledversus Q4 2011. Grow is about to priorities, expanding our global membership and expandingour monetization efforts in ways that benefit both, members and customers.

Product localization continues to be a strong driver of member growth. In 2012, we addedfive new languages brining total to 19. More than 64% of all LinkedIn members now comefrom international markets.

In March, we introduced the new version of People You May Know, we saw memberinvitations increased 80% from 2011 to 2012 leading to an increase in connection density orthe average number of connections per member. This is important as more connections leadto more relevant and fresh content and members feed, thus driving greater engagement.

Regarding monetization in talent solutions, 2012 was marked by new products, design addvalue to our corporate customers across all aspects of talent acquisition. For example, ourlarger customers are more deeply integrated talent pipeline into existing recruiting workflows.Jobs On Mobile is also gaining increasing traction. Introduced just six months ago, nearly 20%of job views and nearly 30% of job viewers now come from mobile devices. Finally, we arefocused on growing international value of the recruiter platform. Already available in French,we are now rolling out recruiter in German and Portuguese, allowing us to better serve muchof Europe and Brazil.

Within Marketing Solutions, in 2012, we introduced the number of new products thatstrengthened LinkedIn's position as the most effective place for companies to engage withprofessionals. We completely redesigned company pages, introduced targeted status updatesand released new analytics and APIs and the number of status updates posted by companiesto their followers increased more than seven times in 2012.

Last month, we introduced rich media sharing on these pages, leveraging SlideShare as acontent host. Additionally companies like Citi, STAPLES and Capital One are using LinkedInmanaged groups to engage their audiences with compelling professional content. Citi'smanaged group now has more than 100,000 members. Finally, for the past two months, wehave been internally testing the ability for companies to promote sponsored content in thestream of updates that appears on our members' homepages.

Last week, we began external next testing with a handful of partners in both the desktopand the iPad streams. So based on how these tests evolve, we anticipate expanding thisoffering to smartphone devices as well. Within premium subscriptions, 2012 saw an emphasison creating value for specific verticals including outbound sales professionals. Our salessolutions, which include sales navigator are still nascent, but represent our fastest-growingpremium subscription products. Our third product theme is delivering value to our membersevery day by helping them build out their professional identities and gain valuable insights.

For example, endorsements allow members to easily recognize the skills of their colleagues. Injust over four months since the launch of the service our members have generated nearly 1billion endorsements. Additionally, in the fall we introduced LinkedIn influencers, furthering ourefforts to develop LinkedIn as a professional publishing platform. Richard Branson, the mostpopular influencer has surpassed 1.3 million followers and we have already seen a LinkedIninfluencer post generate over 1 million views. The success of the influencer program hashelped drive an eightfold increase in traffic to LinkedIn today content over the last year.

Mobile products are also central to delivering value everyday and remains our fastest growingconsumer service. In Q4, we averaged 27% of unique visiting members coming through mobileapps versus just 15% a year ago. The value we create for members allows us to deliveruseful offerings to customers in our account solutions, marketing solutions and premiumsubscriptions products. In Q4, these three diverse revenue streams all performed well. Talentsolutions grew 90% to $161, million marketing solutions was up 68% to $83 million andpremium subscriptions increased 79% to $59 million.

As we move into 2013, our strategy remains the same. For our members, we will continue tobuild great products that deliver on the value propositions of identity, insights, andeverywhere. For our enterprise customers, we will focus on transforming where they hire,market and sell on a global basis.

Lastly, an update on our talent, which is our top operating priority. We entered 2013 withnew 3,500 employees around the world. The transformation of LinkedIn in the last year istheir hard work and dedication to our ultimate mission of creating economic opportunity forevery professional. The culture that shapes LinkedIn has emerged as one of our strongestcompetitive advantages and will continue to serve us well in 2013 and beyond.

Now, I will turn it over to Steve for a deeper dive into our operating metrics and financials.

Steven Sordello - Chief Financial Officer, Senior Vice President

Thanks, Jeff. Before I discuss the result, I want to remind you that my comments on growthrates will refer to year-over-year changes unless I indicate otherwise. Also, non-GAAPfinancial measures exclude stock-based compensation expenses, amortization of intangiblesand the tax impacts of these adjustments. Please refer to our press release for the GAAP tonon-GAAP reconciliations.

As Jeff described, 2012 was a transformative year for LinkedIn. Continued investment in ourtalent and technology infrastructure drove momentum in both product and monetization. Thestrong fourth quarter and full-year financial results reflect this progress.

