Evaluation of the firm's health, management, performance and risk profile using LinkedIn's 2011 10-K and other freely available sources.
Report contents:
A. LinkedIn Company Overview.
B. Trend Analysis of Sales and Earnings Growth.
C. Analysis of Operating Efficiency, Liquidity and Solvency.
D. Analysis of Cash Flows.
E. Is LinkedIn's internal proxy non-GAAP Adjusted EBITDA really the important indicator the firm's 10-K says it is, or is it just "window dressing" the firm's earnings?
Appendix A - Calculations and Ratios
Boost the utilization of your HCL environment by reevaluating use cases and f...
Financial Management: LINKEDIN Company Diagnostic based on 2011 10-K
1.
LinkedIn: Company Case
Financial
Management
Class
203a
Alexandra
Brooks,
!""#!$%#
brooksal@uci.edu
2. LinkedIn: Company Case | 2
CONTENTS
A.
Overview 3
B.
Trend
Analysis
of
Sales
and
Earnings
Growth 5
C.
Analysis
of
Operating
Efficiency,
Liquidity,
and
Solvency 7
D.
Analysis
of
Cash
Flows 8
E.
Own
Question 12
Appendix
1
–
Calculations
and
ratios 14
3. LinkedIn: Company Case | 3
A.
Overview
1.
Company
name
and
locations
Name:
LinkedIn
Corporation
Head
office:
Mountain
View,
California,
USA.
Other
primary
locations:
Amsterdam,
The
Netherlands;
Delhi,
India;
Dublin,
Ireland;
Melbourne,
Australia;
Paris,
France;
Stockholm,
Sweden;
Omaha,
New
York,
Chicago,
and
San
Francisco,
USA,
Brazil,
Germany,
Italy,
and
Spain.
2.
Where
in
the
life
cycle
is
LinkedIn?
LinkedIn
Corporation
is
currently
in
its
growth
phase,
it
was
co-‐founded
in
2003
by
former
CEO
and
current
chairman
Reid
LinkedIn
Co
and
curren
Hoffman.
In
2011
the
company
was
the
first
major
social
networking
company
to
file
an
IPO
and
the
biggest
internet
IPO
networking
company
u
since
Google.
The
company
used
the
proceeds
for
more
investment.
Having
built
a
competent
management
team
led
by
manageme
the
last
2
y
former
Yahoo!
executive
CEO
Jeff
Weiner,
the
company
has
in
the
last
2
years
begun
to
go
through
a
phase
of
small
locations
in
member
ba
acquisitions,
opening
new
sales
office
locations
internationally
as
well
as
continuing
to
invest
in
R&D
and
member
languages.
acquisition
in
order
to
attain
a
critical
mass
of
member.
More
than
half
of
its
member
base
comes
from
outside
the
US,
and
it
offers
its
services
in
half
a
dozen
languages.
3.
Using
its
financial
report,
provide
an
overview
of
LinkedIn’s
(a) Core
activities:
LinkedIn
generates
revenues
from
enterprises
and
professional
organizations
by
selling
its
hiring
and
marketing
solutions
both
offline,
through
the
company’s
field
sales
organization,
and
online,
through
its
the
website.
It
also
generates
revenue
from
subscription
service
fees
from
members,
who
are
either
private
individuals
or
enterprises,
subscribing
to
LinkedIn
premium
services.
(b) Primary
goal
and
the
main
strategies
being
pursued
to
achieve
the
goal(s);
LinkedIn’s
mission
is
to
“connect
the
world’s
professionals
and
make
them
more
productive
and
successful.”
The
firm
proposes
its
solutions
benefit
professionals
and
seeks
to
connect
them
with
enterprises
and/or
professional
organizations
4. LinkedIn: Company Case | 4
seeking
the
world’s
best
talent.
The
10-‐K
also
states
the
firm’s
belief
that
its
members
come
first
and
that
this
long-‐term
approach
enables
the
organization
to
invest,
innovate
and
pioneer
in
unexplored
segments
of
the
industry
in
order
to
increase
the
value
proposition
of
its
proprietary
platform
and
data.
LinkedIn
lists
six
key
points
as
part
of
its
core
strategy.
