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LinkedIn Corp Earnings: What to Watch

By Daniel Sparks - Jul 21, 2015 at 2:29PM

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Can LinkedIn reinvigorate investor confidence next Thursday when it reports earnings?

Investors will be watching closely when LinkedIn (LNKD.DL) reports second-quarter results on Thursday, July 30. While shares are up more than 40% in the past 12 months, they have yet to gain any ground in 2015. And since the company reported first-quarter results, shares are actually down about 11%.

The expectations
When LinkedIn reported its first-quarter results, the company guided for second-quarter revenue of $670 million-$675 million and non-GAAP EPS of $0.28. But analysts, knowing that LinkedIn typically reports results above its own quarterly guidance, have higher expectations. On average, analysts expect LinkedIn to report second-quarter revenue and non-GAAP EPS of $680 million and $0.30, respectively. Compared to the year-ago quarter, these forecasts represent a 28% increase in revenue and a 41% decline in EPS.

Leading up to LinkedIn's first-quarter results, LinkedIn's financials were about in line with analyst estimates. Analysts were expecting revenue of $637 million and non-GAAP EPS of $0.57. Actual revenue and non-GAAP EPS were $638 million and $0.57. But despite meeting analyst expectations, LinkedIn's first-quarter results weren't good enough to impress the Street. Shares plummeted about 19% in the next few trading days following the report. The likely cause of disappointment? Analysts were expecting the company to report higher guidance for its second quarter.

With shares still trading well below where they were before the company reported first-quarter results, can the social network for professionals reinvigorate investor confidence next Thursday?

Checking in on talent solutions
At 62% of LinkedIn's total revenue, the company's talent solutions segment is its most important business when it comes to influencing revenue growth rates for the total business. The segment, which makes money by selling tools to recruiters, is LinkedIn's primary source of revenue by a long shot. The company's other two segments -- marketing solutions and premium subscriptions -- each account for 19% of revenue, respectively.

When LinkedIn reported first-quarter results, the company's talent solutions revenue growth decelerated considerably. Yes, talent solutions year-over-year revenue growth has been decelerating for years, but the 500 basis point sequential decrease in year-over-year growth rates for the segment in Q1 was greater than the 300 basis point sequential drop in the prior quarter. Could this rapid deceleration continue?

Investors should check in on LinkedIn's talent solutions year-over-year revenue growth rate to ensure the segment's revenue growth deceleration isn't continuing to decelerate at increasingly rapid rates. Look for about 33.5% year-over-year revenue growth in its talent solutions segment when the company reports first-quarter results. While this growth would be lower than LinkedIn's first-quarter year-over-year revenue growth for its talent solutions segment of 38%, it would be about in line with the rate of sequential deceleration in Q1.

Full-year guidance
Perhaps most importantly, given LinkedIn's very forward-looking valuation, investors should look for LinkedIn to maintain its full-year guidance for revenue and non-GAAP EPS. If management reduces full-year guidance, it could suggest the company underestimated the difficulties of growing and scaling its business.

Already, LinkedIn expects headwinds when it comes to profitability in 2015. Management entered the year planning to spend heavily on product development and capital expenditures during 2015. While management's spending on growth efforts has paid off handsomely in the past, a choice to reduce its outlook for profitability any further could suggest management's plans for executing on its growth initiatives require more investment than it had anticipated.

In Q1, LinkedIn management said it expected full-year revenue of $2.9 billion and non-GAAP EPS of $1.90, up 31% and down 6%, respectively.

Shortly after market close next Thursday, LinkedIn's quarterly results will be available to read on its investor relations page. The company will also update its investor relations page with a link for investors to tune into its live second-quarter conference call at 2:00 PM PST on the same day.

Stay tuned at The Motley Fool for more earnings coverage for LinkedIn and other stocks as earnings season continues.

Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends LinkedIn. The Motley Fool owns shares of LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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