Detailed Analysis Of The Longer-Term Thematic Potential Of Lynda To LinkedIn Corp (NYSE:LNKD)
LinkedIn Corp (NYSE:LNKD) is a professional network company that boasts about 350 million users in more than 200 countries. Unlike other social networks Facebook Inc (NASDAQ:FB) and Twitter Inc (NYSE:TWTR), LinkedIn has presence in China, and has been working to deepen its penetration in the market that has more than 600 million Internet users.
LinkedIn generates revenue through three sources namely Premium Subscription, Talent Solutions, which involves recruitment services and Market Solutions, which involves advertising services. The company also allows access to knowledge and recently inked a deal with professional skills provider, Lynda.com, to bolster its knowledge offering.
The acquisition of Lynda will enable LinkedIn to serve more products to both its individual and business users. The company will also benefit from new revenue almost immediately because Lynda is an established business with stable revenue stream.
About the acquisition
LinkedIn Corp (NYSE:LNKD) agreed to add Lynda to its portfolio in a cash and stock transaction valued at $1.5 billion. The cash component of the transaction amount is 52% and stock is 48%. The purchase price is about 5% of LinkedIn’s market cap. The deal is expected to close in 2Q2015 if all goes according to plan.
Concerns over the deal
The $1.5 billion purchase for Lynda is at 10 times the online-educator’s revenue and nearly 200 times its adjusted EBITDA. By most accounts, the price appears steep, but there is a potential to recoup the investment if LinkedIn moves fast to tap the opportunity in linking job seekers with professionals skills. The price of $1.5 billion is the highest that LinkedIn has paid for any acquisition in its history.
The move to deepen presence in professional education field is obviously a wise decision for LinkedIn, considering that the company is starting to face competition from more popular rivals Facebook and Twitter in the professional network space. However, competition in the online education market is higher, especially considering that barriers to entry in the market are quite low.
LinkedIn Corp (NYSE:LNKD) will have to battle it out with some well-established institutions of higher education for learners, and the competition can force the company to sink huge amounts of money to promote its professional education service, thereby eating into its cash balance. The company recorded about $2.2 billion in total spending in 2014, which was up 50% from the previous year.
It is worth noting at this juncture that more spending has resulted in more revenue for LinkedIn, which is something that investors appreciate in the leadership of the company’s CEO, Jeff Weiner.
Benefits of the acquisition
Lynda is already an established business generating decent revenue. The company reported $150 million in revenue in 2014, with most of the sales coming from individual subscription and the rest from enterprise customers. Lynda.com platform features hundreds of thousands of tutorials that cover everything from Web design to Photoshop.
Users of Lynda pay subscriptions of between $25 and $37.50 per month to access the video tutorials that are also available in multiple languages. That platform is growing at the rate of 40% annually and has over 1,000 authors. According to Weiner, they looking to add value to Lynda by translating some current English coursework, especially those on leadership, into other foreign languages like Chinese. Besides English, Lynda’s courses are also available in German, Spanish, French and Japanese.
The acquisition of Lynda will enable LinkedIn Corp (NYSE:LNKD) to continue its revenue diversification efforts. While LinkedIn has primarily been known as a CV repository, CEO Weiner hopes the company can growth its revenue by becoming a platform where people also pay to learn new skills to improve their job search. Additionally, employers will also look to the platform to enhance the knowledge capacity of their staff. Lynda is also attractive a learning platform because of its low-cost approach to knowledge sharing.
Offering of professional skills is also a wonderful way for LinkedIn to accelerate its growth in emerging economies. In China, the world’s fastest growing economy, LinkedIn more than doubled its user base last year, but still has just about 9 million Chinese users compared to its total user base of about 350 million. There is a potential for Lynda to become a game-changer for LinkedIn in China and other developing markets as the company adds more users overall and generates from revenue because of expanded product offering.
LinkedIn posted adjusted earnings of $0.61 per share in 4Q2014, better than $0.39 a year earlier and above $0.53 that analysts estimated for the quarter. The company generated revenue of $643 million, up from $447 million a year earlier and ahead of the consensus estimate of $617 million. The management had forecast for 4Q revenue in the range of $600-$605 million.
Currently, the company is looking for $618-$622 million, in-line with the consensus expectation, but very conservative because LinkedIn has the potential to blow up those predictions. Overall revenue for 2015 is expected to come in the range of $2.93-$2.95 billion. Remember 2015 estimated were provided before the acquisition of Lynda, which means that the actual numbers should be better than those considering Lynda’s revenue contribution.
Financial implication of the acquisition
LinkedIn Corp (NYSE:LNKD) will meet the acquisition of Lynda in both cash and stock. The company had $3.4 billion in cash and equivalents at the end of 2014. LinkedIn is using its cash aggressively, and has been able to close four acquisitions recently including its second-most expensive deal at $175 million for Bizo. Adjusting for various 1Q2015 charges and taking into account the recent acquisitions, LinkedIn should still have cash balance of about $2.6 billion, enough to fund its various expansion projects.
Looking at the $1.5 billion amount LinkedIn is paying for Lynda, the acquisition is quite expensive, but also signals the professional network company’s growing appetite for large deals. The company recently tapped business-to-business marketing platform Bizo for $175 million and took over job-matching platform Bright early last year for $120 million. Although the acquisition of Lynda will weigh heavy on LinkedIn’s cash position, the deal is a perfect move as it will complement the company’s current product offering and open up opportunity for new revenue stream. The long-term view of the acquisition paints a positive image of a company that is racing fast to tap key assets to continue differentiating its products.
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