These
include:
viral
growth,
serve
as
the
professional
profile
of
record,
be
the
essential
source
of
professional
insights,
accessibility
for
members,
increasing
monetization
while
creating
value
for
members,
and
also
expanding
internationally.
The
company
says
that
it
has
seen
significant
growth
in
the
international
member
base
and
has
established
operations
in
Australia,
Brazil,
Canada,
France,
Germany,
India,
Ireland,
Italy,
Japan,
the
Netherlands,
Singapore,
Sweden
and
the
United
Kingdom.
It
adds
that
it
intends
to
expand
sales,
technical
and
support
operations
in
additional
locations,
and
expanding
the
member
base
by
supporting
local
languages.
(c) Primary
opportunities
and
risks
associated
with
the
goals
and
strategies.
• The
firm
is
investing
heavily
into
new
technologies
in
order
to
deliver
consistently
high
website
performance
and
new
tools
and
services
for
members
in
order
to
maintain
LinkedIn’s
brand
leader
position;
conversely
this
investment
may
not
result
in
the
level
of
performance
required
in
order
to
grow
the
membership
base
and
if
the
security
of
the
website
is
compromised
this
may
also
affect
LinkedIn’s
business.
• Putting
members
first
is
a
cornerstone
of
the
company’s
philosophy
and
the
management
believes
this
is
the
best
way
to
build
a
critical
mass
of
members
that
will
result
in
beneficial
network
effects
promoting
user
experience,
increasing
value
for
all
members.
The
risk
however,
is
that
this
strategy
may
conflict
with
the
short-‐
term
interests
of
the
business,
and
the
end
result
may
not
be
the
long-‐term
benefit
envisaged.
• The
company’s
current
expansion
in
international
markets
opens
up
the
opportunities
to
successfully
enter
new
markets
and
increase
the
LinkedIn
footprint,
however,
operating
in
different
countries
means
different
laws
and
compliance
could
induce
the
firm
to
incur
additional
costs
and
change
its
business
practices.
4.
What
“industry”
is
LinkedIn
in?
Is
your
company
an
industry
leader?
The
Internet
Information
Provider
(IIP)
industry
is
populated
by
customer
facing
firms
that
generate
their
sales
by
specializing
in
creating
and
/
or
aggregating
content
and
then
attracting
visitors
to
their
site
through
the
generally
free
5. LinkedIn: Company Case | 5
provision
of
such
content.
Companies
that
are
part
of
this
industry
have
mass
consumer
focused
Web
sites
that
supply
“neutral”
information;
supplying
information
from
a
variety
of
sources
and
generally
refrain
from
selling
a
proprietary
product
to
readers
–
that
is,
in
the
main
they
aren’t
selling
tangible
items
like
property
or
services
to
viewers.
Their
customers,
in
a
business
model
sense,
are
not
visitors.
The
visitors
serve
to
convince
advertisers
to
buy
ad
space
or
solutions
on
the
site
or
across
their
networks.
In
comparison
to
the
other
players
in
its
industry,
LinkedIn’s
Market
Capitalization
is
relatively
small
at
$9.6bn;
the
top
players
in
the
industry
include
internet
and
software
corporation
Google
($200bn),
and
social
media
site
Facebook
(offered
1
for
IPO
later
in
2012
with
some
analysts
estimating
a
valuation
of
$100bn.) .
Job
board
Taleo
acquired
recently
by
Oracle
for
$1.3bn
competes
against
LinkedIn’s
hiring
solutions
business,
while
LinkedIn’s
most-‐like
social
networking
public
2
competitor
is
German
professional
networking
site
Xing
(valued
at
€267.50m/$352m.)
In
relation
to
its
segment,
which
could
be
described
as
“business-‐related
social
networking”
it
is
the
market
leader
with
a
3
reported
150m
members.
Competitors
include
France’s
privately
owned
Viadeo,
established
in
2004
(with
40m
members ),
4
and
German
XING
(11m
members )
established
in
2003.
B.
