LinkedIn-Dan(revised)4.0
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Transcript of LinkedIn-Dan(revised)4.0
LinkedInTeam 5 - EMBA 15
Calvin LewDan Shanahan
Dhivakaran MurugananthamJordon TwistSteve Shea
Index
• Dividend analysis using residual/FCFE models• Comparison to industry, sector, competition• Investor base analysis• Conclusion• Recommendations
LinkedIn does not pay dividends
From 2013 annual report:
We do not intend to pay dividends for the foreseeable future.We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
Justification for no dividend
• As a young company LinkedIn needs cash to scale infrastructure to accommodate user growth.– Despite ‘13 revenues of $1.3B Net Income was only $26M.
• Instead of issuing dividends, LinkedIn is increasing the number and scope of their projects.
• Projects spending increased from $212M in ‘12 to $395M in ’13. These projects are returning high value to shareholders. – Talent Solutions– Marketing Solutions– Premium Subscriptions
Residual Model Suggests no Dividend
Amount to distribute = NI – (Tgt Equity ratio x Total capital budget)= $26.8M – (1)($603M)= ($576.2M)
Conclusion:• No residual income to distribute.
• Capital budget of $603M is much greater than $26.2M in Net Income.
• Capital budget is high to allow LinkedIn to invest in projects and scale with user growth.
• As a new company they have plenty of projects to invest in that will be higher than the hurdle rate
Latest Quarter’s Net Income
Q114:• Revenue YoY increased 15%• However Net Income was ($13.4M) due to high costs • that are typical for a company in growth mode
• Capital (PPE) spending was $361M• Project spending was $395M
• Both combine to an overwhelming 58% of $1.3B total revenues
FCFE Suggests no DividendFCFE = Net Income – [(Cap ex - Depr) (1-DR)] - Chg WC (1-DR)
FCFE Worksheet 2013 2012 2011 2010NI 26.8 21.6 11.9 15.3CapEx 1986.2 1990.4 1999.1 1994.7Depr 134.5 79.6 43.1 19.6Total Asset 3400 1400 873.1 238.2Total Liabilities 718.4 473.9 248.7 113.9Debt Ratio 0 0 0 0Working Capital 2100 603.1 499.2 66.7Proceeds from new debt issuances 0 0 0 0FCFE -3091.1 -304.4 -877.6 65.4
Conclusion: LinkedIn IPO’d in ’10. To support continued growth they are investing cash into CAPEX and new projects. CAPEX increased 348% in ‘13.
LinkedIn Expected Rate of Return
• Expected Rate of Return = risk free rate + Beta(mkt rate of return – risk free rate) = 2.47 +1.27(9.03*-2.47) = 10.8%
LinkedIn actual rate of return:1 yr return of (13.5%)2 yr return of 60.7%3 yr return of 223%
LinkedIn Projects are Successful3 Projects Categories:
1. Talent solutions grew 56% to $553.1M
2. Marketing solutions grew 37% to $209.8M.
3. Premium Subscriptions grew 62% to $179.2M.
*Social activity, comments, likes, and users doubled since 2011*
• Each project yielded returns greater than the 10.8% hurdle rate. • Greater value to shareholders to allow LinkedIn to deploy cash for new projects.
LinkedIn Projects are Successful
Conclusion – • Although we cannot see CF for specific projects, we are making the assumption that due
to record user growth in each sub-category the CF’s for each project are greater than the hurdle rate of 10.8%
• Success with projects demonstrates LinkedIn can be trusted with their cash.
Closest Competitors Dividend Policy• Closest competitors are Monster and Facebook.
– Neither pay dividends Linked In Monster Facebook Career Builder Indeed.com
Market Cap: 21.68B 616.19M 192.42B
n/a private n/a private
Employees: 5,416 4,000 6,818
Qtrly Rev Growth (yoy): 0.46 -0.07 0.72
Revenue (ttm): 1.68B 793.74M 8.92B
Gross Margin (ttm): 0.87 0.52 0.8
EBITDA (ttm): 166.26M 99.97M 4.66B
Operating Margin (ttm): 0.01 0.06 0.41
Net Income (ttm): -9.29M -5.74M 1.91B
EPS (ttm): -0.08 -0.04 0.77
P/E (ttm): N/A N/A 97.25
PEG (5 yr expected): 3.02 1.41 1.43
P/S (ttm): 12.47 0.77 20.52
FCF $77M $30M $3.1B
CASH $2.4B* $98.6M $13.6B
Debt 0 $212M $326M
Dividend 0 0 0
* In ‘13 LNKD issues 6.2B shares of Class A common stock, netting them $1.3B
LinkedIn Dividend Policy• Oracle (who acquired Taleo) is LinkedIn’s closest
competitor paying dividends. – Oracle has a $4.3B FCFE contrasted to LinkedIn’s ($3.1B)
Dividend Yield FCFE Cash Dividends 2013 Net Income Divident Payout
(dividends/earnings)
Facebook 0 ($5.9B) 0 1.5B 0
Monster 0 ($32.6M) 0 (287k) 0
LinkedIn 0 ($3.1B) 0 26.8M 0
Oracle 1.20% $4.3B 1.5B 11B 1.6B
Despite No Dividend Stock Is Attractive to Investors
• LinkedIn business model is an attractive investment to investors searching for growth orientated companies.
