Seek's LinkedIn threat

One of the concerns we raised when upgrading Carsales.com to a Long Term Buy recently was the risk that someone like Facebook or Google would come up with game-changing new service, potentially removing the company’s raison d’etre.

For Carsales, that risk is remote. For Seek, it’s already made real by LinkedIn, a US-listed company with US$750m in the bank and a market capitalisation of US$19bn. Unlike Carsales, REA Group and ASX, all of which create discrete markets, Seek trades in people, or at least their labour. And people have their own way of doing things.

Many job vacancies appear and are filled without an ad ever being placed. Someone knows someone who might know someone who might be interested. It’s how humans work. And social media sites like LinkedIn play on our natural networking tendencies. LinkedIn makes it possible to know almost everyone.

On LinkedIn if you’re an employer you can search for a person with the sort of background you’re looking for and then use your network to get in touch with them. Seek remains an alternative but, given the choice, most of would prefer an introduction to someone through someone we trust and respect.

Springboard

That’s especially true of higher-paid positions, which tend to be the most lucrative placements in the recruitment market. Losing a large portion of this business wouldn’t be great news for Seek. And a dominant position in higher-end positions may give LinkedIn a springboard to attack the lower-end classifieds.

The theory seems to be showing up in LinkedIn’s financial results. The company’s ‘Talent Solutions’ division offers a tool that can search for active and passive job candidates based on industry, job function, geography, experience and education, amongst other things. It also earns money from online employment classifieds.

In 2012, revenue from Talent Solutions doubled to more than half of total company revenue, with the US contributing 64% of revenue and Europe 22%, both locations where highly profitable senior positions tend to dominate. In less developed markets, LinkedIn has less of a springboard to attack the classifieds market, at least for the time being.

Even so, with Seek trading on a multiple of 25 times this year’s expected earnings and about three-quarters of its business in developed economies like Australia and New Zealand where LinkedIn is already making inroads, what’s the argument for hanging on?

Overseas businesses

Seek’s overseas businesses are to be found in China (Zhaopin), Asia (JobsDB and JobStreet), Brazil (Brasil Online) and Mexico (OCC). Table 1 shows how in 2012 they contributed only around a quarter of Seek’s revenue and earnings before interest, tax, depreciation and amortisation. But they probably contribute more in terms of value. Zhaopin, for example, is expected to float later this year, potentially valuing Seek’s share at upwards of $500m – compared to Seek’s market capitalisation of $3.4bn.

The employment classifieds business in Australia and New Zealand (about 37% of revenue and 63% of EBITDA) is more developed – and therefore perhaps more threatened by LinkedIn – but it also has greater market dominance and therefore greater network effects to protect it. For the time being, we’d expect it to continue to grow at around 10% a year (very roughly) but shareholders should be cautious about any slowdown.

The final piece of the jigsaw is Seek Education which, after a strong start, came a cropper in 2011, when its THINK business, which provides a multitude of vocational courses, turned a 2010 EBITDA of $7.3m into a loss of $7.5m. The company blamed weak enrolments, as well as underprovisioning for student withdrawals in prior years. The business has since recovered, returning to a profit of $5.3m in 2012.

Holding on, just

It makes reasonable strategic sense for an employment classifieds business to own and cross-sell to education businesses but with 35% of group revenue and only 14% of EBITDA in 2012, it’s likely to remain a relatively small part of the overall picture.

That takes us back to its main domestic employment business, which has a 70% share of the online employment classifieds market and powerful network effects, but is nevertheless probably the one most threatened by LinkedIn.

We’d treat a price above about $12 as an opportunity to get out but for now then there’s just enough to continue to hold on. We’re bringing Seek back onto our formal radar with a HOLD recommendation but are keeping an eye out for evidence of a LinkedIn incursion.