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LNKD > SEC Filings for LNKD > Form 10-K on 13-Feb-2014All Recent SEC Filings

Show all filings for LINKEDIN CORP

Form 10-K for LINKEDIN CORP


13-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This section and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as "anticipates," "expects," "believes," "plans," "predicts," and similar terms. Forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Risk Factors" above, which are incorporated herein by reference.
You should read the following discussion in conjunction with the consolidated financial statements and notes thereto included in Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. All information presented herein is based on the Company's fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to the Company's fiscal years ended in December and the associated quarters of those fiscal years. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Overview
We are the world's largest professional network on the Internet and currently have approximately 277 million members in over 200 countries and territories. Through our proprietary platform, members are able to create, manage and share their professional identity online, build and engage with their professional network, access shared knowledge and insights, and find business opportunities, enabling them to be more productive and successful. We believe we are the most extensive, accurate and accessible network focused on professionals. In 2013, we achieved significant growth from 2012 as our network of registered members and member engagement continues to increase and we continue to benefit from expanded product offerings and international expansion. Our net revenue was $1,528.5 million in 2013, which represented an increase of 57% from 2012. Our future growth will depend, in part, on our ability to continue to increase our member base and member engagement on both desktop and mobile devices, as well as continuing to expand our product offerings and international expansion, which we believe will result in increased sales of our Talent Solutions, Marketing Solutions and Premium Subscriptions to new and existing customers. As our net revenue increases, we expect our growth rate related to net revenue will decrease over time. Also, we believe the rate at which we are able to increase our member base and member engagement, as measured by our key metrics, will decelerate over time because of the large scale of our network, and that this may impact portions of our business.
In September 2013, we closed a follow-on offering, at which time we sold a total of 6,188,340 shares of our Class A common stock. We received total cash proceeds of $1,348.1 million, net of underwriting discounts and commissions and other costs associated with this offering. We intend to use these proceeds for general corporate purposes and to support the growth of our business.
In 2014, our philosophy is to continue to invest for long-term growth and we expect to continue to invest heavily in the following:
Talent. We expect to increase our workforce, which will result in an increase in headcount-related expenses, including stock-based compensation expense. As of December 31, 2013, we had 5,045 employees, which represented an increase of 46% compared to the same period last year.

Technology. We expect to continue to make significant capital expenditures to upgrade our technology and network infrastructure to improve the ability of our website to handle expected increases in usage, to enable the release of new features and solutions, and to scale for future growth.

Product. We expect to continue to invest heavily in our product development efforts to enable our members and customers to derive more value from our platform.

Monetization. We expect to continue to aggressively expand our field sales organization to market our solutions both in the United States and internationally.

As a result of our investment philosophy, we may not be profitable on a U.S. generally accepted accounting principles ("GAAP") basis in 2014.

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Key Metrics
We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
Number of Registered Members. We define the number of registered members in our network as the number of individual users who have created a member profile on our website as of the date of measurement. We believe the number of registered members is a key indicator of the growth of our network and our ability to receive the benefits of the network effects resulting from such growth. Growth in our member base depends, in part, on our ability to successfully develop and market our solutions to professionals who have not yet become members of our network. Member growth will also be contingent on our ability to translate our offerings into additional languages, create more localized products in certain key markets, and more broadly expand our member base internationally.

We believe that a higher number of registered members will result in increased sales of our Talent Solutions, Marketing Solutions and Premium Subscriptions, as customers will have access to a larger pool of professional talent. However, a higher number of registered members will not immediately increase sales, nor will a higher number of registered members in a given region immediately increase sales in that region.
The following table presents the number of registered members as of the periods presented by geographic region:

