LinkedIn (LNKD - Analyst Report) reported third-quarter 2014 non-GAAP earnings (excluding stock-based compensation, accretion of redeemable non-controlling interest, amortization of intangible assets and tax-impact) of 52 cents per share. Non-GAAP earnings increased from 39 cents reported in the year-ago quarter. The Zacks Consensus Estimate was pegged at 5 cents.

Quarter Details

LinkedIn’s third-quarter revenues increased 44.6% year over year to $568.3 million, which not only surpassed the Zacks Consensus Estimate of $558 million but was also ahead of management’s guided range of $543 million–$547 million.   

Segment-wise, revenues from Talent Solutions were up 44.9% from the year-ago quarter to $344.6 million. Revenues from Marketing Solutions increased 44.7% on a year-over-year basis to $109.2 million, primarily driven by higher sponsored updates. LinkedIn garnered $114.5 million in revenues from Premium Subscriptions, which increased 43.5% on a year-over-year basis.

LinkedIn’s cumulative member count increased 28% year over year to 332 million at the end of the third quarter. It is worth noting that a significant portion of the new member additions (75%) came from outside the U.S (particularly from China). The company witnessed a 16% year-over-year increase in unique visiting members and a 28% increase in member page views in the quarter.

The company’s mobile engagement was noteworthy as mobile represented 47% of its traffic compared with 45% in the previous quarter and 38% in the year-ago quarter..

Geographically, LinkedIn’s revenues from the U.S. increased 39.9% on a year-over-year basis. Revenues from the Europe, Middle East & Africa region increased 55.1%. The Asia-Pacific region recorded revenue growth of 60.1% on a year-over-year basis while revenues from Other Americas (Canada, Latin America and South America) increased 35.2%.

Total costs and expenses (excluding amortization but including stock-based compensation expense) for the quarter increased 44.1% year over year. As a percentage of revenues, operating expenses were down 33 basis points and came in at 98.5%.  Operating margin expanded from 1.2% to 1.5% year over year, primarily due to lower operating expenses as a percentage of revenues.

LinkedIn’s adjusted net profit (including stock-based compensation but excluding accretion of redeemable non-controlling interest and amortization of intangible assets) on a proportionate tax basis came in at $3.4 million or 3 cents per share during the quarter.

Balance Sheet & Cash Flow

LinkedIn ended the quarter with cash and cash equivalents of $526.8 million versus $645.1 billion in the previous quarter. Total deferred revenue in the quarter was $463.6 million, down from $481.5 million in the previous quarter. The company generated $181.2 million in cash flow from operations compared with $128.4 million reported in the previous quarter. Free cash flow during the quarter was $61 million.

Guidance

LinkedIn provided its fourth-quarter guidance and raised its fiscal 2014 outlook. For the fourth quarter, the company expects revenues to range between $600 million and $605 million, lower than the Zacks Consensus Estimate of $614 million. LinkedIn expects adjusted EBITDA in the range of $153 to $155 million. Fourth-quarter non-GAAP earnings per share are expected to be approximately 49 cents.

For fiscal 2014, LinkedIn now expects revenues in the range of $2.175 to $2.180 billion (previous forecast $2.14 to $2.15 billion). The Zacks Consensus Estimate is pegged at $2.178 billion. Adjusted EBITDA is expected in the range of $566 million to $568 million, up from the previous forecast of $545 million to $550 million. LinkedIn expects fiscal 2014 non-GAAP earnings per share to be approximately $1.89.

Our Take

LinkedIn remains a leader in the emerging online professional networking segment with increasing worldwide popularity and steady growth in the recent past. LinkedIn reported encouraging results in the third quarter. The company also witnessed 28% addition in its cumulative members. Also, the company provided a promising view for fiscal 2014.

LinkedIn’s traction in the mobile segment is particularly encouraging primarily due to its application launches for Apple’s (AAPL - Analyst Report) iPhones and Android-based smartphones. Synergies from acquisitions are also expected to positively impact results over the long run. The recent acquisitions of Newsle and Bizo will not only enhance user experience but also garner additional dollars through targeted marketing strategies.

We believe that LinkedIn’s initiatives to increase advertising revenues through product launches and partnership programs are praiseworthy. Advertisers are also taking a note of the company’s growing user base, in our view.

We also believe that the investments in strategic products are necessary for LinkedIn as other companies like Facebook (FB - Analyst Report) and Twitter (TWTR - Analyst Report) are looking to expand into the professional space.

Nonetheless, continued investments to provide new and improved products and services might affect LinkedIn’s profitability in the short run. However, these investments drive member growth and user engagement over the long haul. We remain encouraged by the 40–50% top-line growth recorded in the past few quarters.

Currently, LinkedIn has a Zacks Rank #3 (Hold).

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