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LINKEDIN CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as "anticipates," "expects," "believes," "plans," "predicts," and similar terms. Forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Risk Factors" below, which are incorporated herein by reference. You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2013, filed on February 13, 2014. Overview We are the world's largest professional network on the Internet and currently have more than 300 million members in over 200 countries and territories. Through our proprietary platform, members are able to create, manage and share their professional identity online, build and engage with their professional network, access shared knowledge and insights, and find business opportunities, enabling them to be more productive and successful. We believe we are the most extensive, accurate and accessible network focused on professionals. In the three and six months ended June 30, 2014, we continued to grow as compared to the same periods in 2013 as our network of registered members and member engagement continued to increase and we continue to benefit from expanded product offerings and international expansion. Our net revenue was $533.9 million and $1,007.1 million for the three and six months ended June 30, 2014, respectively, which represented an increase of 47% and 46%, respectively, compared to the same periods in 2013. Our future growth will depend, in part, on our ability to continue to increase our member base and member engagement on both mobile and desktop devices, as well as continuing to expand our product offerings and international expansion, which we believe will result in increased sales of our Talent Solutions, Marketing Solutions and Premium Subscriptions to new and existing customers. As our net revenue increases, we expect our growth rate related to net revenue will decrease over time. Also, we believe the rate at which we are able to increase our member base and member engagement, as measured by our key metrics, will decelerate over time because of the large scale of our network, and that this may impact portions of our business. In 2014, our philosophy is to continue to invest for long-term growth and we expect to continue to invest heavily in the following: • Talent. We expect to increase our workforce, which will result in an increase in headcount-related expenses, including stock-based compensation expense. As of June 30, 2014, we had 5,758 employees, which represented an increase of 36% compared to the same period last year. • Technology. We expect to continue to make significant capital expenditures to upgrade our technology and network infrastructure to improve the ability of our website to handle expected increases in usage, to enable the release of new features and solutions, and to scale for future growth. • Product. We expect to continue to invest heavily in our product development efforts, specifically around mobile, to enable our members and customers to derive more value from our platform. Mobile continues to be the fastest growing channel for member engagement, growing more than three times the rate of our internally measured unique visiting members, which we internally track and define as the monthly average number of members who have visited LinkedIn.com on either mobile or desktop environments at least once during a month. Mobile unique visiting members represent 45% of unique visiting members in the six months ended June 30, 2014. • Monetization. We expect to continue to aggressively expand our field sales organization to market our solutions both in the United States and internationally. As a result of our investment philosophy, we may not be profitable on a U.S. generally accepted accounting principles ("GAAP") basis in 2014. Recently Issued Accounting Guidance Revenue Recognition In May 2014, the Financial Accounting Standards Board ("FASB") issued new authoritative guidance on revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue 21-------------------------------------------------------------------------------- Table of Contents arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." The guidance also requires significantly expanded disclosures about revenue recognition. This standard will be effective for us in the first quarter of 2017 and will be applied using either the full or modified retrospective adoption methods. Early adoption of this guidance is not permitted. We are currently evaluating adoption methods and whether this standard will have a material impact on our financial results. Key Business Metrics We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. • Number of Registered Members. We define the number of registered members in our network as the number of individual users who have created a member profile on LinkedIn.com as of the date of measurement. We believe the number of registered members is a key indicator of the growth of our network and our ability to receive the benefits of the network effects resulting from such growth. Growth in our member base depends, in part, on our ability to successfully develop and market our solutions to professionals who have not yet become members of our network. Member growth will also be contingent on our ability to translate our offerings into additional languages, create more localized products in certain key markets, and more broadly expand our member base internationally. We believe that a higher number of registered members will result in increased sales of our Talent Solutions, Marketing Solutions and Premium Subscriptions, as customers will have access to a larger pool of professional talent. However, a higher number of registered members will not immediately increase sales, nor will a higher number of registered