Trend
Analysis
of
Sales
and
Earnings
Growth
Table1: LinkedIn - Common Size statement of operations data (redacted)
Year
Ended
December
31
000s$
/
%
2011
2010
2009
2008
2007
Net
$522,18 100%
$243,09 100%
$120,12 100%
$78,73 100%
$21,48 100%
revenue
9
9
7
3
6
Cost
of
81,488
15.6%
44,826
18.4%
25,857
21.5%
18,589
23.6%
7,384
22.7%
revenue
S
&
Mktg
164,703
31.5%
58,978
24.2%
26,847
22.3%
16,986
21.5%
5,037
15.5%
expense
Product
13,222
25%
65,104
26%
39,444
32%
29,366
37%
11,578
35%
develop’
Expense
Gross
440,751
84.4%
198273
81.6%
94,270
78.5%
60184
76.4%
25102
77.3%
margin
OpEx
496,344
95%
223,523
92%
123,482
102%
84,272
107%
32,918
101%
Operating
22942
4.3%
18966
7.8%
(3125)
(2.7%)
(4232)
(5.3%)
341
1.04%
Income
1
Top
Internet
Information
Providers
Companies
by
Market
Cap
http://finance.yahoo.com/q/in?s=LNKD
accessed
3/13/12
2
Xing
AG
snapshot
http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=O1BC:GR
acc
3/7/12
3
Viadeo
Homepage
http://www.viadeo.com
accessed
3/13/12
4
XING
homepage
http://www.xing.com
accessed
3/13/12
6. LinkedIn: Company Case | 6
Net
11912
2.3%
15385
6.3%
(3973)
(3%)
(4522)
(5.7%)
328
1%
Income
Other
2903
0.55%
610
0.25%
230
0.02
1277
1.62%
773
2.3%
income
(expense)
net
Other
data
Adj
EBITDA
98,713
18.9%
47,959
19.6%
14,651
12.2%
5,461
7%
3,480
11%
#
members
144,974
90,437
55,111
32,307
16,712
(000s)
1. Sales growth
LinkedIn
has
experienced
accelerated
revenue
growth
as
the
adoption
of
social
media
in
business
enters
the
mainstream
and
infiltrates
the
professional
community.
LinkedIn’s
corporate
webpages
report
that
as
of
February
9,
2012
the
website
has
over
150m
members
(145m
members
were
reported
as
December
31,
2011),
in
200
countries,
and
that
professionals
5
are
signing
up
to
join
LinkedIn
at
a
rate
that
is
faster
than
2
new
members
per
second.
The
company
has
shown
consistent
growth
over
period
2008
to
2011
seeing
net
revenue
grow
from
$78.8m
to
$522.2m,
a
compounded
annual
growth
rate
of
approximately
88%.
The
mix
of
revenue
generation
from
the
firm’s
hiring
solutions,
marketing
solutions
and
online
sales
of
premium
subscriptions
has
also
shifted
over
the
past
few
years.
Since
2008,
net
revenue
from
its
hiring
solutions
has
increased
as
a
6
percent
of
revenue
to
49%
at
the
end
of
Q1
in
2011
indicating
growing
market
penetration
of
online
hiring
solutions.
Over
the
next
two
to
three
years,
we
should
expect
to
see
sales
continuing
to
grow
as
the
company’s
international
operations
ramp
up,
its
membership
base
grows,
and
the
rise
in
hiring
and
marketing
solutions
are
adopted
by
firms
seeking
to
bypass
traditional
recruitment
and
marketing
methods
in
order
to
access
talent.
I
assess
that
as
the
company
has
a
management
team
that
will
be
able
to
manage
through
the
different
stages
of
growth
and
handle
the
challenges
to
come.
Now
that
membership
has
passed
100
million
members
the
firm
is
entering
territory
where
it
has
enough
critical
mass
in
terms
of
being
part
of
people’s
on-‐line
brands
it
will
be
difficult
for
a
firm
to
launch
a
competing
offering
–
excepting
the
entrance
of
a
lower
cost
substitute
into
the
market.
5
LinkedIn:
About
Us
http://press.linkedin.com/about
accessed
3/13/2012
6
LinkedIn
Corp
Form
424B4
filed
05/09/11
7. LinkedIn: Company Case | 7
2. Operating income
Operating
earnings
outpaced
sales,
although
there
was
some
volatility
in
year-‐over-‐year
in
this.
