In its Q2 2014 earnings release, professional networking site LinkedIn Corp (NYSE:LNKD) registered a solid earnings and revenue beat. In the same earnings announcement, the company also released some of its internal user growth and engagement tracking metrics. We’ll begin by looking at how the new metrics are different from the ones that were being used earlier. Further, we’ll explain why they don’t look as encouraging as LinkedIn’s total member growth.
So what’s new about LinkedIn’s internal metrics?
To sum up quickly, LinkedIn earlier reported the total number of registered users and some data from Comscore like unique visitors and page views. Starting from Q2 2014, the company transitioned to its own internal metrics, ‘Unique Visiting Members’, ‘Mobile Unique Visiting Members’ and ‘Member Page Views’.
What has changed and why the transition?
The common change in the metrics is that they now focus on ‘members’, while the previously used Comscore metrics did not differentiate between members and non members and factored in all unique users into their measurements.
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Further, both metrics now include mobile visitors and page views respectively, while Comscore’s metrics measured visits and page views on LinkedIn’s desktop website only.
According to LinkedIn, the company has transitioned to the new metrics given the increase in mobile traffic and user engagement on mobile devices.
LinkedIn Member Growth & Engagement
LinkedIn Corp (NYSE:LNKD)’s member base has been growing at a healthy rate. The company’s total registered members grew by close to 32% YoY in the latest quarter, adding about 17 million members to touch 313.4 million members. However there’s quite a divergence between LinkedIn’s total member base and its active user base, as we had highlighted in our LinkedIn Valuation post earlier this year. We use data from Quantcast, for the number of people accessing LinkedIn, since Comscore data excludes mobile traffic. Based on those numbers, the gap between total members and active users had been widening, and the trend has continued in Q2 2014. Active user addition has been negative in 3 out of the last 4 quarters.
LinkedIn’s latest internal metrics also show a declining trend. There has been a rapid decline in the ‘active member’ YoY growth rates, and absolute active member addition hasn’t been impressive either. LinkedIn’s member addition over the last twelve months looks impressive at 75 million users, whereas the number of incremental active members during the same period has been under 10 million.
What’s good for LinkedIn though, is that the active mobile members as a percentage of the total active members have been trending upwards quarter after quarter. Mobile users being the focus of all internet platforms, traffic growth in that segment is good news.
LinkedIn Corp (NYSE:LNKD)’s member engagement also shows an erratic trend in incremental page views. Further, the company registered its 1st sequential decline in page views in addition to a sharp decline in YoY growth for the same metric.
What This Means
Like any other internet business, LinkedIn’s biggest resource is its ‘active member base’. How big that base is and how engaged they are on the site determines the value LinkedIn can generate out of them. Unlike in the case of its peers Facebook and Twitter, LinkedIn’s revenue is not as heavily dependent on advertising revenue. However, active users are still just as important to sustain long term revenue growth.
LinkedIn Corp (NYSE:LNKD)’s revenue is earned from 3 segments, all of which are impacted by the number of active users and their engagement levels on the site.
LinkedIn’s monetization rates have been much higher than those of Facebook Inc (NASDAQ:FB) or Twitter Inc (NYSE:TWTR). Depending on whether you use active users (Quantcast data) or active members data, LinkedIn’s user monetization rate for Q2 ranges from $3.7-$6.3 per monthly active user/member per quarter, v/s Facebook’s $2.2 per monthly active user per quarter. LinkedIn’s business also comes with the inherent advantage of user quality. Advertisers would rather gain visibility with working professionals, rather than teenagers who might have more time but less money to spend. LinkedIn’s monetization rates could fuel revenue growth for some time to come. However, for long term growth, active member growth and engagement will need to keep up.
LinkedIn Could Be A Risky Bet
The company’s profit margins have been close to non-existant in the last 4 quarters. Given its ongoing expansion in China, there’s no reason to believe that margins will improve significantly in the near term. Further it might be a little premature to bet on growth in China, given the challenges like government regulation and others that have been well documented by many.
Post the Q2 results, LinkedIn’s stock has recovered significantly, but it has still underperformed the NASDAQ over the last 1 year. Given LinkedIn’s user growth rate concerns and its Price to Sales multiple of about 15, LinkedIn Corp (NYSE:LNKD) is a risky bet at its current valuations.