members in a given region immediately increase sales in that region. The following table presents the number of registered members as of the periods presented by geographic region (certain items may not total due to rounding): June 30, 2014 2013 % Change (in thousands) Members by geographic region: United States 103,818 33 % 83,260 35 % 25 % Other Americas (1) 54,121 17 % 40,815 17 % 33 % Total Americas 157,939 50 % 124,075 52 % 27 % EMEA (2) 98,866 32 % 72,074 30 % 37 % APAC (3) 56,623 18 % 41,923 18 % 35 % Total number of registered members (4) 313,428 100 % 238,072 100 % 32 % ______________________ (1) Canada, Latin America and South America (2) Europe, the Middle East and Africa ("EMEA") (3) Asia-Pacific ("APAC") (4) The number of registered members is higher than the number of actual members due to various factors. For more information, see "Risk Factors-The number of our registered members is higher than the number of actual members and a substantial majority of our page views are generated by a minority of our members. Our business may be adversely impacted if we are unable to attract and retain additional members who actively use our services. In addition, the tracking of certain of our performance metrics is done with internal tools and is not independently verified." • Unique Visiting Members. In the second quarter of 2014, we transitioned to disclosing our internal measure of unique visiting members, which we internally track and define as the total number of members who have visited LinkedIn.com on desktop and mobile at least once during the month. Historically, we disclosed unique visitors based on data provided by comScore, a leading provider of digital marketing intelligence. comScore defines unique visitors as users who have visited our desktop website (which excludes mobile visitors) at least once during a month, regardless of whether they are members. We will no longer be disclosing unique visitors from comScore and prior period comparisons reflect our internal measure of unique visiting members. We believe our internal measure of unique visiting members is a more relevant measure of engagement on our 22-------------------------------------------------------------------------------- Table of Contents website, particularly with the increase in engagement on mobile devices. We view unique visiting members as a key indicator of growth in our brand awareness among members and whether we are providing our members with useful products and features, thereby increasing member engagement. We believe that a higher level of member engagement will result in increased sales of our Talent Solutions, Marketing Solutions and Premium Subscriptions, as customers will have access to a larger pool of professional talent. Growth in unique visiting members will be driven by growth in the number of registered members, improvements to features and products that drive traffic to our website, and international expansion. The following table presents the average monthly number of unique visiting members during the periods presented: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 % Change 2014 2013 % Change (in thousands) (in thousands) Unique visiting members (1), (3) 84,222 74,534 13 % 83,160 69,735 19 % Mobile unique visiting members (2), (3) 37,514 25,645 46 % 36,348 23,006 58 % ______________________(1) Members who have visited LinkedIn.com on their desktops and/or mobile devices. (2) Members who have visited LinkedIn.com on their mobile devices. (3) We track unique visiting members using internal tools, which are subject to various risks. For more information, see "Risk Factors-The tracking of certain of our performance metrics is done with internal tools and is not independently verified. Certain of our performance metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business." • Member Page Views. In the second quarter of 2014, we transitioned to disclosing our internal measure of page views, which we internally track and define as the total number of page views on LinkedIn.com for desktop and mobile that members view during the measurement period. Historically, we disclosed page views based on data provided by comScore, which defines page views as the number of pages on our desktop website (which excludes mobile page views) that users view during the measurement period, regardless of whether they are members. We believe our internal measure of page views is a more relevant measure of engagement on our website, particularly with the increase in engagement on mobile devices. We will no longer be disclosing page views from comScore and prior period comparisons reflect our internal measure of member page views. Similar to unique visitors, we believe page views is a key indicator for gaining insight into whether we are increasing member engagement and whether our members are deriving value from our solutions. We expect growth in page views will be driven, in part, by growth in the number of registered members, improvements in products and features that drive member traffic to our website, and international expansion. However, page views may not capture all of the value that our members and other users derive from our solutions because part of the benefit of certain products and features is that the member does not need to visit our website to receive value from our platform. For example, members can respond to InMails they receive from other members without accessing their LinkedIn account or our website. In addition, mobile page views may be lower than they would otherwise be on desktop because a well-designed mobile app reduces the number of clicks and pages a user touches in order to create a high quality mobile experience. 