LinkedIn Q2 preview: Decelerating growth

Despite a slowdown in growth, analysts expect solid user numbers and robust mobile usage

Professional social network, LinkedIn, is set to release after the close Thursday its second quarter earnings report, in which it is expected to report that revenue grew as much as 77% from the same quarter last year.  

Analysts expect LinkedIn to post second-quarter earnings of 16 cents a share on revenue of $216.5 million, according to FactSet and Thompson Reuters.

If LinkedIn hits the consensus figure, that would be up 79% from $121 million generated in the same period last year, but down from the 101% growth it saw in revenue for the first three months of this year when sales hit $178.8 million.

Some analysts, however, expect LinkedIn to come in above the consensus figure, and are optimistic about LinkedIn's user engagement. 

"We believe the  accelerated pace of product innovation, including a re-designed Homepage and LinkedIn Today, will continue to drive strong growth in user engagement," wrote Doug Anmuth, an analyst at JP Morgan, in a note to clients. Anmuth also expects LinkedIn to generate $218 million in revenue, up 81% from last year. "We will be looking for updates around LinkedIn’s user engagement on mobile devices (including the iPad app launched in April), as well as the company’s efforts to develop new marketing solutions products targeted for mobile devices."

If LinkedIn shows substantial growth in its revenue (advertising, premium subsriptions and recruitment services), as analysts expect, it may boost LinkedIn shares, which have fared better than all the other public high-profile socially-centered stocks on the market. Shares of LinkedIn are up more than 110% since the company's IPO last May, when it debuted at $45 a share. Shares have traded as high as $111, and as low as $59 since. 

Shares of LinkedIn fell 7% to $95.64 in Wednesday trading.   

What analysts are watching for:

As LinkedIn continues to show its ability to create new fee-driven services, one of the concerns that users and premium payers have is the security of the site. Just last month, LinkedIn experienced a security breach where users passwords were leaked on a hacker site. LinkedIn never clarified how many of the more than six million passwords that were distributed online corresponded to its users' accounts. 

It would show great transparency if LinkedIn can clarify what occurred and give investors an idea what the company is doing to increase security. 

With new offices being built in Japan, Brazil, India, Singapore, and South Korea, LinkedIn might also address its international aspirations and markets on the horizon.

Mobile is also going to be a key component. Analysts want to know how the mobile app is fairing, how many more people are moving to its mobile service and if the company is going to monetize the app any more in coming months.

Mark Mahaney, analyst with Citi Research stated in a note that he will be looking for commentary on 1) mobile monetization strategy for Hiring Solutions 2) The Slideshare acquisition integration update  3) Updates related to recent password theft and 4) The specific impact of European Macro weakness.

"In terms of specific June quarter estimates, we are modeling a 93% year over year increase in Hiring Solutions revenues, a 57% year over year growth in Marketing Solutions Revenue, and a 75% reported Y/Y increase in Premium Subscriptions Revenue," said Mahaney, who has a price target of $210. "We believe the slowdown in unique visitors following the attention given the site during the IPO process could simply reflect the impact of the large numbers law and the challenge of maintaining what have been exceptionally high growth rates."

Diversifying 

Unlike Facebook, which gets more than 80% of its revenue from online advertising, LinkedIn generates revenue from three distinct revenue streams.

Analysts will be looking at how the three streams (advertising, premium subscription fees and recruiting service) are each faring. 

With the advertising arm accounting for just above a quarter of the revenue, investors will be looking to see if LinkedIn can continue growing this sector at the same 73% annual increase that it has in the quarters past.

The premium subscriptions with LinkedIn has, in the past, made up roughly one-fifth of the company's revenue with an approximate 91% annual growth rate in the first quarter.

Third, and most promising of the revenue streams is the recruiting service, which grew 121% last quarter. Comprising 54% of the revenue stream, the growth of this sector will have the greatest impact on the company and will show if there is still a great deal of room to grow or if most companies looking for this service have already jumped on board.

Weeks ago there were also rumblings that Facebook was looking at expanding its internal service to include a jobs board and recruitment effort -- neither of which has been comfirmed by the social network -- and many want to know if LinkedIn is making any moves to secure its spot. There is also the concern that investors will be less excited by LinkedIn's stock if Facebook moves into their territory.

JP Morgan's Anmuth wrote in a note that his firm does "not view [Facebook's rumoured interest in creating a jobs board] as a material threat to LinkedIn and we would view any material weakness as a good buying opportunity."

Facebook comparisons/disparities 

Facebook and LinkedIn may not be precise peers, but as the two public companies with social networking at the center of their business, the desire to look for comparisons is unavoidable. One of the first disparities, however, comes in just how these companies present their quarterly reports. 

Since Facebook released its first quarterly earnings report last week, everyone wanted to see just how much information the release would have. One thing missing from the Facebook report was a forecast. LinkedIn, however, did provide a Q2 revenue range of $210 million and $215 million. 

By hitting that revenue range, LinkedIn will show a similarity with Facebook in that it would reflect a slowing rate of growth for all the social networks. Facebook's growth slowed from 55% to 45% to 32% during its last three quarters, and now LinkedIn is expected to report a growth rate of less than 100% for the first time in two years (roughly 74% to be exact).