Over
the
past
five
years
the
company’s
operating
earnings
have
remained
volatile
as
LinkedIn
has
concentrated
on
growing
its
offering
and
acquiring
members
in
order
to
attain
critical
mass
during
its
start-‐up
phase.
Looking
at
the
firm’s
common
size
statement
it
is
evident
that
as
the
company
is
moving
into
its
post-‐IPO
phase.
Product
development
spend,
sits
at
quarter
of
revenues
in
2011,
trending
down
from
over
a
third
in
2007/2008.
On
the
other
hand,
sales
and
marketing
expenses
have
risen
consistently
from
only
15.5%
five
years
ago
to
nearly
a
third
of
revenue
in
2011.
Operating
costs
have
fluctuated,
remaining
high.
Gross
margin
has
consistently
improved
over
the
period,
while
costs
for
SG&A
and
Depreciation
and
Amortization
(not
shown
in
common
size
statement)
have
remained
relatively
constant
at
around
15%
and
8.5%
respectively
(averaged
over
the
period
2008-‐2011.)
3. Net income
As
with
operating
income,
the
firm’s
net
income
has
been
volatile,
emerging
from
losses
incurred
in
2009
and
2009,
in
2010.
As
detailed
above
this
is
due
to
the
company
focusing
its
resources
on
developing
its
products,
entering
new
markets,
and
member
acquisition.
Other
income
(loss)
expense,
net
over
the
period
has
moved
from
positive
to
negative.
The
firm
reports
this
as
primarily
of
the
interest
income
earned
on
cash
and
cash
equivalents,
investments,
foreign
exchange
gains
and
losses,
and
changes
in
the
fair
value
of
a
warrant
during
2010
and
2009.
Therefore
taking
into
account
the
firm’s
international
expansion,
a
strengthened
dollar
since
2009
has
impacted
net
transaction
losses
on
foreign
exchange.
C.
Analysis
of
Operating
Efficiency,
Liquidity,
and
Solvency
1. Operating efficiency: Turnover ratios.
LinkedIn’s
Asset
Turnover
ratio
is
fluctuating
around
between
1.3
and
0.9,
the
market
average
is
low
around
0.3,
the
industry
at
0.67
indicating
that
LinkedIn’s
asset
turnover
is
more
efficient
than
its
immediate
competitors
and
the
IIP
7
Hoovers
Corporation
Profile:
Competitive
Landscape
-‐
accessed
2/25/2012
8. LinkedIn: Company Case | 8
industry
as
a
whole.
Likewise
the
increasing
Property
&
Equipment
ratio
indicates
the
company
improving
its
effective
use
of
its
fixed
assets
to
generate
revenue
and
is
nearing
the
fixed
asset
average
for
the
industry.
Finally
using
the
3-‐fiscal
data
available,
the
company’s
receivables
turnover
is
fluctuating
above
the
industry
average
indicating
a
better
than
average
ability
to
extend
credit
and
collect.
Other
measures
that
an
analyst
would
rely
on
would
be
average
time
spent
on
the
site
by
members,
page
views,
user-‐generated
transactions,
and
percentage
of
members
returning
frequently
to
the
site.
These
are
non-‐financial
metrics
but
indicative
of
the
firm’s
business.
2. Liquidity:
Over
the
past
3-‐fiscal
years
both
LinkedIn’s
Current
and
Quick
ratios
have
hovered
above
the
industry’s
average
ratio.
As
the
data
is
limited
no
trend
was
easily
discerned
for
either
ratio.
The
Current
ratio
sits
well
above
the
minimum
ratio
of
1
to
pay
off
debts
and
coupled
with
a
healthy
looking
receivables
turnover
ratio
the
company’s
operating
cycle
looks
efficient.
The
Quick
(or
Acid
Test)
ratio
again
indicates
that
the
company
can
and
has
been
able
to
cover
its
immediate
liabilities.
The
higher
values
indicate
that
the
company
is
more
liquid
than
the
industry
as
a
whole.
