Takeaway: Guidance implies that Brand Revenue goes away overnight....Mgmt may want some breathing room, but it can’t cry wolf two quarters in a row
- 2Q15 = INORGANIC CLOUDS: LNKD handily beat 2Q15 estimates, which were depressed by its low-balled 2Q15 guidance. But what looked like a massive beat was partly fueled by inorganic revenues that mgmt didn’t properly guide to ($18M vs. $3M guidance), with $15M of its $32M revenue beat coming from Lynda. Still, organic trends remain solid, with Talent Solutions recovering from the account transition, and interestingly, much of its upside surprise coming from Marketing Solutions (next point).
- CRYING WOLF…AGAIN: We were concerned that LNKD may guide light for 3Q, but mgmt took it one step further. LNKD raised 2015 guidance, but cut its organic guidance by ~$35M, citing pressure in its display business (Marketing Solutions). However, we estimate that display contributed roughly $48M in 1H15 revenue (based on mgmt commentary). That said, guidance now implies that display basically goes to $0 overnight, which obviously doesn't make sense, especially since display was flat q/q. In short, LNKD just wanted display revenues out of its guidance.
- BUT NOT AN EXCUSE: We do appreciate that LNKD is concerned with managing expectations, but it can’t cry wolf two quarters in a row. We can’t help but wonder if something else is going on, or LNKD is just being overly cautious. But either way, situations like this prevent the mob from chasing the print the next time around, or worse, trains the sell-side to take guidance less seriously. LNKD remains a Best Ideas Long, but we're not pounding the table since we're not sure what mgmt will do the next time it sees its shadow.
2Q15 = INORGANIC CLOUDS
LNKD handily beat 2Q15 estimates; it was actually its biggest beat since 2012. But much of that came off of depressed expectations off its low-balled 2Q15 guidance. Further, much of that beat was partly fueled by inorganic revenues that mgmt didn’t properly guide to ($18M vs. $3M guidance), with $15M of its $32M revenue beat coming from Lynda.
There was no real cause for concern in its organic trends. Our long thesis centered on its Talent Solutions segment, which came in above consensus estimates. Net LCS customer growth accelerated off a weak 1Q15 print, which suggests that the 1Q15 investment in its salesforce is starting to pay off, or at a minimum, suggests the account transition was a transitory issue.
The one blemish was the deceleration in its Talent Solution ARPA, which is what we're keying in on since this is where both the bulk of its TAM and current opportunity exists. ARPA diverged from our tracker in 2Q15, which we don't want to overreact to since it's just one quarter, but obviously something to monitor.
We were concerned that LNKD may guide light for 3Q, but mgmt took it one step further. LNKD raised 2015 guidance by $40M, but actually cut its organic guidance by $35M after considering the cumulative $75M in tailwinds from its 2Q15 guidance beat and incremental revenue from its Lynda acquistion.
However, the math doesn't make sense. The $35M organic cut was due to incremental pressure around display advertising. But according to mgmt commentary, we estimate that display represented roughly $48M in 1H15 revenue. By cutting guidance by $35M against $48M in 1H revenue, mgmt is suggesting that display advertising will evaporate in the back-half, which is odd since management commentary also suggests that display remained flat q/q in 2Q15 . More likely than not, mgmt just wants display revenues out of its guidance.
BUT NOT AN EXCUSE
We do appreciate that LNKD is concerned with managing expectations, but it can’t cry wolf two quarters in a row. We can’t help but wonder if something else is going on, or LNKD is just being overly cautious.
But either way, situations like this prevent the mob from chasing the print the next time around, or worse, trains the sell-side to take guidance that less seriously. LNKD remains a Best Ideas Long, but we're not pounding the table since we're not sure what mgmt will do the next time it sees its shadow.
Let us know if you have any questions or would like to discuss further. See note below for incremental detail and analysis on our long thesis thesis.
Hesham Shaaban, CFA
LNKD: New Best Idea (Long)
07/14/15 08:00 AM EDT
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Client Talking Points
One of the best positions you could have had this month was LONG the U.S. Dollar and SHORT the #Deflations (commodities and their country, currency, debt, equity, etc. links) – USD is retesting the top-end of its range here and hammering Oil (-1.5%), Russian Stocks (-1.9%), etc.
Eurozone and/or Italian CPI of 0.2% year-over-year isn’t a win for Mario Draghi, and the sovereign-bond market is starting to figure that out again (he needs to bring more cowbell to Jackson Hole); 10YR German Yield down to 0.65% this morning and could go a lot lower.
On a positive note, we hope you stayed with the net LONG Japanese equity position in July – it performed as well as the Yen did not. Last night’s core CPI print of 0.1% year-over-year in Japan (Household Spending -2% year-over-year) keeps the easy money play firmly intact.
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Top Long Ideas
General Mills (GIS) remains on the Hedgeye Consumer Staples Best Ideas list as a LONG. Key segments across the company are turning the corner and improving performance. Specifically GIS has figured out the yogurt category, after 3 years of struggling with Greek and losing on the core business, management has turned the Yogurt division into a growth segment. Cereal has obviously been a struggle for all companies participating. Although still down, the trend is looking better, in FY16 we hope to see the switch to Gluten Free Cheerios and other improvement, turn performance around.
Penn National Gaming reported Q2 profit of $16.9 million on Thursday. The company's profit of 19 cents per share beat analysts' expectations. PENN posted revenue of $701 million in the period, which also beat forecasts. Shares have climbed 40% since the beginning of the year and 58% over the last 12 months, obviously much higher than the S&P 500. Gaming, Lodging and Leisure Sector Head Todd Jordan was at Penn National Gaming's investor day on July 24th. He will provide a detailed update this week.
Those long of #LowerforLonger enjoyed another solid week of 2%+ gains for TLT and EDV. VNQ followed up last week’s gains with a pullback of equal size, but we received a positive sloth of data this week that confirms our long housing theme. A positive housing outlook within a bearish rate environment should be positive for VNQ.
Three for the Road
TWEET OF THE DAY
Italy's unemployment rate ramps to 12.7% (from 12.5%) - Draghi's drugs doing nothing but asset inflation
QUOTE OF THE DAY
The force of character is cumulative.
Ralph Waldo Emerson
STAT OF THE DAY
According to a Quinnipiac poll, 30% of Republican voters said they definitely did not support Donald Trump in his bid for the party’s presidential nomination.
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