LinkedIn’s (LNKD) CEO Jeff Weiner on Q2 2014 Results – Earnings Call Transcript

Reconciliations to the most directly comparable GAAP financial measures are provided in tables in our earnings release. This conference call is also being broadcast on the internet and is available through the Investor Relations section of the LinkedIn web site.

Lastly, this quarter on our Investor Relations web site, we have included supplemental slides discussing our Talent Solutions market opportunity and go-to-market. We have also included in our selected company metrics and financials table, history of our internally measured member metrics, the recasted history of Talent and Marketing Solutions revenue, and a field versus online revenue breakout for Talent Solutions.

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’ll start by summarizing the operating results for the second quarter of 2014, and I’ll recap some of the key milestones that highlight the success of our strategy. I’ll then turn it over to Steve for a more detailed look at the numbers and outlook.

LinkedIn delivered strong financial results in the second quarter, while maintaining continued investment in our member and customer offerings. We made significant progress against several key strategic priorities, including increasing the scale of job opportunities on LinkedIn; expanding our professional publishing platform; adding to our growing portfolio of mobile apps; and successfully positioning our Marketing Solutions business for the future through the growth of Sponsored Updates.

We are also excited about today’s launch of the all new Sales Navigator and last week’s acquisition of Bizo. Both underscore the opportunities we have to continue building a scalable, diverse business, that adds value for our members and customers based on the critical mass of the LinkedIn network.

For Q2, overall revenues grew 47% to $534 million. We delivered adjusted EBITDA of $145 million, and non-GAAP EPS of $0.51. We continue to see healthy member engagement dynamics across LinkedIn, especially in light of the challenging year-over-year comparison that we discussed last quarter.

During Q2, cumulative members grew 32% to 313 million. Internally-measured unique visiting members to LinkedIn grew 13% to an average of 84 million per month, and internal member pageviews grew 22% percent to 25 billion for the quarter, well ahead of unique member growth.

Organic engagement is one area of particular strength, driven by our mobile and content efforts. Homepage traffic, as measured by unique visiting members, continues to outpace overall site traffic growth, increasing approximately 40% faster over the past year.

Mobile also continues to drive a growing share of engagement, growing more than three times as fast as overall uniques. Mobile now accounts for 45% of total traffic to LinkedIn. The value we deliver to members remains consistent. We enable professionals to build and manage their identities; create and leverage their professional networks; and gain the knowledge they need to be more successful in their careers, across multiple screens and devices.

We want to highlight a few of our efforts since the start of the year that deliver across these value propositions. Within identity, in June, we revamped the design of profiles on LinkedIn’s desktop site to make them more visually distinctive and personalized; and earlier this week we launched a major redesign of the LinkedIn profile. The new profile, first introduced on our flagship mobile app, helps members define their professional identities more quickly and effectively. It adds important contextual information, including Recent Activity such as updates and long-form posts, and makes it easier for members to ensure their profiles are up-to-date.

Changes to LinkedIn Profiles help members better showcase their professional brands and get more value out of their LinkedIn networks; and now they can be found more effectively through Galene, our new search architecture rolled out in June. Pageviews to content driven by search have since accelerated.

Specific to network, earlier this month, we unveiled Connected on iOS, the newest mobile app in our growing multi app portfolio. Connected enables LinkedIn members to strengthen their professional relationships by delivering timely updates and opportunities to engage with the people in their networks. Connected has quickly become a top app in the App store business category. Early data shows that active users of the app are using it on average more than four days per week, suggesting that Connected has already become an integral part of each work day.

We also continue to grow the network through international expansion; 67% percent of LinkedIn members come from outside the United States. After launching our Simplified Chinese site in February, China has now become our fastest growing major market for new members over the past several months.

On knowledge, we continue to see LinkedIn members embrace the idea of creating and consuming long-form content through the publishing platform. Thus far, we’ve ramped the functionality to over 15 million members, on our way to opening up publishing to every member on LinkedIn. We’re encouraged by the early trends, recently surpassing 30,000 weekly long-form posts. Since launching in February, traffic to publisher and Influencer posts is up more than 100%.

Finally, two weeks ago, we announced the acquisition of Newsle to accelerate our ability to deliver relevant content to our members. Newsle’s technology finds blogs and articles that mention people who may be professionally relevant to you and notifies you seconds after publication. While we are currently maintaining Newsle’s standalone site and app, we are already beginning to integrate the functionality into our existing offerings, including the new Sales Navigator launched today.

Creating value for our members enables us to deliver useful offerings to customers of our Talent Solutions, Marketing Solutions, and Premium Subscriptions products. These product lines transform the way our customers hire, market, and sell on a global basis.

In Q2, Talent Solutions grew 49% to $322 million; Marketing Solutions was up 44% to $106 million; and Premium Subscriptions increased 44% to $105 million. For Talent Solutions, our goal is to power the world’s hires. In order to achieve this goal, we are investing in our existing portfolio of recruiting products, as well as increasing our focus on members actively looking for work opportunities.