The
CFO
turnover
ratio
deals
with
the
company’s
ability
to
cover
current
liabilities
from
the
firm’s
own
operations.
This
ratio
is
>1
and
is
slowly
trending
upwards.
This
ties
in
with
the
company’s
reliance
on
investor
capital
during
its
start
up
phase,
giving
it
the
firm
its
ability
to
cover
its
liabilities
and
remain
relatively
liquid.
3. Solvency:
The
company
does
not
have
any
debt
of
material
capital
lease
obligations.
The
company
reported
no
off
balance
sheet
arrangements
for
2011,
2010,
or
2009.
In
terms
of
liability,
the
firm’s
debt
to
equity
ratio
(total
liabilities/total
SE)
is
trending
down
indicating
that
the
company’s
liability
position
is
moving
back
from
a
position
where
LinkedIn’s
creditors
had
more
money
in
the
company
than
its
equity
holders,
even
more
so
considering
the
2011
IPO.
The
firm’s
ROA
has
for
the
past
4-‐fiscal
fluctuated
slightly
above
the
market
average
of
0.88%
indicating
above
average
manageme
D.
Analysis
of
Cash
Flows
1. What were LinkedIn’s 2 largest sources of cash? The 2 largest uses of cash?
9. LinkedIn: Company Case | 9
a)
During
the
past
3
fiscal
years
the
two
largest
sources
of
cash
to
the
company
was
the
Initial
Public
Offering
in
2011
that
raised
$248.8
million
and
its
follow
on
offering
later
that
year
which
raised
$177.7
million.
These
are
recorded
on
the
company’s
2011
consolidated
statement
of
cash
flows.
b)
LinkedIn’s
two
largest
uses
of
cash
were
the
purchase
of
investments
at
$251.1
million
in
2011,
and
purchases
of
property
and
equipment
totaling
$152.2
million
between
the
period
2009
and
2011.
These
are
recorded
on
the
company’s
2011
consolidated
statement
of
cash
flows.
2. For the past 3-fiscal years, has LinkedIn’s cash flows from operations
(CFOs) been adequate to fund its growth initiatives? How has LinkedIn funded
the CFO’s shortfalls to fund growth?
Over
the
years
2009
and
2010
the
company’s
CFOs
were
not
adequate
to
fund
its
growth
initiatives,
therefore
it
is
apparent
that
the
company
has
been
reliant
upon
early
investment
from
venture
capital
firms.
Investors
of
the
company
include
5%
8
stockholders
founder
Reid
Hoffman,
Sequoia
Capital,
Greylock
Partners,
and
Bessemer
Venture
partners.
In
2011
the
company
closed
its
IPO
and
follow
on
offerings
unlocking
capital
for
the
organization.
3. Based on your review of the cash flow statement, has LinkedIn’s growth
been driven by organic growth or acquisitions?
Although
positive
throughout
2012
peaking
at
$17.9m
following
the
firm’s
IPO,
the
company’s
Free
Cash
Flow
(FCF)
ended
2011
relatively
low
at
$3.57m.
In
prior
FYs
2008
through
2010
the
FCF
oscillated
from
-‐$10.42m
(Q4
2008)
to
$8.09m
(Q4
2010).
The
lack
of
free
cash
can
be
explained
by
the
company’s
significant
investments
into
technology
infrastructure,
product
development,
and
sales
and
marketing
in
order
to
maintain
is
competitive
advantage
and
stay
ahead
of
the
competition.
Since
starting
in
2003m
LinkedIn’s
growth
has
been
driven
by
a
organic
growth,
since
2010
the
company
has
begun
to
make
acquisitions,
a
number
of
small
companies,
although
in
comparison
to
the
increase
in
revenues,
this
is
still
limited
–
members
are
not
being
purchased,
it
is
likely
more
technology
and
talent.
The
annual
report
states
its
aim
that
in
2012,
it
will
continue
to
invest
in
product,
engineering,
and
sales
infrastructure
in
order
to
capitalize
on
the
long-‐term
opportunity.
8
LinkedIn
Press
Pages:
Investors
http://press.linkedin.com/investors
accessed
3/17/12.