                                  December 31,                         December 31,
                                2013        2012       % Change      2012        2011       % Change
                                                (in thousands, except percentages)
Members by geographic region:
United States                  94,115      73,633         28 %      73,633      57,745         28 %
Other Americas (1)             47,646      32,746         46 %      32,746      20,850         57 %
Total Americas                141,761     106,379         33 %     106,379      78,595         35 %
EMEA (2)                       85,656      60,020         43 %      60,020      41,758         44 %
APAC (3)                       49,425      35,513         39 %      35,513      24,621         44 %
Total number of registered
members (4)                   276,842     201,912         37 %     201,912     144,974         39 %


 ______________________


(1) Canada, Latin America and South America

(2) Europe, the Middle East and Africa ("EMEA")

(3) Asia-Pacific ("APAC")

(4) The number of registered members is higher than the number of actual members due to various factors. For more information, see "Risk Factors-The number of our registered members is higher than the number of actual members and a substantial majority of our page views are generated by a minority of our members. Our business may be adversely impacted if we are unable to attract and retain additional members who actively use our services. In addition, the tracking of certain of our performance metrics is done with internal tools and is not independently verified."

The number of our registered members increased by 37% in 2013 compared to 2012, and by 39% in 2012 compared to 2011. Over these same periods, the growth rate in our net revenue exceeded the growth rate of our number of registered members. While growth in the number of registered members is an important indicator of expected revenue growth, it also informs our management's decisions with respect to those areas of our business that will require further investment to support expected future membership growth. For example, as the number of registered members increases, we will need to increase our capital expenditures to improve our information technology infrastructure to maintain the effectiveness of our solutions and the performance of our website for our members.
Unique Visitors. We report our unique visitors based on data provided by comScore, a leading provider of digital marketing intelligence. comScore defines unique visitors as users who have visited our desktop website (which excludes mobile engagement) at least once during a month regardless of whether they are a member. We view unique visitors as a key indicator of growth in our brand awareness among users and whether we are providing our members with useful products and features, thereby increasing member engagement. We believe that a higher level of member engagement will result in increased sales of our Talent Solutions, Marketing Solutions and Premium Subscriptions, as customers will have access to a larger pool of professional talent. Growth in unique visitors will be driven by growth in the number of registered members, improvements to features and products that drive traffic to our website, and international expansion.

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The following table presents the average monthly number of unique visitors during the periods presented:

December 31, December 31,
2013 2012 % Change 2012 2011 % Change
(in millions, except percentages)

Unique visitors (1) 183 126 45 % 126 84 50 %

(1) Includes the impact of Slideshare, which was acquired on May 17, 2012, beginning on June 1, 2012. Excluding the impact of Slideshare, the average monthly number of unique visitors for the year ended December 31, 2013 and December 31, 2012 was 139 million and 109 million, respectively.

The number of unique visitors increased by 45% in 2013 compared to 2012, and by 50% in 2012 compared to 2011. These increases reflect increased traffic to our website by a growing number of users. While this increase in unique visitors helped to drive the increase in net revenue that we experienced during this period, it also provided management with important insights into the ways in which our users and members were using our website, including how they were coming to our website and which products and features best promoted brand awareness to attract users to our website.
Page Views. We report our page views based on data provided by comScore. comScore defines page views as the number of pages on our desktop website (excluding mobile page views) that users view during the measurement period. Similar to unique visitors, we believe page views is a key indicator for gaining insight into whether we are increasing member engagement and whether our members are deriving value from our solutions. We expect growth in page views will be driven, in part, by growth in the number of registered members, improvements in products and features that drive member traffic to our website, and international expansion. However, page views may not capture all of the value that our members and other users derive from our solutions because part of the benefit of certain products and features is that the member or user does not need to visit our website to receive value from our platform. For example, members can respond to emails they receive from other members without accessing their LinkedIn account or our website.

The following table presents the number of page views during the periods presented:

                 December 31,                     December 31,
                2013      2012      % Change     2012      2011      % Change
                              (in millions, except percentages)
Page views (1) 47,336    38,258        24 %     38,258    29,420        30 %

(1) Includes the impact of Slideshare, which was acquired on May 17, 2012, beginning on June 1, 2012. Excluding the impact of Slideshare, the number of page views for the year ended December 31, 2013 and December 31, 2012 was 45 billion and 37 billion, respectively.

