Spending Cuts Hold the Answer for LinkedIn

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities. 

LinkedIn (NYSE:LNKD) will report Q1:13 (ending March) results on Thursday, May 2 after markets close, with a call at 2 p.m. PDT (dial-in: 914-495-8529, conf. ID: 34761898, investors.linkedin.com).

We’re expecting Q1 results in line with our estimates. We expect revenue of $320 million vs. consensus of $317 million and guidance of $305-$310 million. We expect adjusted EBITDA of $71 million vs. guidance of $67-$69 million, and EPS of $0.41 vs. consensus of $0.30. Top-line growth should be driven by Talent Solutions and Marketing Solutions, and user engagement should once again be strong (page views up 67 percent in Q4, the strongest growth rate in 2012) from mobile, Thought Leaders, and Endorsements. Based on the $78.6 million of EBITDA generated in Q4, our estimates may prove to be conservative.

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Management will likely pass through any Q1 beat to FY guidance. 2013 guidance is for revenue of $1.41-$1.44 billion (vs. our estimate of $1.49 billion) and adjusted EBITDA of $315-$330 million (vs. our estimate of $396 million). As we said in our February 8 note, LinkedIn can meaningfully improve profitability during its growth phase by scaling down investment in R&D and marketing.

We expect some moderation of these categories, from 59.9 percent to 59 percent of revenues in 2013. These assumptions led to our above-consensus EPS estimates for 2013.

LinkedIn has only scratched the surface in terms of attracting Corporate Solutions customers, job seekers, and marketers. In 2012, LinkedIn had 16,400 customers for its high-ASP Corporate Solutions product. The domestic addressable market could be as high as 300,000, at lower ASPs than in the past.

Earlier this month, Linkedin announced the acquisition of Pulse, a news reader and mobile content distribution platform, for ≈ $90 million. We believe the company will use Pulse to drive engagement further, with Linkedin attempting to become the default location for all career-related content.

Initiating our FY:14 estimates for revenue of $2.00 billion and EPS of $2.60.

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Maintaining our NEUTRAL rating and 12-month price target of $140. Our price target reflects a P/E multiple of ≈ 75x to our CY:13 EPS estimate of $1.86. Although our multiple continues to be somewhat steep, we believe it is justified due to its significant potential to deliver operating leverage from cost control, strong revenue growth, large addressable market, and dominant position.

Michael Pachter is an analyst at Wedbush Securities.

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