10. LinkedIn: Company Case | 10
4. If LinkedIn continues to grow at its recent historic rate, does it appear
that its CFOs can fund this growth? How might it fund future growth?
As
of
December
31,
2011
the
company
reported
having
cash
and
cash
equivalents
of
$339.0
million
and
short-‐term
investments
of
$238.5
million.
It
is
likely
that
the
existing
cash
and
cash
equivalents
and
short-‐term
investment
balances,
together
with
cash
generated
from
operations,
will
be
sufficient
to
meet
working
capital
expenditure
requirements
for
at
least
the
next
12
months.
If
however,
the
company
is
unable
to
fund
the
costs
of
growth
internally
then
the
company’s
management
and
board
will
have
to
decide
whether
or
not
to
incur
debt
from
a
bank
or
the
bond
market,
(if
they
are
able
to
find
terms
that
are
acceptable
to
them)
or
to
sell
more
stock
which
will
be
dilutive
to
the
current
stockholders.
5. During
the
past
3-‐fiscal
years,
what
dollar
amount
of
common
stock
did
LinkedIn
repurchase
and
what
dollar
amount
of
dividends
did
it
pay?
Over
the
period
2009
–
2011
the
company
repurchased
$953,000
of
its
common
stock
related
to
unvested
stock
options,
at
the
original
exercise
price
due
to
the
termination
of
employees.
The
company
has
not
repurchased
stock
for
any
other
reason,
as
reinvesting
capital
into
the
company
would
yield
a
higher
return.
The
company
has
not
issued,
and
has
no
future
plans
to
issue
a
dividend,
opting
to
retain
all
future
earnings
for
use
in
the
development
of
the
business
or
for
general
corporate
purposes.
The
company
does
not
have
any
debt
or
material
capital
lease
obligations.
E.
Accounting
Policies
1. Identify
and
describe
three
of
LinkedIn’s
significant
accounting
policies/issues.
(a)
Accounting
issues
(b)
How
does
LinkedIn
handle
this
accounting
issue?
(c)
Appropriateness
1:
Allowance
for
doubtful
The
firm
maintains
an
allowance
for
doubtful
I
think
the
treatment
of
this
accounts
accounts
receivable
based
on
historic
loss
patterns,
accounting
issue
as
a
whole
is
the
number
of
days
that
billings
are
past
due,
and
an
appropriate,
however,
the
evaluation
of
potential
risk
of
loss
associated
with
treatment
does
not
specify
if
credit-‐
delinquent
accounts.
The
allowance
is
the
company’s
worthiness
and
current
economic
best
estimate.
As
at
December
31,
2011
the
trends
would
also
be
taken
in
allowance
for
doubtful
accounts
represents
account.
approximately
5%
of
accounts
receivable
(around
$5.5m.)
11. LinkedIn: Company Case | 11
2:
Determining
the
fair
Estimates
intangible
assets
such
as
goodwill
are
There
are
no
mentions
of
any
value
of
assets
acquired
based
on
information
obtained
from
management
of
analytical
tests,
or
how
from
purchased
acquired
companies
and
historical
experience.
These
management’s
experience
complies
businesses
and
liabilities
parameters
include
but
are
not
limited
to:
a)
the
with
the
guidelines
set
out
in
ASC-‐
assumed
especially
with
time
and
expenses
that
would
necessary
to
recreate
350.
Due
to
the
inherently
respect
to
intangible
the
asset;
b)
the
profit
margin
a
market
participant
uncertain
and
unpredictable
nature
assets
(including
would
receive;
c)
cash
flows
that
an
asset
is
expected
of
intangible
assets
such
as
goodwill).
to
generate
in
the
future;
and
d)
discount
rates.
goodwill,
an
analyst
would
need
to
Testing
for
goodwill
impairment
was
adopted
during
assess
the
competency
of
the
third
quarter
of
2011
in
line
with
FASB
guideline
management
in
depth
before
420.
deciding.
3:
Management
decision
The
accounting
policy
lays
down
specific
criteria
as
to
The
company
is
currently
to
lease
office
facilities
what
constitutes
a
capital
(ownership
for
accounting
undergoing
considerable
growth
under
operating
leases
purposes)
or
an
operating
(off
balance
sheet,
rental
and
has
just
floated,
using
as
opposed
to
capital
expense)
lease.