The number of page views according to comScore increased 24% in 2013 compared to 2012, and by 30% in 2012 compared to 2011. These increases reflect increased use of the information, products and features available on our website by our users. While similar to the increase in registered members and unique visitors, this increase in page views also helped to drive the increase in net revenue that we experienced during this period. The page views metric also provided management with important insights into the ways in which our users were utilizing the information, products and features on our website, which informs management's decision on how to improve these products and features to provide our users with compelling reasons for continuing to come back to our website.
Number of LinkedIn Corporate Solutions Customers. We define the number of LinkedIn Corporate Solutions customers as the number of enterprises and professional organizations that we have under active contracts for this product as of the date of measurement. Our LinkedIn Corporate Solutions include LinkedIn Recruiter, Job Slots, LinkedIn Recruitment Media and LinkedIn Career Pages, which are all part of Talent Solutions. We believe the number of LinkedIn Corporate Solutions customers is a key indicator of our market penetration in the online recruiting market, the productivity of our field sales organization and the value that our products bring to both large and small enterprises and professional organizations. The number of customers subscribing to our LinkedIn Corporate Solutions product is particularly important to monitor given that we expect revenue from LinkedIn Corporate Solutions to continue to represent a significant portion of our total net revenue, and we are significantly investing in our ability to successfully sell this unique product in a new and rapidly evolving market.

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The following table presents the number of LinkedIn Corporate Solutions customers as of the periods presented:

                                 December 31,                          December 31,
                               2013        2012        % Change       2012       2011       % Change
LinkedIn Corporate Solutions
customers                     24,444      16,409           49 %     16,409      9,236           78 %

The number of LinkedIn Corporate Solutions customers increased by 49% in 2013 compared to 2012, and by 78% in 2012 compared to 2011. During these periods, we experienced an increase in net revenue from sales of our Talent Solutions, both in terms of absolute net revenue and as a percentage of our total net revenue (as further described in "Results of Operations" below), which was, and continues to be, largely driven by increases in the number of our customers that have purchased our LinkedIn Corporate Solutions products.
Sales Channel Mix. Depending on the specific product, we sell our Talent Solutions and Marketing Solutions offline through our field sales organization or online on our website. The vast majority of our Premium Subscriptions are sold through our website. Our field sales organization uses a direct sales force to solicit customers and agencies. This offline channel is characterized by a longer sales cycle where price can be negotiated, higher relative average selling prices, longer contract terms, higher selling expenses and a longer cash collection cycle compared to our online channel.

Our online sales channel allows members to purchase solutions directly on our website. Members can purchase Premium Subscriptions as well as certain lower priced products in our Talent Solutions and Marketing Solutions, such as job postings and self-service advertising. This channel is characterized by lower average selling prices and higher cancellations compared to our offline channel, lower selling costs due to our automated payments platform and a highly liquid collection cycle.
The following table presents our net revenue by field sales and online sales:

                                Year Ended December 31,
                     2013                  2012                 2011
                                    ($ in thousands)
Field sales  $   891,458     58 %   $ 552,459     57 %   $ 287,634     55 %
Online sales     637,087     42 %     419,850     43 %     234,555     45 %
             $ 1,528,545    100 %   $ 972,309    100 %   $ 522,189    100 %

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed within this Annual Report on Form 10-K adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below of adjusted EBITDA to net income, the most directly comparable GAAP financial measure.
We have included adjusted EBITDA in this Annual Report on Form 10-K because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the payment of bonuses to our executive officers and employees. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
For additional information on the limitations of adjusted EBITDA, see "Adjusted EBITDA" in Item 6 "Selected Financial Data" for more information.