Starting the members, crossing the 200 million milestone illustrates LinkedIn's global reach. Inthe fourth quarter, international represented 64% of total members compared to 60% lastyear. While member growth remained steady, engagement accelerated across many keymetrics, results driven by the success of product releases towards the end of the year. Inthe fourth quarter, comScore unique visitors increased by 26% year-over-year versus 25%last quarter, while comScore page views which exclude mobile grew 28% compared to 17%last quarter.

Using our internal metrics, unique paying members grew 29% year on year versus 22% in thethird quarter and the percent of members visiting the site increased slightly. Desktop pageview growth increased to approximately 38% year-over-year compared to 22% last quarter,and when including mobile, total page views grew approximately 67%, the highest rate ofgrowth of any quarter in 2012.

Our business directly benefited from greater member engagement, yielding strong financialresults. Overall revenues grew 81% year-over-year to $304 million.

Before going into product lines,, I want to call out a small portion the field sales revenue ofapproximately $4.4 million related to selling through outside agencies that we beganrecognizing on a gross basis in the fourth quarter. This had a net zero impact to adjustedEBITDA due to the offset in increase in sales and marketing expense. Going forward, weexpect this not to decrease as a percent of sales. Without the impact, revenue in the fourthquarter would have been $299 million, a growth of 78% year-on-year, materially exceedingour own expectations.

Turning to our product lines. Talent solutions displayed sustained momentum in both field andonline channels despite larger scale. Talent Solutions generated $161 million in revenue, up90% to 53% of total sales versus 51% last year. We continue to gain traction with newenterprise clients. Growth remained strong as we added approximately 2,400 customers inthe quarter ending the year with over 16,400 organizations under contract. With existingcustomers, average revenue per customer again exhibited positive growth and renewals andadd-ons ended the year at a high point reflecting the increasing value we provide customersas we broaden our product portfolio.

We remain encouraged by our growing scale outside the U.S., especially in newergeographies. In Southern Europe, we added Pirelli in Italy as a new customer and expandedbusiness with Telefonica in Spain L'Oreal in France. We also signed noteworthy newcustomers in nascent regions, including Bally in Brazil and Etihad Airlines to our new Dubaioffice.

LinkedIn jobs once again perform well as the number of open jobs increased nearly 100%. Wealso maintained strong growth from talent finder and job seeker subscriptions, which onceagain grew at a higher rate than overall Talent Solutions revenues. One last note, we willpass through a moderate price increase on recruiter and job slots beginning in the secondquarter in Americas other select regions. In those geographies, we expect a blended contractvalue to increase mid-single digits year-on-year. Since our last increase, the LinkedInmember base has doubled and we have greatly strengthened the value delivered across theportfolio. It is worth noting that this is the first time we have raised prices on LinkedIn jobslots in addition to recruiter.

Marketing Solutions generated $83 in million revenue with growth accelerating to 68%year-on-year to 60% in the third quarter. Marketing Solutions represented 27% of totalrevenue versus 30% last year. Field sales continue to show improved performance and helpfrom product offerings including our campaigns and custom groups as well as the growingcontribution from CPM-based recruitment media.

LinkedIn ads also showed positive gains benefiting from strong engagement in the quarterwith year-on-year growth nicely increasing compared to the third quarter. LinkedIn adsremains one of the most efficient mechanisms to monetizing increased engagement anddemand remains strong as the number of active advertisers nearly doubled compared to lastyear. Finally, premium subscriptions generated $59 million in revenues with growthaccelerating to 79% versus 74% last quarter. Greater engagement and higher conversionrates resulted in improved new subscriber growth year-over-year.

Our Sales Solutions product grew more quickly than other subscriptions and we continue toimprove the product functionality and while early we are encouraged by the trend.International revenue growth accelerated in the fourth quarter to 106% year-on-year 97%last quarter. Non-U.S. revenue increased to 38% of sales in the fourth quarter versus 33% ayear ago and the gap between international revenues and international members continues tonarrow. A little more than three years ago, international revenue was just 25% of sales andwe had only one location outside the U.S. This compares to 20 international offices today.

Moving to revenue by channel, online sales performed well under back of strong memberengagement. Online growth accelerated to 74%, comprising 41% of revenue compared to43% last year. It is important call out that we would have expected more of a mix shifttowards the field sales channel given typical seasonality. However, strong engagement,record better online contribution was positively impacted EBITDA.

