LinkedIn Delivers, but at What Cost?

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Maybe social media isn't dead after all. LinkedIn (NAS: LNKD) is riding a wave of market optimism today after its second-quarter revenue beat the Street's expectations and non-GAAP earnings were as expected. Are the good vibes deserved? Let's dig into the company's latest reports to find out.

What the numbers tell you
LinkedIn's latest quarter continues a consistent trend of booming revenue and shrinking margins. Revenue improved 89% year over year, but net income declined relative to the year-ago quarter. Non-GAAP earnings did improve by 68%, looking much better in comparison. We're sticking to GAAP numbers to paint the picture of LinkedIn's recent history:

Sources: Morningstar and company earnings release.

Sources: Morningstar and company earnings release.


Each of LinkedIn's three segments saw impressive top-line growth, but one is clearly coming to dominate the total take:

Segment

Q2 Revenue

Year-over-Year Growth

Percent of Total

Hiring Solutions$121.6 million107%53%
Marketing Solutions$63.1 million64%32%
Premium Subscriptions$43.5 million82%20%

Source: company earnings release.

Last year, Hiring Solutions was only 48% of the company's overall revenue. LinkedIn's previous quarter saw similar growth by segment, with Hiring Solutions leading the pack. Demand for top talent seems to be running high. LinkedIn recently renewed a major Hiring Solutions contract with Microsoft (NAS: MSFT) , underscoring the need for premium workers even in an economy that seems to have little need for non-tech talent. There are now 12,503 corporate customers using LinkedIn's Hiring Solutions, representing a doubling from last year.

The high-tech/low-tech dichotomy is easy to see at LinkedIn's peers as well. Midrange-job board Monster Worldwide (NYS: MWW) might need to sell itself to stay alive, but specialty-job repository Dice Holdings (NYS: DHX) has continued to grow both top and bottom lines.

LinkedIn's revenue growth is particularly impressive compared with its membership growth. The 174 million members now on LinkedIn represent only 50% growth from the year-ago quarter. Many of these members are now international -- LinkedIn's member base is only 38% American, and 70% of the 13 million members added in the most recent quarter were in overseas markets. The fact that premium subscription growth is outpacing total membership growth also makes it clear that members are becoming more willing with each passing quarter to pay up for access.

Thanks to this growth, LinkedIn's full-year revenue guidance has been bumped up by $35 million on the low end and $25 million on the high end, into the range of $915 million to $925 million.

Points to ponder
LinkedIn's been adding to its headcount as it expands internationally, and new overseas offices were a significant contributor to the company's lower free cash flow levels this quarter. There are now more than 2,800 employees, with 414 added in the latest quarter. LinkedIn sports much lower revenue and much lower profit per employee than social kingpin Facebook (NAS: FB) , which has been unfavorably compared with LinkedIn a number of times after its latest earnings disappointed everyone:

Company

Employees

Revenue per Employee (TTM)

Profit per Employee (TTM)

LinkedIn2,800$258,000$4,600
Facebook3,976$1.09 million$96,500

Sources: Morningstar and author's calculations.

Keep in mind that these are the most recent employee numbers matched up to full-year results. Each company's actual per-employee results are likely a bit higher, but Facebook's orders-of-magnitude dominance of the profit category comes after adding more than 1,000 employees in the past year and after taking a massive profit hit on post-IPO stock compensation expenses.

While an increase in revenue makes for a nice upward slope on my graph, it doesn't mean anything if the bottom line doesn't grow as well. LinkedIn's still valued at an astronomical 640 P/E today, and though free cash flow has outpaced profit, that might not be maintained as LinkedIn continues to aggressively grow overseas.

This latest earnings report doesn't offer us much in the way of news. A real surprise would have been a sudden deceleration in LinkedIn's growth rate. I'm curious to see how its cash flow copes with the need for international presence, and whether it can improve each employee's fiscal effectiveness. This is a stock that will require some patience if you believe it'll keep moving higher. To buy into LinkedIn's growth story, you have to assume either that its stratospheric valuation will remain intact as it tries to augment its cash flow, or that it'll soon figure out a way to drastically expand its profit margins.

Right now, despite LinkedIn's superior revenue growth rate, Facebook still looks like the better buy in my book. Find out all of the key opportunities and threats facing the company in the Fool's latest premium research report. This service includes a full year of updates when must know news hits, so make sure to claim your copy today.

The article LinkedIn Delivers, but at What Cost? originally appeared on Fool.com.

Fool contributorAlex Planesholds no financial position in any company mentioned here. Add him onGoogle+or follow him on Twitter,@TMFBiggles, for more news and insights.The Motley Fool owns shares of Facebook, Microsoft, and LinkedIn.Motley Fool newsletter serviceshave recommended buying shares of LinkedIn, Facebook, and Microsoft and creating a bull call spread position in Microsoft. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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