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                                          Year Ended December 31,
                                      2013          2012         2011
                                              (in thousands)
Reconciliation of Adjusted EBITDA:
Net income                         $  26,769     $  21,610     $ 11,912
Provision for income taxes            22,459        35,504       11,030
Other (income) expense, net           (1,416 )        (252 )      2,903
Depreciation and amortization        134,516        79,849       43,100
Stock-based compensation             193,915        86,319       29,768
Adjusted EBITDA                    $ 376,243     $ 223,030     $ 98,713

Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe that the assumptions and estimates associated with revenue recognition, stock-based compensation, the valuation of goodwill and intangible assets, website and internal-use software development costs, leases, income taxes and legal contingencies have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements under Item 8.
Revenue Recognition
A majority of our arrangements for Talent Solutions and Marketing Solutions include multiple deliverables. In accordance with authoritative guidance on revenue recognition, we allocate consideration at the inception of an arrangement to all deliverables based on the relative selling price method in accordance with the selling price hierarchy. The objective of the hierarchy is to determine the price at which we would transact a sale if the service were sold on a stand-alone basis and requires the use of: (1) vendor-specific objective evidence, or VSOE, if available; (2) third-party evidence, or TPE, if VSOE is not available; and (3) best estimate of selling price, or BESP, if neither VSOE nor TPE is available.
VSOE. We determine VSOE based on our historical pricing and discounting practices for the specific solution when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for these services fall within a reasonably narrow pricing range. We have not historically priced our Marketing Solutions within a narrow range to allow us to establish VSOE. We have established VSOE for a limited number of our Talent Solutions products and for such products, VSOE has been used to allocate the selling price of deliverables.
TPE. When VSOE cannot be established for deliverables in multiple element arrangements, we apply judgment with respect to whether we can establish selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of services with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor services' selling prices are on a stand-alone basis. As a result, we have not been able to establish selling price based on TPE.
BESP. When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration. The process for determining our BESP for deliverables without VSOE or TPE involves management's judgment. Our process considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors that we considered in developing our BESPs include: (1) historical sales prices, (2) prices we charge for similar offerings, (3) sales volume, and (4) geographies. Generally, we are not able to establish VSOE nor TPE for our Talent Solutions and Marketing Solutions deliverables. The allocation of revenue has generally been based on our BESPs.
If the facts and circumstances underlying the factors we considered change or should future facts and circumstances lead us to consider additional factors, both our determination of our relative selling price under the hierarchy and our BESPs could change in future periods.

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Stock-Based Compensation
We account for stock-based compensation in accordance with the authoritative guidance on stock compensation. Under the fair value recognition provisions of this guidance, stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. As a result, we are required to estimate the amount of stock-based compensation we expect to be forfeited based on our historical experience. If actual forfeitures differ significantly from our estimates, stock-based compensation expense and our results of operations could be materially impacted.
Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options and employee stock purchase plan options. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of our common stock, our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates, and expected dividends, which are estimated as follows:
Fair Value of Our Common Stock. Because our stock was not publicly traded prior to our initial public offering, the fair value of our common stock underlying our stock options was determined by our board of directors or compensation committee of our board of directors, which intended all options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant. Upon completion of our initial public offering on May 19, 2011, our Class A common stock was valued by reference to its publicly traded price.

Expected Term. The expected term was estimated using the simplified method allowed under SEC guidance.

Volatility. As we do not have a significant trading history for our common stock, the expected stock price volatility for our common stock was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in the technology industry similar in size, stage of life cycle and financial leverage. We did not rely on implied volatilities of traded options in our industry peers' common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

Risk-Free Rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.

Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

Valuation of Goodwill and Intangible Assets When we acquire businesses, we allocate the purchase price to the tangible assets and liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on information obtained from management of the acquired companies and historical experience. These estimates can include, but are not limited to:
the time and expenses that would be necessary to recreate the asset;

the profit margin a market participant would receive;

. . .

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