This is a summary of the main points behind our thesis. As usual, we will be publishing follow-up notes with incremental analysis, and hosting a call to run through the detail. In the interim, let us know if you have any questions or would like to discuss in more detail.
- REAL PLATFORM, REAL CASH: LNKD is a professional networking site, but its core value comes from its database of professionals profiles, which we believe can't be replicated at comparable scale. That competitive moat has led to a premium-priced product portfolio that produces the margins/cash flow necessary to consistently reinvest in its business and expand its TAM.
- EMPLOYEE’S MARKET = GROWING OPPORTUNITY: We see LNKD’s Talent Solutions segment as the swing factor; the bulk of that TAM is not in account volume (LCS customers), but in up-selling those accounts (ARPA). Historically, that up-sell becomes much easier for LNKD as the burden to fill open positions intensifies, which the current macroeconomic backdrop suggests is the case (see tracker below).
- TRANSITION = INVESTMENT: Mgmt didn't really emphasive what caused the salesforce account transition that pressured 1Q15 results. LNKD ramped its salesforce by 51% (largest increase since 3Q13). We see the ramp as an as investment given the improving selling environment mentioned above. LNKD's 2015 guidance cut captured the transitory impact from the transition, but more importantly, rebased consensus expectations that were tracking above initial guidance.
- BUT NOT A SLEEPY LONG: Everything we discussed in point 2 above also means that we are late cycle in terms of employment, which makes us somewhat uneasy in terms of the holding period. The other major risk is consensus upping estimates too much on a good print and pushing us out of the name. In short, we may only be in this position for 1-2 quarters.
REAL PLATFORM, REAL Cash
LNKD is a professional networking site, but its core value comes from its database of professional profiles. Many of LNKD’s core services are essentially paywalls, predicated on various degrees of access (search & outreach) to these profiles. LNKD's flagship & highest-priced product (Recruiter) allows employers/recruiters access to every profile in LNKD’s database, while its lower-priced products naturally offer less functionality, with 3rd-degree search and fewer InMails (solicitation emails).
We believe LNKD is one of those rare cases where the first-mover advantage really means something. The profiles in LNKD's databases are user-generated, and the content within them is generally more extensive than that of other social media sites. We doubt many of LNKD's existing users would be willing to recreate their profiles elsewhere given the time/effort necessary to do so (at least at any meaningful scale). In short, LNKD has a virtual moat around its content.
There may not be another platform that can offer a professional search capability comparable to the LinkedIn platform. In turn, LNKD's product portfolio garners premium pricing, which has produced the margins/cash flow necessary to consistently reinvest in its business, and expand its TAM.
EMPLOYEe’S MARKET = GROWING opportunity
We're going to break down LNKD's overall TAM in greater detail in a follow-up note, and within our upcoming deck. Below, we're going to focus primarily on LNKD's current opportunity, i.e. the selling environment, which we define as the size of LNKD's TAM at different points in the economic cycle.
We view LNKD's US Talent Solutions segment (primarily Recruiter & Job Postings) as the swing factor; not only because its the largest segment (~60% of revenue), but the one most sensitive to economic cycles. There are two key considerations when dissecting LNKD's US Talent Solutions TAM, and its current opportunity.
- TAM favors ARPA: The bulk of LNKD's TAM is not in account volume (LCS customers), but in up-selling those accounts (Average Revenue per Account or ARPA) via additional licenses/job postings.
- Macro drives ARPA: Historically, that up-sell becomes much easier for LNKD as the burden to fill open positions intensifies (tracker below).
We're attempting to illustrate both points in the below analysis. We are calculating LNKD's TAM and current opportunity specifically for its flagship Recruiter product.
We are basing our analysis on historical hiring needs (peak, trough, and current hiring rates by firm size according BLS data since 2001). Note that hiring needs are based off of gross hiring (rather than net) since firms must replace open positions due to employee churn (i.e. terminations, quits and retirement). More importantly, we're using rather restrictive assumptions to both simplify the analysis, and to err on the side of being conservative (see notes in table below for detail).
Regarding the selling environment, note that current hiring rates are elevated, but not at historical peak levels; suggesting a healthy selling environment with room for improvement. Historically, it becomes much easier for LNKD's salesforce to up-sell its existing customer base as the burden to fill open positions intensifies, which both the analysis above and our tracker below suggests is the case.
TRANSITION = INVESTMENT
Management didn't really emphasive what caused the salesforce account transition that pressured 1Q15 results. LNKD made a massive investment in its salesforce (up 51% y/y), which is what we want to see given the improving selling environment mentioned above.
That said, we're not reading too much into the 2015 guidance cut on the 1Q15 release, especially since 1Q15 results came in above quarterly guidance. We suspect management used the 1Q15 consensus miss to rebase full-year expectations, which were tracking ahead of guidance at the time.
LNKD cut its full-year revenue guidance by ~$50M, which management attributed to the following:
- +$20M-$25M: Lynda Acquisition Revenue (net deferred revenue write-off)
- -$50M: Heightened Fx headwinds (EUR/USD)
- -$30M: Operational issues, primarily in Marketing Solutions (display advertising) and Talent Solutions (salesforce account transitions)
Regarding the account transition, management stated that ~60% of its customer accounts now have a new sales rep, but implied the transition will be a temporary headwind. We're inclined to take management's word on the latter only because the transition was due to the aforementioned investment in its salesforce, which grew at its highest rate since 3Q13. Given the current macro backdrop mentioned above, we see the ramp in its salesforce as a coiled spring.
As we mentioned above, we see the Talent Solutions segment as the swing factor, especially now that consensus appears to have concentrated their estimate reductions into the other two segments. In the scenario analysis below, we're flexing LNKD's two core drivers for its Talent Solutions segment: LCS Accounts & ARPA.
LNKD should have no problem exceeding consensus Talent Solutions estimates barring a notable deceleration in BOTH of these two factors from 1Q15 levels, which were depresssed by the account transition mentioned above, and heightened Fx pressure that should abate in 2H15 on easier comps.
BUT NOT A SLEEPY LONG
Everything we discussed regarding the strength of the job market also means that we are late cycle, which makes us somewhat uneasy in terms of the holding period. The other main risk is consensus upping estimates too much on a good print and pushing us out of the name. In short, we may only be in this position for 1-2 quarters.
We will be publishing follow-up notes with incremental analysis, and hosting a call to run through the detail. In the interim, let us know if you have any questions, or would like to discuss in more detail.
Hesham Shaaban, CFA