23-------------------------------------------------------------------------------- Table of Contents The following table presents the number of page views during the periods presented: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 % Change 2014 2013 % Change (in millions) (in millions) Total page views (1), (2) 25,427 20,818 22 % 51,358 38,927 32 % ______________________ (1) These metrics include member page views on LinkedIn.com for desktop and mobile. (2) We track page views using internal tools, which are subject to various risks. For more information, see "Risk Factors-The tracking of certain of our performance metrics is done with internal tools and is not independently verified. Certain of our performance metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business." • Number of LinkedIn Corporate Solutions Customers. We define the number of LinkedIn Corporate Solutions customers as the number of enterprises and professional organizations that we have under active contracts for this product as of the date of measurement. Our LinkedIn Corporate Solutions include LinkedIn Recruiter, Job Slots, LinkedIn Recruitment Media and LinkedIn Career Pages, which are all part of Talent Solutions. LinkedIn Corporate Solutions does not include LinkedIn Jobs or Subscriptions. We believe the number of LinkedIn Corporate Solutions customers is an indicator of our market penetration in the online recruiting market and the value that our products bring to both large and small enterprises and professional organizations. The following table presents the number of LinkedIn Corporate Solutions customers as of the periods presented: June 30, 2014 2013 % Change LinkedIn Corporate Solutions customers 28,080 20,256 39 % • Sales Channel Mix. Depending on the specific product, we sell our Talent Solutions and Marketing Solutions offline through our field sales organization or online on our website. The vast majority of our Premium Subscriptions are sold online on our website. Our field sales organization uses a direct sales force to solicit customers and agencies. This offline channel is characterized by a longer sales cycle where price can be negotiated, higher relative average selling prices, longer contract terms, higher selling expenses and a longer cash collection cycle compared to our online channel. Our online, or self-service, sales channel allows members to purchase solutions directly on our website. Members can purchase Premium Subscriptions as well as certain lower priced products in our Talent Solutions and Marketing Solutions, such as job postings and self-service advertising. This channel is characterized by lower average selling prices and higher cancellations compared to our offline channel, lower selling costs due to our automated payments platform and a highly liquid collection cycle. 24-------------------------------------------------------------------------------- Table of Contents The following table presents our net revenue by field sales and online sales: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 ($ in thousands) Field sales $ 318,984 60 % $ 209,227 58 % $ 594,246 59 % $ 393,198 57 % Online sales 214,893 40 % 154,434 42 % 412,824 41 % 295,168 43 % Net revenue $ 533,877 100 % $ 363,661 100 % $ 1,007,070 100 % $ 688,366 100 % Adjusted EBITDA To provide investors with additional information regarding our financial results, we have disclosed adjusted EBITDA, a non-GAAP financial measure. The table below presents a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure. We have included adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the payment of bonuses to our executive officers. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; • adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation; • adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and • other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure. Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following table presents a reconciliation of adjusted EBITDA for each of the periods indicated (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Reconciliation of Adjusted EBITDA: Net income (loss) $ (934 ) $ 3,734 $ (14,253 ) $ 26,350 Provision for income taxes 16,253 4,109 29,834 4,827 Other (income) expense, net (1,197 ) 252 (2,223 ) 560 Depreciation and amortization 56,306 32,193 106,046 57,999 Stock-based compensation 74,828 48,354 142,597 82,293 Adjusted EBITDA $ 145,256 $ 88,642 $ 262,001 $ 172,029 Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We believe that the assumptions and estimates associated with revenue recognition, stock-based compensation, the valuation of goodwill and intangible assets, website and internal-use software development costs, leases, income taxes and legal contingencies have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. There have been no material changes to the our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 13, 2014. 25-------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth our results of operations for the periods presented as a percentage of net revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (As a percentage of revenue) Condensed Consolidated Statements of Operations Data: (1) Net revenue 100 % 100 % 100 % 100 % Costs and expenses: Cost of revenue (exclusive of depreciation and amortization shown separately below) 13 14 13 13 Sales and marketing 35 34 35 34 Product development 24 26 25 26 General and administrative 15 15 15 14 Depreciation and amortization 11 9 11 8 Total costs and expenses 97 98 99 95 Income from operations 3 2 1 5 Other income (expense), net - - - - Income before income taxes 3 2 2 5 Provision for income taxes 3 1 3 1 Net income (loss) - 1 (1 ) 4 Accretion of redeemable noncontrolling interest - - - - Net income (loss) attributable to common stockholders - % 1 % (1 )% 4 % ______________________(1) Certain items may not total due to