• Growth minded investors are interested in stock price appreciation and not tax preferences so not having a dividend does not negatively impact.
• Institutional and mutual funds account for 55% of outstanding shares – suggests there still is a large investor base who invest regardless of dividend payouts.
Top Institutional Holders
Holder Shares % Out Value*
Price (T.Rowe) Associates Inc 7,519,686 7.14 1,390,690,728
Jennison Associates LLC 5,358,659 5.09 991,030,395
Sands Capital Management, Inc.
5,221,883 4.96 965,735,042
Capital World Investors 4,518,500 4.29 835,651,390
Ameriprise Financial, Inc. 3,990,000 3.79 737,910,600
Vanguard Group, Inc. (The) 3,694,907 3.51 683,336,100
FMR, LLC 3,587,379 3.41 663,449,872
Morgan Stanley 3,277,491 3.11 606,139,185
JP Morgan Chase & Company 2,862,910 2.72 529,466,575
Baillie Gifford and Company 2,513,974 2.39 464,934,351
42,545,389 40.41
Top Mutual Fund Holders
Holder Shares % Out Value*
Growth Fund Of America Inc 2,681,500 2.55 495,916,610
Fidelity Contrafund Inc 2,669,400 2.54 493,678,836
Harbor Capital Appreciation Fund 1,991,430 1.89 341,470,502
Vanguard Total Stock Market Index Fund
1,601,021 1.52 296,092,823
Price (T.Rowe) Growth Stock Fund Inc.
1,578,300 1.5 291,890,802
Columbia Fds Ser Tr I-Columbia Select Large Cap Growth Fd
1,473,519 1.4 272,512,603
JP Morgan Large Cap Growth Fund
1,211,800 1.15 185,974,946
American Funds Insurance Ser-Growth Fund
1,135,000 1.08 209,906,900
Morgan Stanley Inst Fund Tr-Mid Cap Growth Port
1,046,931 0.99 193,619,419
Touchstone Funds Group Tr-Touchstone Sands Capital Select
Gr984,000 0.93 181,980,960
16,372,901 15.5
Options to Raise Cash
• Stock Repurchases – LinkedIn did not repurchase stock
• Bond Issuance – LinkedIn did not issue bonds – they have enough cash to fund projects
• In September of ‘13 LinkedIn closed on an offer to sell 6.2B shares of Class A common stock, netting them $1.3B in cash. • LinkedIn intends to use this cash for more projects
to grow their business.
LinkedIn Should be Trusted With Cash - Strong Corporate Governance
• Have $12B in cash ($12B) to empower the managers to invest in new projects.
• Moody’s assigned LinkedIn the lowest and best risk score of 1. Industry median is 4. – This is a good indicator managers are doing a good job and
can be trusted with cash.• The compensation committee ensures the CEO and officers of
the company are established, documented, maintained, and monitored.
Conclusions
• As a young company we agree LinkedIn should not use cash to issue dividends or do stock buy backs. Money should be invested back into the company for managers to undertake additional projects. – Residual and FCFE models illustrate there is not sufficient cash to pay
shareholders. • To issue a dividend LinkedIn would need to significantly improve one or all of the
following balance sheet items:– Increase Net Income– Increase Cash Flow from Operations– Decrease CAPEX or working capital
• Not issuing a dividend does not restrict investors. LinkedIn attracts growth minded investors. These types of investors understand investing in more projects will bring more value to shareholders
• Only 31% of US companies issue dividends– Companies have shifted to a capital appreciation strategy because it lowers the tax since capital gains
are lower than taxes on dividends.
Recommendations
• When growth rate stabilizes and project returns start to dip below the 10.8% hurdle rate, we recommend LinkedIn reinvestigate their dividend policy to be consistent for the value minded investor.
• We recommend LinkedIn consider a stock split. Having a stock price of $200+ stock price to some might be too expensive. A split would make the investment appear to be more affordable and perceived as a positive signal to investor base.
• We also recommend LinkedIn continue being very transparent with their sentiment towards dividends. It is very clear that there is no immediate thought to issuing dividends.
• With interest rates being low LinkedIn could consider accumulating debt through bonds to as a method to finance projects.