The
company’s
most
significant
operating
leases
will
reduce
any
leases.
estimates
used
by
management
in
accounting
for
Debt
to
Equity
ratio
and
increase
property
leases
are:
a)
Expected
lease
term;
b)
ROA
allowing
it
appear
more
liquid
Incremental
borrowing
rate;
c)
Fair
market
value
of
and
maintain
investor
interest.
leased
asset
2.
In
light
of
LinkedIn’s
core
activities,
goals
and
strategies,
discuss
why
each
of
the
accounting
policies/issues
identified
is
significant:
• Allowance
for
doubtful
accounts
–
as
the
company
is
undergoing
rapid
expansion
of
its
operations
and
growth
ensuring
that
potential
cash
flow
issues
are
warded
off
is
important.
This
fiscal
conservatism
allows
the
company
a
cushion.
Furthermore
assuming
the
company
has
made
sufficient
provision
in
its
allowance
for
doubtful
accounts,
reported
earnings
will
not
be
penalized
by
bad
debts
when
bad
debts
occur.
The
company’s
bad-‐debt
expense
ratio
to
revenues
has
declined
from
1.2%
in
2008
to
0.4%
in
2011.
• Valuation
for
goodwill
and
intangible
assets
–
the
company
has
made
several
acquisitions
of
small,
private
companies,
primarily
to
acquire
talent
and
technology.
Such
legal
and
competitive
intangibles
include
developed
technology,
non-‐compete
agreements,
workforce
in
place,
in-‐process
research
and
development
and
a
patent.
The
company’s
goal
in
2012
is
to
continue
expending
substantial
financial
and
other
resources
on
five
main
areas,
including
technology
infrastructure
and
product
development,
potential
sources
of
intangible
assets
and
goodwill.
• Office
facility
leases
–
the
company
has
all
of
its
office
leases
structured
as
operating
leases,
by
adopting
this
accounting
treatment,
this
means
potentially
smoother
time-‐series
of
Reported
Earnings,
higher
net
income
12. LinkedIn: Company Case | 12
and
times
interest
earned
ratios
towards
the
start
of
the
contract.
Because
the
operating
leases
will
be
expensed
this
also
will
assist
with
cash
flow
by
not
tying
up
cash,
allowing
“off
balance”
sheet
financing
resulting
in
lower
debt
to
equity
ratio,
and
higher
ROA.
3.
In
general,
do
you
think
LinkedIn
does
a
satisfactory
job
of
discussing
its
accounting
policies?
The
disclosures
describe
the
company’s
accounting,
explains
its
estimates,
quantifying
how
different
estimates
could
impact
the
business.
The
accounting
policies
put
forward
by
the
firm
allow
the
reader
to
gain
a
reasonable
understanding
of
the
business’s
condition
of
its
operations.
The
use
of
plain
English
and
layout
of
the
discussion
is
also
helpful
for
the
reader.
4.
MD&A:
Do
you
think
LinkedIn
does
an
adequate
job
of
discussing
its
operations,
financial
position,
and
cash
flow
issues?
I
believe
that
LinkedIn’s
MD&A
section
does
an
adequate
job
of
covering
the
firm’s
operations,
financial
position,
and
cash
flow
issues.
The
report
is
succinctly
written,
in
plain
English
and
gives
an
adequate
“top
down”
assessment
based
on
the
previous
years’
activities,
it
gives
the
reader
an
indication
of
the
management’s
stance
and
style.
It
also
sets
out
the
company’s
plans
for
the
coming
year
highlighting
the
risks
and
additional
interpretive
considerations
that
need
to
be
borne
in
mind
when
making
an
assessment.
The
messaging
within
the
MD&A
generally
matches
the
rest
of
the
audited
10-‐K.
One
area
that
could
be
improved
in
the
discussion
is
the
Revenue
Recognition
section,
which
clearly
states
the
different
revenue
models
but
does
not
discuss
at
what
point
revenue
is
recognized/payment
made,
although
this
is
laid
out
in
another
part
of
the
document.