rounding. Net Revenue We generate revenue from Talent Solutions, Marketing Solutions and Premium Subscriptions. Talent Solutions. Revenue from Talent Solutions is derived primarily from providing access to the LinkedIn Recruiter product and job postings. We provide access to our professional database of both active and passive job candidates with LinkedIn Recruiter, which allows corporate recruiting teams to identify candidates based on industry, job function, geography, experience/education, and other specifications. Revenue from the LinkedIn Recruiter product is recognized ratably over the subscription period, which consists primarily of annual subscriptions that are billed monthly, quarterly, or annually. We also earn revenue from the placement of job postings on our website, which generally run for 30 days. Independent recruiters can pay to post job openings that are accessible through job searches or targeted job matches. Revenue from job postings is recognized as the posting is displayed or the contract period, whichever is shorter. Marketing Solutions. Revenue from Marketing Solutions is earned from the display of advertisements (both graphic and text link) on our website primarily based on a cost per advertisement model. Revenue from Internet advertising is recognized as the online advertisements are displayed on our website. The typical duration of our advertising contracts is approximately two months. Premium Subscriptions. Revenue from Premium Subscriptions is derived from selling various subscriptions to customers that allow users to have further access to premium services on our LinkedIn.com website. We offer our members monthly or annual subscriptions. Revenue from Premium Subscriptions is recognized ratably over the contract period, which is generally one to 12 months. 26-------------------------------------------------------------------------------- Table of Contents In the second quarter of 2014, recruitment media products have been reclassified from Marketing Solutions to Talent Solutions as they are generally sold to Talent Solutions customers. Accordingly, prior period amounts have been recast to conform to the current year presentation. Recruitment media revenue was $18.2 million and $11.8 million in the three months ended June 30, 2014 and 2013, respectively, and $33.9 million and $21.9 million in the six months ended June 30, 2014 and 2013, respectively. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 % Change 2014 2013 % Change ($ in thousands) ($ in thousands) Revenue by product: Talent Solutions $ 322,227 $ 216,938 49 % $ 613,821 $ 411,230 49 % Marketing Solutions 106,476 73,747 44 % 192,540 138,535 39 % Premium Subscriptions 105,174 72,976 44 % 200,709 138,601 45 % Total $ 533,877 $ 363,661 47 % $ 1,007,070 $ 688,366 46 % Percentage of revenue by product: (1) Talent Solutions 60 % 60 % 61 % 60 % Marketing Solutions 20 % 20 % 19 % 20 % Premium Subscriptions 20 % 20 % 20 % 20 % Total 100 % 100 % 100 % 100 % ______________________ (1) Certain items may not total due to rounding. Total net revenue increased $170.2 million and $318.7 million in the three and six months ended June 30, 2014, respectively, compared to the same periods last year. Net revenue from our Talent Solutions increased $105.3 million and $202.6 million in the three and six months ended June 30, 2014, respectively, compared to the same periods last year. These increases were driven by increased spending by existing customers as well as generating business from new customers, as evidenced by the 39% increase in the number of LinkedIn Corporate Solutions customers as of June 30, 2014 compared to June 30, 2013. Net revenue from our Marketing Solutions increased $32.7 million and $54.0 million in the three and six months ended June 30, 2014, respectively, compared to the same periods last year primarily due to the introduction of our Sponsored Updates product in our field sales and self-service channels, which was launched in the third quarter of 2013, and to a lesser extent sales of our display advertising products. Sponsored Updates allows marketers to show paid content in LinkedIn members' update feeds. Sponsored content represents 28% and 26% of Marketing Solutions revenue, for the three and six months ended June 30, 2014, respectively, and we expect it to continue to represent a larger percentage of Marketing Solutions revenue as we continue to gain traction in our shift to content marketing. Net revenue from our Premium Subscriptions increased $32.2 million and $62.1 million in the three and six months ended June 30, 2014, respectively, compared to the same periods last year as a result of an increase in the number of premium subscribers in part driven by higher member engagement. Specifically, the number of registered members is a meaningful metric in evaluating and understanding net revenue from our Premium Subscriptions because an increase in the number of registered members has historically led to a proportionate increase in the number of premium subscribers. In addition, our Sales Solutions products, which include Sales Navigator, are continuing to grow at a faster rate than our other Premium Subscription products as well as continuing to represent a larger percentage of total Premium Subscriptions revenue. 