LinkedIn Corp. Earnings: Time to Deliver

By Tim

If analyst estimates are any indication, it's no wonder LinkedIn's share price has meandered for much of the past year. Heading into its Q4 earnings call, one analyst recently downgraded LinkedIn from buy to hold, and lowered his target price to $230 a share, below its current value. At the same time, several other analysts have weighed in suggesting LinkedIn is a strong buy, with one price target as high as $280, which would obliterate its 52-week high.

Why are analysts, and apparently investors based on LinkedIn's ho-hum stock performance, all over the board? Most everyone who follows LinkedIn expected another quarter of revenue and non-GAAP -- excluding one-time items -- earnings growth. However, concerns about sustaining user growth and the lack of diversification from its three primary sources of revenue lingered.

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Just the factsAnalyst estimates for revenue and earnings varied only slightly from LinkedIn's guidance. At the end of 2014 Q3, LinkedIn CFO Steve Sordello forecasted earnings of $600 million to $605 million in the fourth quarter, and non-GAAP earnings per share of $0.49. Those compare with consensus targets of $618 million in revenue and earnings of $0.52 a share. Turns out that both Sordello and analysts missed -- in a good way.

Revenue jumped a whopping 44% in Q4, to $643 million, obliterating the Street's expectations and driving after-hours trading up about 6% immediately after LinkedIn announced the news. The jump in revenues translated to a solid, non-GAAP earnings performance, as well, beating Sordello's expectation, and matching analyst's estimates of $0.61 per share.

Perhaps as important as posting strong sales and earnings results was LinkedIn's mix of revenues. Its Talent Solutions division, which accounted for a disconcerting 61% of LinkedIn's revenues in Q3, had another stellar quarter. Talent's $369 million in sales last quarter was a 41% jump from 2013's Q3, and represented 57% of LinkedIn's total. Not a huge difference in terms of diversifying revenue sources, but certainly a step in the right direction.

The Marketing Solutions division gets credit for some of the spreading of LinkedIn's revenue wings. Not only was its $153 million in sales a 56% improvement from the year-ago period, it amounted to 24% of total revenues. Last year at this time, Marketing accounted for 20% of sales, just as LinkedIn's Premium Subscriptions did. In 2014's Q4, Subscription revenues also grew 38%, to $121 million, but still represent the same 20% of LinkedIn's total.

Diversifying revenue sources couldn't come at a more opportune time. It was just last month that social media king Facebook announced it was beta testing a new professional service called Facebook at Work. As noted in a recent article, at this early stage, At Work isn't a direct competitor of LinkedIn. Facebook has nearly 1.4 billion monthly average users, or MAUs, and a familiarity unrivaled in social media circles; if Facebook At Work takes off, how difficult would it be to expand its reach directly into LinkedIn's path?

As for member growth, LinkedIn performed admirably, if not spectacularly. By year-end 2014, CEO Jeff Weiner announced LinkedIn now boasts 347 million members, up 25% from the end of 2013. That compares to 332 million members in Q3 2014.

Outstanding? Not on a sequential basis; but member-growth expectations should be tempered recognizing LinkedIn's professional user target base. Sure, Facebook makes sense for most anyone interested in sharing data -- which explains its 1.39 billion MAUs -- but LinkedIn has a more targeted member base.

Where do we go from here?Based on late trading, investors feel awfully good about LinkedIn's Q4 and 2014 annual financial results, as they should. LinkedIn CEO Jeff Weiner and team delivered solid results. Revenue was strong, though higher expenses limited non-GAAP earnings a bit; but that's to be expected as LinkedIn assimilates acquisitions like business advertising solutions provider Bizo, and ramps up marketing. However, after-hours stock price pops and upside momentum aren't the bases for long-term investing.

LinkedIn's future looks just a little brighter than it did the day before it announced earnings. LinkedIn expanded its international reach to the point where nearly 70% of its users now visit from outside the U.S. -- including doubling Chinese users to more than 8 million. Enhanced user engagement, as evidenced by the more than 50,000 posts weekly, demonstrate that LinkedIn is becoming a source of content in addition to a jobs-and-collaboration portal. Toss in strong sales, earnings growth, and diversifying revenue sources, and LinkedIn belongs on a growth investor's watchlist.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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