Earlier this year, LinkedIn (NYSE:LNKD) acquired Lynda.com, an online learning company that teaches business, technology, and creative skills through online videos, in a deal valued at about $1.5 billion. Will Lynda.com find synergy in LinkedIn's online network of professionals? More importantly, will LinkedIn get its money's worth out of this investment?
To both questions, management would probably answer with a resounding, "yes." Here's why LinkedIn management is so bullish on its future with Lynda.com.
Putting Lynda.com into perspective
For LinkedIn, the $1.5 billion deal to acquire Lynda.com was no small sum. While the social network may have a market capitalization of $24 billion, the company only had about $3.5 billion in cash on its balance sheet before it purchased Lynda.com.
Wielding its stock's pricey valuation, the company chose to pay about half of the $1.5 billion in stock, using cash for the other half. With management forking out so much cash and stock, investors are counting on the acquisition to pay off handsomely.
What kind of immediate value does Lynda.com bring to LinkedIn? For the full year, LinkedIn expects to recognize about $20 million to $25 million in revenue from Lynda.com. With LinkedIn's total annualized revenue approaching $3 billion, investors may initially be tempted to conclude Lynda.com's business is too small for investors to care about at this point. But this would be a mistake.
This estimated revenue to be recognized from Lynda.com in 2015 reflects a late second-quarter close, some transitional impacts, and accounting related to fair-value adjustment for deferred revenue. Together, these accounting impacts substantially reduce Lynda.com's usual annual revenue. As the company rebuilds Lynda.com's deferred revenue base, this revenue will begin to normalize. But it won't be until 2017 when revenue from Lynda.com for the full year begins to represent actual top-line sales.
What will Lynda.com's revenue look like in 2016 when it has finally normalized? When LinkedIn acquired Lynda.com, it noted in a press conference that the online learning company registered $150 million in revenue in 2014. Even more, LinkedIn noted that Lynda.com's revenue was growing in the mid 20% range. If Lynda.com's revenue continues to grow at this pace, Lynda.com could contribute $225 million to LinkedIn's top line next year.
Further, if there are some synergies created as a result of the acquisition, and Lynda.com's revenue growth rate actually gets a boost, the online learning company's contribution to LinkedIn's top line, going forward, could be even greater than it was in the past. Looking out over the next few years, therefore, Lynda.com is likely to represent at least 7% to 10% of LinkedIn's total revenue.
The opportunity in education
In the longer term, LinkedIn management seems to believe that Lynda.com could be a significant driver for the company. Indeed, during LinkedIn's first-quarter earnings call, management went as far as to say that its acquisition of Lynda.com represents one of its "most transformational opportunities."
How is the Lynda.com acquisition transformational for LinkedIn? It's a major step forward in becoming an established player in the online education market.
Education is "a byproduct of the Lynda acquisition," LinkedIn CEO Jeff Weiner said during the company's first-quarter earnings call, "and one of the things we are most excited about -- taking that coursework in the library and that high quality repository and expanding the global footprint."
Just how big is LinkedIn's opportunity in education? According to Weiner, it's substantial.
I would also add, though it didn't come up specifically, the addressable opportunity in learning and development at $30 billion is something we are obviously very excited about. And we think by virtue of the quality, of the library that Lynda brings to the table, and that world-class team that we are very well positioned to integrate in unique ways and start to get after that addressable opportunity.
With the company estimating its total addressable market across all of its businesses -- including the $30 billion in the learning and development market -- to be about $115 billion, LinkedIn management believes that its new addressable market in learning and development represents a meaningful 26% of the company's long-term opportunity.
Even though management believes learning and development, with the help of Lynda.com, can eventually represent a substantial chunk of its business, the company will have to overcome challenges of integrating this new company. And challenges could prove to be more difficult than management is anticipating. Still, it's worth noting management's greater bullishness in this arena now that it has Lynda.com on its side.
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.