LinkedInTeam 5 - EMBA 15

Calvin LewDan Shanahan

Dhivakaran MurugananthamJordon TwistSteve Shea

Dividend Policy

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.

Technology Sector Dividend Average is 2.7%

Application SW Industry Average Dividend Yield is 1.1%

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.