In May, we began testing ‘limited listings’, an initiative that dramatically grows the number of job opportunities made available on LinkedIn for active job searchers. There are now more than one million jobs on LinkedIn, compared to only 300,000 plus jobs just a few months ago. We expect this number to continue to ramp through Q3 and beyond.

In addition, in June we launched the LinkedIn Job Search App for iPhone. The app addresses the growing level of mobile job interaction on LinkedIn, which at the end of Q2 accounted for more than 40% of all job views versus approximately 25% a year ago. Engaged users of the new app are using it to view an average of 15 jobs per week.

In Marketing Solutions, sponsored updates drove revenue growth in Q2, as we continued the strategic shift towards content marketing. Just last week, we launched Direct Sponsored Content, enabling marketers to test and optimize targeted content campaigns, not specifically limited to company pages. With last week’s acquisition, we are also excited to welcome Bizo to LinkedIn. Integration of Bizo will increase the speed with which we can leverage our own content marketing products to create a comprehensive B2B platform and help customers build stronger relationships with professionals.

Within Subscriptions, today we are pleased to announce the launch of the all-new Sales Navigator. This new SaaS product delivers a customized view into LinkedIn to better connect sales professionals with the right buyers, by leveraging key insights and connections across the LinkedIn network. Our research shows that social selling transforms the sales process; buyers are over five times more likely to engage with sales professionals when introduced through a common connection versus a cold call. Just as the launch of our flagship Recruiter product transformed the way talent professionals recruit, we expect Sales Navigator will similarly transform the effectiveness of sales professionals.

Finally, I want to extend a special thanks to our employees. During our most recent InDay in July, thousands of them contributed to more than 40 projects dedicated to helping underserved audiences create economic opportunity for themselves and their communities.

And now, I’ll turn it over to Steve, for a deeper dive into our operating metrics and financials.

Steve Sordello – CFO

Thanks Jeff. Today I will discuss growth rates on a year-over-year basis unless indicated otherwise, and non- GAAP financial measures exclude items such as stock-based compensation expenses, amortization of intangibles, and the tax impacts of these adjustments.

We had a strong quarter as we continue to leverage the scale of the LinkedIn network. Each of our product lines performed well; Talent Solutions continued to grow against the larger hiring market opportunity, while investments in content marketing and sales solutions are beginning to take hold.

We also remain focused on aggressively investing in the LinkedIn member platform. Creating increased value for members through a richer experience further expands our long-term opportunity. To that end, organic engagement is on the rise, mobile is contributing greater levels of traffic, and we have seen substantial page view per unique member growth over the past two years dating back to our inversion initiatives.

Last year’s strength translated into accelerated member growth and engagement. As we mentioned last quarter, this strength created difficult comparisons for member metrics in 2014, particularly in the second and third quarters.

Briefly reviewing what happened last year illustrates these trends; in early 2013, we improved new member onboarding to the site by better leveraging key products including People You May Know, the homepage, and address book invitations.

Starting in the second quarter of last year, these initiatives led to a dramatic pull forward of new member growth. As a result, monthly member signups accelerated between April and September; from single digits to at one point nearly 70% year-on-year growth. This also drove accelerated unique and page-view growth through the middle of 2013.

Just recently, new member additions on an absolute basis returned to a more normalized level, compared to our historical trend and we expect stable engagement trends through the rest of 2014.

For the remainder of the year, we are focused on continued investment in core experiences like the homepage and the multi-app strategy. Longer-term, we look forward to the impact of newer member initiatives like the publishing platform, jobs and deeper international engagement in new geographies like China.

With regard to monetization, all three product lines experienced strong growth, leading to $534 million in revenue, an increase of 47% percent year-over-year. Talent Solutions continued to perform well as our largest and fastest growing revenue line. Revenue increased 49% year-over-year to $322 million, representing 60% of total sales. Field sales, representing 75% percent of Talent Solutions revenue, showed balanced strength between new customer acquisition and relationship management.

Over the past three years, our land & expand playbook has consistently driven growth. Recent three year U.S. cohort data highlights that enterprise customers increased spend by five times, in some cases much more. This has led to consistent revenue growth per customer, even as we’ve added many smaller accounts over time.

Across our base of more than 28,000 field sales customers, we’ve had continued success deepening relationships with accounts as illustrated by improvement in the net ratio, which measures year-over-year growth of existing customer spend, net of churn. This increase in net ratio is a better than expected outcome, given the increasing scale of the business.

Our hunter reps also performed well, and we plan to add more hunters and relationship managers in the second half than initially planned as we see opportunity expanding into next year.

In addition, the online channel showed strength, especially job seeker subscriptions, now one of the fastest growing products within Talent Solutions. More broadly, our opportunity within the global hiring market continues to expand as our member base grows, as we increase hiring activity on LinkedIn, and as we grow our existing business.