Turning to the non-income statement, strong flow through from engagement to onlineproducts drove a higher level of profitability that significantly outpaced our expectations.Gross margin excluding depreciation and amortization was 89% versus 86% last year. Thefourth quarter is consistently the highest gross margin quarter given the revenue seasonality.

Sales and marketing was up slightly to 31% in revenue from 30% last year, while R&Dimproved to 21% from 22% last year. In 2012, we had success tracking, engineering andproduct talent at LinkedIn maintaining a similar pace of headcount growth as in 2011. And,G&A as a percentage of revenue declined 11% versus 13% last year, a similar trend relativeto the third quarter.

We generated a record $79 million in adjusted EBITDA in the fourth quarter, a 26% margin.This compares to $34 million in adjusted EBITDA and a 21% margin last year. Depreciationand amortization totaled $24 million while stock-based compensation was $28 million. GAAPtaxes on an absolute basis were above expectations, but the GAAP and non-GAAP rates werelower than expected due to a greater level of pre-tax profit and improving profitability in ourinternational entities.

Bottom-line results reached record high. GAAP net income was $11 million leading to EPS of$0.10 on $114 million fully diluted weighted shares. This compares to $7 million of net incomeand $0.06 per share last year.

On a non-GAAP basis, net income more than tripled to $40 million translating to $0.35 in EPSversus $13 million or $0.12 per share last year. The balance sheet remains well positionedwith $750 million in cash, cash equivalents and short-term investments against zero debt.Cash flow remains strong with $69 million of operating cash flow and $37 million in free cashflow. For the full year, operating cash flow was $267 million compared to $133 million lastyear and free cash flow more than tripled to $142 million compared to just $44 million lastyear.

I will close the call with guidance for the first quarter and full year 2013. For the firstquarter, we expect revenue between $305 million and $310 million, a range of 62% to 64%year-over-year. For the full year, we expect revenues of $1.410 billion to $1.440 billion,growth of 45% to 48% year-on-year. For adjusted EBITDA, we expect $67 million to $69million in the first quarter, a 22% margin at that mid-point. For the full year, we expect arange of $315 million to 330 million, a 23% margin at the mid-point.

I want to take a moment to reflect on our performance since the IPO. During the past 18months, we have exceeded our own expectations by a wide margin on the top line andpassed through a higher profitability as a result. Driven by new products and heightenedmember engagement, our results were especially strong in the second half of 2012. While2012 was an investment year, the business' outperformance allowed us to receive a 23%adjusted EBITDA, much higher than our initial guidance of 19%.

The profitability flow-through has allowed us to apparatus to reinvest over performance backin to the company, especially in product and engineering and these investments have shownstrong returns. Our 2013 guidance reflects where we plan to be at this point in time as weprogress towards our long-term operating target of 30% adjusted EBITDA.

We continue to invest for the company's long-term success. Our investment planincorporates recruiting aggressively for top tier engineering and sales talent in order to

achieve scale in our current roadmap while also investing in new strategic initiatives,including mobile, enterprise, higher education, and non-U.S. markets.

Growing our team requires increased investment in support infrastructure, such as buildingour global facilities footprint but we have committed to grow occupancy over 60% to 1.2million square feet across 26 locations. We also expect to continue to invest heavily in ourdata center expansion.

For the remaining expense line items, we expect depreciation and amortization of $25 millionto $27 million in the first quarter and $130 to $135 million for the full year. We estimate thatstock-based compensation expense of $32 million to $34 million in the first quarter and $160million to $165 million for the full year.

We continue to have limited visibility on tax rates but we would assume GAAP and non-GAAPrates somewhere to at least around 2012. One small note on tax. The R&D tax credit wasrecently extended through 2013, and we expect an approximate $11 million in one-timebenefit in the first quarter for both GAAP and non-GAAP taxes. On diluted share count, weexpect approximately 115 million shares in the first quarter at an average of approximately160 million for the full year.

To conclude, we achieved success on many fronts in 2012. We exited the year on themomentum and a dynamic period of product development and member engagement. Each ofour diverse product lines continue to grow at impressive rates and exhibited healthyunderlying fundamentals. Growth combined with greater operating skill led to record highrevenues, earnings and cash flow. As we look forward to 2013, we remain excited about thevalue LinkedIn will provide for our customers and our customers in the coming year.

Thank you for your time and we will now take questions.

Courtesy of an article dated February 7, 2013 appearing in Seeking Alpha