The
company
also
refers
to
the
use
of
Adjusted
EBITDA
as
an
important
measure
used
by
the
management
and
board
of
directors.
The
use
of
what
is
essentially
a
measure
of
profitability,
not
a
measure
of
actual
cash
earnings
could
be
window
dressing
by
the
company
of
its
earnings,
although
the
company
clearly
states
that
other
measures
should
be
referred
to
when
assessing
the
company.
E.
Own
Question
1.
Is
LinkedIn’s
internal
proxy
non-‐GAAP
Adjusted
EBITDA
really
the
important
indicator
the
firm’s
10-‐K
says
it
is,
or
this
just
window
dressing
the
company’s
earnings?
13. LinkedIn: Company Case | 13
Why
it’s
important
to
ask:
LinkedIn’s
Q4
earnings
announcement
caused
an
18%
spike
in
the
company’s
stock
price
in
February;
some
might
argue
the
firm’s
healthy
looking
Adjusted
EBITDA
($34m)
was
partially
responsible.
It’s
apparent
that
other
social
Internet
information
provider
companies
are
also
using
their
own
versions
of
the
EBITDA
metric
to
‘tweak’
earnings
figures
and
transform
net
losses
in
previous
years.
LinkedIn’s
adjusted
EBITDA
differs
from
standard
EBITDA
by
its
inclusion
of
stock-‐based
compensation.
Is
the
stock-‐based
compensation
component
relevant?
Attempt
at
answering:
First
in
order
to
see
the
difference
in
the
numbers
I
compared
the
traditionally
calculated
EBITDA
with
LinkedIn’s
adjusted
EBITDA
and
the
percentage
difference
between
the
two:
2011 2010 2009* 2008* 2007
Std.
EBITDA 68,945 39,127 8,499 856 1805
Adj.
EBITDA 98,713 47,959 14,651
5461
3480
%
difference
35.5%
20.3%
53.7%
145.8%
63.4%
*Net
income
loss
recorded
for
company
in
this
year.
The
difference
over
time
is
that
the
earnings
of
the
company
look
better
by
a
fifth
in
2010
to
nearly
150%
in
2008
(a
year
when
the
company
recorded
a
net
income
loss
of
$4,552,000)
using
the
adjusted
figures.
Researching
this
deeper
it
appears
that
other
social
network
related
businesses
use
variations
of
this
metric,
like
Groupon,
Zynga
and
Overstock.com.
Each
has
its
own
version
of
non-‐GAAP
“adjusted“
EBITDA.
Interestingly
Facebook’s
IPO
prospectus
has
bucked
the
trend
9
with
no
mention
of
EBITDA
or
adjusted
EBITDA
or
any
non-‐GAAP
measures
included.
One
could
assume
that
the
company's
reliance
on
attracting
and
retaining
talent
through
its
issuance
of
stock-‐based
compensation
could
be
a
relevant
expenditure
that
affects
profitability.
Also
stock-‐based
compensation
is
a
non-‐cash
item
-‐
the
shares
are
not
free.
It
is
a
mixed
bag,
because
it
aligns
the
management
or
employee’s
interests
with
shareholders
to
see
a
rising
share
price
but
also
incentivizes
risk
taking.
]
It
appears
that
the
use
of
positive-‐adjusted
EBITDA
is
the
organization’s
way
of
glossing
over
the
firm’s
difficulty
in
achieving
profits
during
its
pre-‐IP0
growth
phase.
In
order
to
gain
further
insight
I
looked
to
see
if
there
is
a
Q&A
dealing
with
the
use
of
Adjusted
EBITDA
on
the
LinkedIn
investor
relations
website
in
order
to
understand
the
inclusion
of
stock-‐based
compensation,
there
was
none.
If
I
were
to
research
this
further
I
would
contact
the
investor
relations
department
at
LinkedIn
for
a
background
brief.
9
Facebook’s biggest surprise – no funny numbers, Gary Weiss, Forbes
http://www.forbes.com/sites/thestreet/2012/02/15/facebooks-‐biggest-‐surprise-‐no-‐funny-‐numbers
Accessed
3/18/12