Marketing Solutions grew 44% to $106 million, representing 20% of total sales. During the quarter, we benefited from strength in sponsored updates and traditional display. This is compared to the relatively muted growth in the second quarter of last year, when we transitioned away from one-time deals to a more scalable content marketing strategy.

Sponsored updates maintained strong momentum through the second quarter; where it represented 28% of Marketing Solutions revenue, up from 23% in Q1, 15% in Q4, and 7% in Q3 of last year. The product and sales teams remain focused on driving demand, contributing to a 20% increase in effective pricing during the quarter and we expect auction dynamics to further improve over time with the launch of Direct Sponsored Content, API partner growth, and the integration of Bizo’s targeting and ROI tools.

In addition, our display-driven business unexpectedly benefited from Sponsored Updates traction. Compared with last year, field sales sell-through improved and the average spend for display customers slightly increased. For the online business, one by-product of field success has been reduced self-serve ad inventory.

Finally, we are excited to welcome Bizo and begin investing in creating a broader B2B platform, building on the current success of sponsored updates. Premium Subscriptions grew 44% to $105 million, contributing 20% of revenue. General Subscriptions, which still represent the majority of subs revenues, had a good quarter, with stable churn and a nice uptick in new subscriber ARPU. Moreover, we are excited to launch the new Sales Navigator. Today, field sales generates roughly one-third of Sales Navigator revenue, but over time, we expect Sales Solutions to be more field driven as the business scales, much like Talent Solutions.

Over the past year, we’ve invested in building a standalone salesforce, which today is split roughly 60% US versus 40% international. We will also sell the same flagship Sales Navigator product on a self-serve basis for small business and individual sales professionals, wanting to leverage social selling.

In terms of geography, we continue to become more global across the business. International now represents 40% of overall revenue versus 38% last year. By channel, field sales contributed 60% of revenue versus 58% last year, with Marketing Solutions in particular driving strong field sales performance.

Moving to the non-GAAP financials, revenue outperformance resulted in adjusted EBITDA of $145 million, a 27% margin compared to $89 million and a 24% margin last year. Depreciation and Amortization totaled $56 million, while stock compensation was $75 million. On taxes, GAAP expense was $16 million, while non-GAAP expense was $34 million, reflecting the static 35% non-GAAP tax rate we expect throughout 2014.

GAAP net loss was $1 million, resulting in a $0.01 loss per share, compared to last year to a gain of $4 million and earnings per share of $0.03. Non-GAAP net income was $63 million, resulting in earnings of $0.51 per share, compared with $44 million and $0.38 last year.

The balance sheet remains strong with $2.4 billion of cash and marketable securities. Operating and free cash flow were $128 million and $32 million during the quarter, both slightly higher than last year.

I will end the call with guidance for the third quarter and an updated outlook for 2014. For revenue; we expect Q3 to range between $543 million and $547 million, 39% growth at the midpoint. For the full year, we are raising our outlook by $75 million, to range between $2.14 billion and $2.15 billion, a 40% annual growth rate compared to the 35% reflected in prior guidance. Revenue guidance incorporates stable and consistent Talent Solutions performance; more normalized Marketing Solutions comps versus last year; and transitioning to the new Sales Navigator product, which due to its SaaS nature will build gradually over time.

For Adjusted EBITDA, we expect Q3 to range between $134 million and $136 million, a 25% margin at the midpoint and for the full year, we are raising our outlook to between $545 million and $550 million from approximately $505 million to $510 million, now a 26% margin at the midpoint.

Adjusted EBITDA guidance incorporates continued heavy investment in the second half, especially in R&D and sales, to support our 2014 strategic initiatives. Guidance also includes the following acquisition impacts; specific to Bizo, the longer-term strategy is to leverage Bizo’s products and technology to create a larger B2B focused business. We plan to maintain a portion of their existing business, specific to multi-channel advertising and for revenue, we expect Bizo to add approximately $3 million in Q3 and $6 million in Q4.

For Adjusted EBITDA, we expect Bizo to have a negative $2 million impact in each of Q3 and Q4. This is in addition to the $8 million to $10 million full year adjusted EBITDA impact from Bright.

Lastly, we expect Non-GAAP EPS of approximately $0.44 for Q3 and $1.80 for the full year. Additional guidance inputs include; depreciation of $50 million for Q3 and $202 million for the full year. Amortization of $8 million for Q3 and $28 million for the full year. Stock based compensation of $80 million for Q3 and $305 million for the full year; and fully diluted weighted shares of approximately 126 million for both Q3 and the full year.

In closing, we are pleased with the strong results across the business. We continue to make long-term investments to drive both deeper member engagement as well as broaden our business through initiatives like Sales Navigator, B2B marketing, and greater scale around hiring. As we focus on the second half, we will maintain this long-term approach in scaling both our member and customer platforms.

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

Question-and-Answer Session

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