LinkedIn's disruptive power play

Following Facebook’s stellar earnings announcement last week, fellow Silicon Valley social networking darling LinkedIn reported its second quarter numbers this morning with similar vigour. The stock is up 7 per cent in after-hours trading.

The top line numbers were solid. Revenue was up 59 per cent to $363 million for the 3 months ending June 30, and user numbers were up to 238 million members in total, a 37 per cent increase year-on-year. Quarterly earnings before interest tax depreciation and amortisation for the period was significantly higher than the same period in 2012, from $50 million in 2012 to $89 million in 2013. However the effect of stock-based compensation resulted in a net profit of $3.7 million, a $900,000 rise from the same period in 2012.

LinkedIn chief executive Officer Jeff Weiner commented that the company would continue to pursue growth rather than short term gains. “Accelerated member growth and strong engagement drove record operating and financial results in the second quarter (and) we are continuing to invest in driving scale across the LinkedIn platform in order to fully realise our long-term potential."

A large chunk of this growth is coming from the impressive growth of the company’s Talent Solutions product, which is basically highly targeted job advertisements which put LinkedIn in closer competition with online job classified players such as Seek. Talent Solutions reported a 69 per cent increase in revenue year-on-year for the 3 months ending June 30, totalling $205.1 million for the quarter and representing 56 per cent of the company’s total revenue.

Marketing Solutions, non-classifieds advertising used by business to business or business to consumer focused marketers, experienced 36 per cent growth year-on-year rising to $85.6 million. While this growth rate is lower than what LinkedIn is achieving within the jobs focused Talent Solutions area, it is still significantly higher than the annual growth rate of the rest of the digital advertising market and a positive for investors.

Premium subscriptions were also up 68 per cent year-on-year, bringing in $73 million. Premium subscriptions – where users pay a fee anywhere from $25 to $75 a month to access parts of the LinkedIn product not available to free users – are a high margin piece of the company’s revenue puzzle, a piece that is set to bring the company in the vicinity of $450 million of revenue across the 2014 financial year.

Asia-Pacific regional results are increasing faster than the global. For the period ending June 30 Asia-Pacific revenues contributed 8 per cent of total group revenues. In the past 3 years Asia-Pacific revenues across Q2 have risen from just under $1 million in 2010 to $29.1 million for Q2 2013. Australia would be a sizeable contributor to this. At current rates LinkedIn Asia-Pacific will be a $100 million plus annual revenue business by the end of the year, something that would surely be making local businesses in the job advertisement and business media categories more than a little nervous.

It’s LinkedIn’s three pronged product and revenue mix which makes the company such a rare commodity and has allowed the company to triple global revenue over the past two years. The company’s efforts in targeting high net-worth customers is allowing it to challenge incumbents who have for decades remained relatively unchallenged in selling advertising access to this audience – companies such as Forbes, the NY Times and CNBC globally, and the likes of Fairfax’s Financial Review Group and Newscorp Australia’s The Australian locally. LinkedIn’s data trove on its users in many instances is allowing it greater insight into them, and the ability to use this data to extract higher advertising yields. It also helps that LinkedIn has managed to recruit some very high profile C-Level types to provide editorial contributions such as Bill Gates, Japan's Prime Minister Shinzo Abe, Richard Branson, Senator Elizabeth Warren and JP Morgan CEO Jamie Dimon.

Its position as a professional network is also reinventing the way many users are finding new employment. It’s an interesting area to observe, as LinkedIn threatens to disrupt the very core of highly valued and profitable incumbent businesses such as Seek who themselves were disrupting the category little over a decade ago in a similar way. The great hope for investors, which is driving the company’s stratospheric 620 x Price/Earnings ratio, is that it can pull this off at a global scale.