27-------------------------------------------------------------------------------- Table of Contents The following table presents our net revenue by geographic region: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 % Change 2014 2013 % Change ($ in thousands) ($ in thousands) Revenue by geographic region: United States $ 317,774 $ 224,277 42 % $ 602,652 $ 425,680 42 % Other Americas (1) 35,527 26,857 32 % 67,431 51,033 32 % Total Americas 353,301 251,134 41 % 670,083 476,713 41 % EMEA (2) 134,930 84,691 59 % 252,801 159,848 58 % APAC (3) 45,646 27,836 64 % 84,186 51,805 63 % Total $ 533,877 $ 363,661 47 % $ 1,007,070 $ 688,366 46 % ______________________(1) Canada, Latin America and South America (2) Europe, the Middle East and Africa ("EMEA") (3) Asia-Pacific ("APAC") International revenue increased $76.7 million and $141.7 million in the three and six months ended June 30, 2014, respectively, compared to the same periods last year. International revenue represented 40% and 38% of total revenue in the three and six months ended June 30, 2014 and June 30, 2013, respectively. The increase in international revenue, in absolute dollars and as a percentage of total revenue, is primarily due to the expansion of our international field sales organization and our site localization efforts. As of June 30, 2014, we operated our websites and mobile applications in 23 languages, and continued our expansion outside of the United States. We expect international revenue to increase on an absolute basis and as a percentage of revenue in 2014 as we continue to focus expanding our sales force outside the United States in key markets where our member engagement supports business efforts at scale. 28-------------------------------------------------------------------------------- Table of Contents The following table presents our net revenue by geography, by product: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 % Change 2014 2013 % Change ($ in thousands) ($ in thousands) Revenue by geography, by product: United States Talent Solutions $ 197,852 $ 140,420 41 % $ 378,255 $ 266,350 42 % Marketing Solutions 59,383 41,259 44 % 108,421 78,925 37 % Premium Subscriptions 60,539 42,598 42 % 115,976 80,405 44 % Total United States revenue $ 317,774 $ 224,277 $ 602,652 $ 425,680 International Talent Solutions $ 124,375 $ 76,518 63 % $ 235,566 $ 144,880 63 % Marketing Solutions 47,093 32,488 45 % 84,119 59,610 41 % Premium Subscriptions 44,635 30,378 47 % 84,733 58,196 46 % Total International revenue $ 216,103 $ 139,384 $ 404,418 $ 262,686 Total $ 533,877 $ 363,661 $ 1,007,070 $ 688,366 Cost of Revenue Our cost of revenue primarily consists of salaries, benefits and stock-based compensation for our production operations, customer support, infrastructure and advertising operations teams and web hosting costs related to operating our website. Credit card processing fees, sales taxes, allocated facilities costs and other supporting overhead costs are also included in cost of revenue. Consistent with our investment philosophy for 2014, we currently expect cost of revenue to increase on an absolute basis and remain relatively flat as a percentage of revenue. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 % Change 2014 2013 % Change ($ in thousands) ($ in thousands) Cost of revenue $ 69,536 $ 49,264 41 % $ 131,991 $ 91,648 44 % Percentage of net revenue 13 % 14 % 13 % 13 % Headcount (at period end) 883 616 43 % 883 616 43 % Cost of revenue increased $20.3 million and $40.3 million in the three and six months ended June 30, 2014, respectively, compared to the same periods last year. The increases during the same periods were primarily attributable to $11.2 million and $23.4 million in headcount related expenses, $6.1 million and $10.6 million in web hosting service expenses, and $2.5 million and $5.5 million in facilities and related costs, respectively. 29-------------------------------------------------------------------------------- Table of Contents Sales and Marketing Our sales and marketing expenses primarily consist of salaries, benefits, stock-based compensation, travel expense and incentive compensation for our sales and marketing employees. In addition, sales and marketing expenses include customer acquisition marketing, branding, advertising, public relations costs, and commissions paid to agencies, as well as allocated facilities and other supporting overhead costs. We plan to continue to invest heavily in sales and marketing to expand our global footprint, grow our current customer accounts and continue building brand awareness. Consistent with our investment philosophy for 2014, we expect sales and marketing expenses to increase on an absolute basis and decrease slightly as a percentage of revenue. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 % Change 2014 2013 % Change ($ in thousands) ($ in thousands) Sales and marketing $ 184,494 $ 122,276 51 % $ 351,016 $ 231,693 52 % Percentage of net revenue 35 % 34 % 35 % 34 % Headcount (at period end) 2,452 1,822 35 % 2,452 1,822 35 % Sales and marketing expenses increased $62.2 million and $119.3 million in the three and six months ended June 30, 2014, respectively, compared to the same periods last year. The increases during the same periods were primarily attributable to $52.7 million and $101.1 million in headcount related expenses as we continue to expand our field sales organization, $4.5 million and $7.5 million in facilities and related costs, and $3.5 million and $5.8 million in consulting services, respectively. Product Development Our product development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product managers and developers. In addition, product development expenses include outside services and consulting, as well as allocated facilities and other supporting overhead costs. We believe that continued investment in features, software development tools and code modification is important to achieving our strategic objectives. Consistent with our investment philosophy for 2014, we expect to continue to invest heavily in product development; therefore, we expect product development expense to increase on an absolute basis and increase slightly as a percentage of revenue. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 % Change 2014 2013 % Change ($ in thousands) ($ in thousands) Product development $ 128,731 $ 95,608 35 % $ 249,353 $ 176,280 41 % Percentage of net revenue 24 % 26 % 25 % 26 % Headcount (at period end) 1,555 1,204 29 % 1,555 1,204 29 % Product development expenses increased $33.1 million and $73.1 million in the three and six months ended June 30, 2014, respectively, compared to the same periods last year. The increases during the same periods were primarily attributable to $28.6 million and $65.1 million in headcount related expenses as a result of our focus on developing new features and products to encourage member growth and engagement. We also experienced an increase in $3.0 million and $5.6 million in facilities and related costs. 30-------------------------------------------------------------------------------- Table of Contents General and Administrative Our general and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, legal, information technology, human resources and other administrative employees. In addition, general and administrative expenses include outside consulting, legal and accounting services, and facilities and other supporting overhead costs not allocated to other departments. We expect that our general and administrative expenses will increase on an absolute basis in 2014 and remain relatively flat as a percentage of revenue. In particular, we anticipate that costs related to legal proceedings will increase as we are, and expect to continue to be, subject to increasing litigation and compliance requirements. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 % Change 2014 2013 % Change ($ in thousands) ($ in thousands) General and administrative $ 80,688 $ 56,225 44 % $ 155,306 $ 99,009 57 % Percentage of net revenue 15 % 15 % 15 % 14 % Headcount (at period end) 868 599 45 % 868 599 45 % General and administrative expenses increased $24.5 million and $56.3 million in the three and six months ended June 30, 2014, respectively, compared to the same periods last year. The increases during the same periods were primarily attributable to $16.8 million and $39.0 million in headcount related expenses to support our overall growth.We also experienced an increase in legal and consulting services of $3.0 million and $9.8 million and facilities and related costs of $2.4 million and $4.0 million, respectively. Depreciation and Amortization Depreciation and amortization expenses primarily consist of depreciation on computer equipment, software, leasehold improvements, capitalized software development costs and amortization of purchased intangibles. We expect that depreciation and amortization expenses will increase on an absolute basis and remain relatively flat as percentage of revenue as we continue to expand our technology and facilities infrastructure. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 % Change 2014 2013 % Change ($ in thousands) ($ in thousands) Depreciation and amortization $ 56,306 $ 32,193 75 % $ 106,046 $ 57,999 83 % Percentage of net revenue 11 % 9 % 11 % 8 % Depreciation and amortization expenses increased $24.1 million and $48.0 million in the three and six months ended June 30, 2014, respectively, compared to the same periods last year. The increases in depreciation expense of $22.6 million and $44.5 million in the three and six months ended June 30, 2014, respectively, were primarily a result of our continued investment in expanding our technology infrastructure in order to support continued growth in our member base, and to a lesser extent, increases in amortization of acquired intangible assets of $1.5 million and $3.5 million, respectively. Other Income (Expense), Net Other income (expense), net consists primarily of the interest income earned on our investments and foreign exchange gains and losses. Hedging strategies that we have implemented or may implement to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations. 31-------------------------------------------------------------------------------- Table of Contents Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 ($ in thousands) ($ in thousands) Interest income $ 1,329 $ 578 $ 2,334 $ 1,048 Net loss on foreign exchange and foreign currency derivative contracts (220 ) (819 ) (195 ) (1,752 ) Net realized gain on sales of marketable securities 56 3 70 6 Other non-operating income (expense), net 32 (14 ) 14 138 Total other income (expense), net $ 1,197 $ (252 ) $ 2,223 $ (560 ) Other income (expense), net increased $1.4 million and $2.8 million in the three and six months ended June 30, 2014, respectively, compared to the same periods last year. The increases were primarily due to interest earned on higher investment balances and decreases in foreign exchange losses compared to the same periods last year. Provision for Income Taxes Provision for income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions. We expect that our provision for income taxes may equal or exceed income before taxes in 2014. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 % Change 2014 2013 % Change ($ in thousands) ($ in thousands) Provision for income taxes $ 16,253 $ 4,109 296 % $ 29,834 $ 4,827 518 % Income tax expense increased $12.1 million and $25.0 million in the three and six months ended June 30, 2014, respectively, compared to the same periods last year primarily due to the expiration of the research tax credit applicable to activities incurred after December 31, 2013, foreign tax losses which derive no benefit, acquisition costs, and non-deductible stock-based compensation. Foreign tax losses increased in the three and six months ended June 30, 2014 compared to same periods last year due to international research and development expenses growing at a faster rate than international revenue. International research and development expenses include costs charged by LinkedIn Corporation. |